Finance Assignment: Investment Analysis, Portfolio and Tax Policy

This finance assignment provides solutions to questions covering various topics, starting with calculating the present value of an investment's cash flows and determining the payment amount for loan amortization. It further analyzes the impact of reducing the Australian corporate tax rate, considering the dividend imputation system and its effects on Australian taxpayers and foreign investors. Additionally, the assignment includes a portfolio analysis, calculating holding period returns for NAB, BHP, and the market portfolio, and applying the Capital Asset Pricing Model (CAPM) and Security Market Line (SML) to assess investment risk and expected returns. The analysis helps determine the best investment strategy based on risk and return, concluding that investing in a portfolio is preferable due to its low risk and average return. Desklib offers a platform for students to access this and other solved assignments for academic assistance.

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Assessement Item: 2

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Question 1:
A:
Cash Flow
End of the year Amount $ PV @ 9% PV
1 $ 400.00 0.917 $ 366.97
2 $ 800.00 0.842 $ 673.34
3 $ 500.00 0.772 $ 386.09
4 $ 400.00 0.708 $ 283.37
5 $ 300.00 0.650 $ 194.98
$ 1,904.76
The present value of the above investment is $1904.76. So Sandy has to pay $1904.76 to
get the given cash flows in 5 years.
B:
It is case of loan amortisation and it has been solved using the excel function PMT. Refer Excel
for detailed answer. The lee payment per quarter amount to be paid is $6414.71.
C:
The size of monthly payment will be = $985.77
Question 2:
i:
Time Line
% 8% 6% 7%
Yea
r 0 1 2 3 4 5 6 7 8 9 10
Cfi 6500 1500 -2500 10000
ii:
Year Cash Flows Interest Rate PVF PV
0 1 $ -
1 8% 0.926 $ -
2 $ 6,500.00 8% 0.857 $ 5,572.70
3 $ 1,500.00 6% 0.840 $ 1,259.43
4 6% 0.792 $ -
5 6% 0.747 $ -

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6 -$ 2,500.00 6% 0.705 -$ 1,762.40
7 6% 0.665 $ -
8 6% 0.627 $ -
9 $ 10,000.00 7% 0.544 $ 5,439.34
10 7% 0.508 $ -
Present Value at Time 1 $ 10,509.07
Year Cash Flows Interest Rate PVF PV
1 6% 0.943 $ -
2 -$ 2,500.00 6% 0.890 -$ 2,224.99
3 6% 0.840 $ -
4 6% 0.792 $ -
5 $ 10,000.00 7% 0.713 $ 7,129.86
6 7% 0.666 $ -
Present Value at Time 5 $ 4,904.87
Present value at time 10 = 0
Question 3:
Introduction
The corporate tax, also known as company tax, is regarded to be a direct tax imposed by
the jurisdictions on the income of the corporate depending on the income level. As such, large
economies around the world are placing emphasis on lowering the corporate tax rate for
promoting economic growth and creating large-scale jobs. The withdrawal of tax incentives
makes a country more attractive for seeking global investment (Irivine, 2018). In this context, the
Australian federal government is planning to reduce its corporate tax rate for promoting business
growth and job creation such as that done by the US. As such, this essay examines whether
lowering the Australian corporate tax is good policy or not. This is discussed with reference to
the Australian dividend imputation system and the impact on the Australian taxpayers.
Lowering the Australian Corporate Tax Rate
The federal government in Australia is planning to reduce the tax rate from 30% to 25%
for supporting the economic growth in the country. This can be achieved through promoting
investment in Australia through seeking the attraction of foreign investors. This would in turn
result in developing a more productive capital stock and technology competencies for promoting
the productivity and growth of business companies in Australia. As such, the generation of a
more productive capital stock would result in providing higher wages to the employees. On the
other hand, there are also some negative views regarding the decisions of Australian federal

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government to reduce the corporate tax rate. This is because it is estimated that the economic
growth in Australia would only boost by about 1 per cent in the long-term whereas it would cost
about $65 billion in the first 10 years whereas the annual cost incurred will be around $15
billion. Thus, some economist’s belief that gains realized by the corporate through a significant
decline in the tax rate would be overcome by the increase in financial burden on the government
due to heavy cost incurred (Australian Taxation Office, 2018).
Australian divided imputation system is the system adopted by the country for managing
the issue of double taxation. The system provides the shareholders a tax credit that can be used to
offset the personal income tax liabilities. As such, the presence of such a system ensures that
profits distributed to the shareholders is not taxed twice that is at the company and the personal
level. The most significant benefit of imputation to the Australian investors is realizing higher
rate of return through gaining the tax benefits. Therefore, it can be said that there is large impact
of the imputation system on financial and operations decisions. As such, it is important for the
government to recognize the impact of lowering the tax rate to the corporate and to the
shareholders. The overall taxation of income distributed as dividends is not very high in
Australia due to the presence of an imputation system. As such, it can be argued that lowering
down the corporate tax rate in Australia would cause only small benefit to shareholders due to
the presence of an imputation system. This is because the higher dividends that can be provide
by the company with lowering the corporate tax rate is associated with lower level of franking
credits. However, it could have a positive economic impact on the foreign shareholders as they
receive fully franked dividend because it is exempted from Australian tax (Eligibility for the
lower company tax rate and access to imputation credits clarified, 2018).
As such, it can be stated that lowering down the corporate tax rate is only a good policy
for Australian government. This is because its benefits are realized only by foreign shareholders
and not on the Australian investors. The government of the country has reduced the tax rate from
49 per cent to 30 percent between the years 1986-2001 but there has been no significant increase
in the business growth. The country need not to reduce its corporate tax rate in order to stay
competition with the US and the UK because its present imputation system would restrict it from
achieving nay benefit by corporate tax reduction. The foreign investors will only be largely
benefitted through it without causing any profits to be realized by Australian investors which are
necessary for the economic growth of the country. Therefore, it is strongly recommend to the
Australian government to look out at other measures for promoting its economic growth in order
to secure its global competitive position (Davis, 2016).
Conclusion
It can be said from the overall discussion held in the essay that there is both positive and
negative implications associated with the policy of corporate tax reduction planned to be adopted
by the Australian government. The positive implications are associated with the positive
economic growth due to reduction in tax burden on the Australian companies whereas negative

