Financial Modeling and Investment Analysis: A Comprehensive Approach

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ACCOUNTING & FINANCE ASSIGNMENT 2
1

Table of Contents
Question 1.......................................................................................................................................3
(a).....................................................................................................................................................3
(b)....................................................................................................................................................3
(c).....................................................................................................................................................4
Question 2.......................................................................................................................................6
(i)......................................................................................................................................................6
(ii)....................................................................................................................................................6
Question 3.......................................................................................................................................7
References.....................................................................................................................................14
2

Question 1
(a)
First of all, effective interest rate will need to be computed.
Effective interest rate, i =(1+k/m) m -1
i =(1+0.06/12)12 – 1
Thus, i = 6.16% p.a. or 0.51%.
Let the amount to be deposit be $ x p.a.
The formula of computing the present value from future value will be:
FVn = PVn (1+r)n
15000 = x(1+0.0616)1.25
15000 = 1.077 x
Thus, x = 13927.58
Accordingly, the amount of monthly payment will be $ 1160.63 (13927.58/12).
(b)
(i)
Years Cash flows Discount factor
(15%)
Present value of
cash flows
0 -$16,000,000 1 -$16,000,000
1 $2,500,000 0.869 $2,172,500
2 $0 0.756 $0
3 $5,000,000 0.657 $3,285,000
4 $6,800,000 0.572 $3,889,600
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5 $7,000,000 0.497 $3,479,000
6 $7,000,000 0.432 $3,024,000
7 $9,500,000 0.376 $3,572,000
8 $5,500,000 0.327 $1,798,500
9 $2,000,000 0.284 $568,000
10 -$4,500,000 0.247 -$1,111,500
Net present value $4,677,100
Since, the net present value of mining business investment is positive, it is advisable to purchase
the investment.
(ii)
Years Cash flows Discount factor
(15%)
Present value of
cash flows
0 -$16,000,000 1 -$16,000,000
1 $2,500,000 0.869 $2,172,500
Present value at the end of 2 years -$13,827,500
Thus, the present value at the end of 2 years is negative, i.e., -$13,827,500.
(c)
(i)
Year
s
Portfolio
Income
Superannuation Fund
Superannuation as
on date
Addiito
ns Total Interest Balance
46 7,500 750,000 12,000 762,000 60,960 822,960
47 7,500 822,960 12,000 834,960 66,797 901,757
48 7,500 901,757 12,000 913,757 73,101 986,857
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49 7,500 986,857 12,000 998,857 79,909 1,078,766
50 7,500 1,078,766 12,000 1,090,766 87,261 1,178,027
51 7,500 1,178,027 12,000 1,190,027 95,202 1,285,229
52 7,500 1,285,229 12,000 1,297,229 103,778 1,401,008
53 7,500 1,401,008 12,000 1,413,008 113,041 1,526,048
54 7,500 1,526,048 12,000 1,538,048 123,044 1,661,092
55 7,500 1,661,092 12,000 1,673,092 133,847 1,806,940
56 7,500 1,806,940 12,000 1,818,940 145,515 1,964,455
57 7,500 1,964,455 12,000 1,976,455 158,116 2,134,571
58 7,500 2,134,571 12,000 2,146,571 171,726 2,318,297
59 7,500 2,318,297 12,000 2,330,297 186,424 2,516,721
60 7,500 2,516,721 12,000 2,528,721 202,298 2,731,018
Total 112,500 180,000 24,313,746
Consolidated Financial Holdings =
24,246,
246
It has been assumed that the portfolio income was utilised to fund monthly contributions
and rest was funded through her regular income. Rest of the income was completely spent.
5

(ii)
Amount needed at the end of 30 years = 41,199
Amount remaining for Investment = 24,205,047
Monthly pension received = 61,351.64
6

Question 2
(i)
Real rate of interest is the rate of interest that takes into consideration the concept of inflation or
inflation rate (Ide & Schöbel, 2016).On the other hand, nominal rate ignores the concept of
inflation. Thus, for computing real rate of interest the inflation rate is reduced.
Further, call deposit account or ‘at call’ account is used to mean the account having the features
and characteristics of both saving and checking account. Thus, it can be said that at call bank
account is the fusion of checking and saving account at the same time thereby satisfying the
requirements of all the customers.
(ii)
Negative gearing is the most widely used concept in the investment sector of Australia or other
countries. Negative gearing is a form or type of financial leverage when investor used to borrow
the money from the concerned lender or financial institution. The prominent advantage is that
under negative gearing, it increases the possibility of profitability (Ide & Schöbel, 2016).
Under the concept of negative gearing, all the possible costs are duly taken into consideration. In
other words, costs covering from maintaining and operating the investment are also covered in
the negative gearing including costs of depreciation and charge of interest on the loan.
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Question 3
(i)
There are different concepts or aspects of risk that generally exists or prevails in the mind of the
investors or financial institutions. However, majority of the investors are of the opinion that the
return increases when risk increases (Boholm, et. al., 2016). Generally the term ‘risk’ is used by
the investorat the time of investing or even after investing the amount. On the basis of risk factor,
investments are made by all the investors can be categorised into three parts, namely, the high
risk, moderate risk and low risks. Accordingly, investments are made with low risks when
investors want to avert or reduce the risk. On the other hand, investments with high risks are
made in order to earn maximum possible return.
There are some investors which are ready tor willing to take moderate risk. Generally, there is a
positive relationship between the risk taken and the return received. In other words, it is said that
the investments made with higher risks will yield higher return keeping other things remaining
constant or neutral (Boholm, et. al., 2016). However, sometimes this statement becomes
incorrect or not feasible.
This happens when there are various factors affecting that influence o affect the return in an
adverse or opposite direction.
(ii)
The main purpose of introducing dividend imputation tax system is to avoid or eliminate the
double taxation. This happens because in case of distribution of dividend it may arouse doubt or
confusion as to who will pay the tax on distribution of dividend. To avoid such confusion, tax is
paid by the company paying or distributing dividend (Boholm, et. al., 2016). The tax paid will be
claimed by the shareholder on his income. This situation arises when the shareholder or investor
is also earning income from other sources apart from such dividend.
Accordingly, while computing the tax liability of the shareholders, the amount of tax paid by the
company or the distribution of dividend will be deducted. As such, the tax paid earlier can be
claimed as credit (Harding, et. al., 2014).
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They will have to pay lower tax to the extent such tax has been paid by the company on
distribution of dividend. However, for the purpose of claiming reduction, it is necessary to fill
income tax return (Harding, et. al., 2014).
(iii)
Date Open Close Dividend Return of BHP for
2018 (in $)
Return of
BHP for 2018
(in %)
Jan 29.57 30.2 0.63 2.13%
Feb 30.2 30.5 0.3 0.99%
Mar 30.5 28.21 -2.29 -7.51%
Apr 28.21 30.95 2.74 9.71%
May 30.95 32.79 1.84 5.95%
Jun 32.79 33.91 1.12 3.42%
Jul 33.91 34.86 0.95 2.80%
Aug 34.86 33.21 -1.65 -4.73%
Sep 33.21 34.63 1.42 4.28%
Oct 34.63 32.21 -2.42 -6.99%
Nov 32.21 30.69 -1.52 -4.72%
Dec 30.69 34.23 3.54 11.53%
(iv)
Average monthly return 1.41%
(v)
Tax on dividend = 30%
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received by the non
resident
Annual holding
period return =
((1+Total
return)^(1/no. of
years))-1
Total return =
(income+(Current Value-Original
value))/original value
Dividend = 1.56
Income received = 1.09
Total return = 0.19
Annual holding
period return 0.19
Rate of Annual
holding period
return = 19%
Total Return and annual holding period retunes are same
because as the period is of 1 year only.
It has been assumed that the Australia doesn’t have any treaty with the country of the non-
resident shareholder and hence no tax benefit is received by him (Harding, et. al., 2014).
(vi)
Annual holding period return = ((1+Total return)^(1/no. of years))-1
Total return = (income+(Current Value-Original value))/original value
Total return = 0.21
Annual holding period return 0.21
Rate of Annual holding period return = 21%
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Total Return and annual holding period retuen are same because as the period is of 1 year only.
(vii)
Date Open Close Market
monthly
return (in $)
Market
monthly return
(in %)
Jan 6146.5 6117.3 -29.2 -0.48%
Feb 6117.3 5868.9 -248.4 -4.06%
Mar 5868.9 6071.6 202.7 3.45%
Apr 6071.6 6123.5 51.9 0.85%
May 6123.5 6289.7 166.2 2.71%
Jun 6289.7 6366.2 76.5 1.22%
Jul 6366.2 6427.8 61.6 0.97%
Aug 6427.8 6325.5 -102.3 -1.59%
Sep 6325.5 5913.3 -412.2 -6.52%
Oct 5913.3 5749.3 -164 -2.77%
Nov 5749.3 5709.4 -39.9 -0.69%
Dec 5709.4 5783.3 73.9 1.29%
(viii)
Annual holding period return -0.47%
(x)
Monthly return of
BHP (in %)
Monthly
return of
MKT (in %)
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2.13% -0.48%
0.99% -4.06%
-7.51% 3.45%
9.71% 0.85%
5.95% 2.71%
3.42% 1.22%
2.80% 0.97%
-4.73% -1.59%
4.28% -6.52%
-6.99% -2.77%
-4.72% -0.69%
11.53% 1.29%
1 2 3 4 5 6 7 8 9 10 11 12
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
Monthly return of BHP (in %)
Monthly return of MKT (in %)
(xiii)
The equation as per CAPM is,
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