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views are reading the presence of an imputation system in the country. The imputation systems
will largely offset the benefits realized through reducing the corporate tax rate and thus it is not
suggested to be a good policy for Australian government.
Question 4:
i:
Date NAB BHP Market Holding Period Return
Close Close Close NAB BHP Market Portfolio
31/12/2015 26.69 21.91 4154.30
31/01/2016 24.19 22.61 4040.10
-
9.37% 3.19% -2.75% -0.57%
29/02/2016 26.24 25.90 4207.30 8.47% 14.55% 4.14% 12.73%
31/03/2016 27.19 31.34 4348.00 3.62% 21.00% 3.34% 15.79%
30/04/2016 27.15 26.97 4448.30
-
0.15%
-
13.94% 2.31% -9.80%
31/05/2016 25.43 28.56 4323.80
-
6.34% 5.90% -2.80% 2.23%
30/06/2016 26.54 29.69 4588.50 4.36% 3.96% 6.12% 4.08%
31/07/2016 27.34 30.00 4479.80 3.01% 1.04% -2.37% 1.64%
31/08/2016 27.87 34.65 4480.60 1.94% 15.50% 0.02% 11.43%
30/09/2016 28.00 35.02 4395.60 0.47% 1.07% -1.90% 0.89%
31/10/2016 28.93 37.54 4506.70 3.32% 7.20% 2.53% 6.03%
30/11/2016 29.70 35.78 4695.80 2.66% -4.69% 4.20% -2.48%
31/12/2016 30.33 41.29 4667.90 2.12% 15.40% -0.59% 11.42%

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01/01/2016
01/02/2016
01/03/2016
01/04/2016
01/05/2016
01/06/2016
01/07/2016
01/08/2016
01/09/2016
01/10/2016
01/11/2016
01/12/2016
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Holding Peroid Returns
NAB
BHP
Market
Time
HPR
ii to iv:
NAB BHP Market
Average HPR 1.18% 5.85% 1.02%
Annual HPR 13.64% 88.45% 12.36%
Standard Deviation 0.0478 0.0977 0.0313
v:

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0 2 4 6 8 10 12
0.00%
200.00%
400.00%
600.00%
800.00%
1000.00%
1200.00%
f(x) = NaN x + NaN
R² = 0 NAB
NAB
Linear (NAB)
Risk
Annual HPR
0 2 4 6 8 10 12
0.00%
200.00%
400.00%
600.00%
800.00%
1000.00%
1200.00%
f(x) = NaN x + NaN
R² = 0 BHP
BHP
Linear (BHP)
Risk
Annual HPR

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0 2 4 6 8 10 12
0.00%
200.00%
400.00%
600.00%
800.00%
1000.00%
1200.00%
f(x) = NaN x + NaN
R² = 0 Market
Series1
Linear (Series1)
Risk
Annual HPR
vi:
Risk Free Rate 2.95% 2.95%
Market Return 6.50% 6.50%
Beta 1.23 0.9
Expected return when beta = 0 2.95% 2.95%
Expected Return on given beta 7.32% 6.15%
vii:
0 0.2 0.4 0.6 0.8 1 1.2 1.4
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
NAB Security Market Line
Series2
Linear (Series2)
Linear (Series2)
BEta
Return

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0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
BHP Security Market Line
Series2
Linear (Series2)
Linear (Series2)
Beta
Return
viii:
Date
NA
B
BH
P
Mark
et Holding Period Return
Clos
e
Clos
e Close NAB BHP
Mark
et
Portfol
io
31/12/2015 26.6
9
21.9
1
4154.3
0
31/01/2016
24.1
9
22.6
1
4040.1
0
-
9.37
% 3.19%
-
2.75% -0.57%
29/02/2016
26.2
4
25.9
0
4207.3
0
8.47
%
14.55
% 4.14% 12.73%
31/03/2016
27.1
9
31.3
4
4348.0
0
3.62
%
21.00
% 3.34% 15.79%
30/04/2016
27.1
5
26.9
7
4448.3
0
-
0.15
%
-
13.94
% 2.31% -9.80%
31/05/2016
25.4
3
28.5
6
4323.8
0
-
6.34
% 5.90%
-
2.80% 2.23%
30/06/2016
26.5
4
29.6
9
4588.5
0
4.36
% 3.96% 6.12% 4.08%
31/07/2016
27.3
4
30.0
0
4479.8
0
3.01
% 1.04%
-
2.37% 1.64%
31/08/2016
27.8
7
34.6
5
4480.6
0
1.94
%
15.50
% 0.02% 11.43%

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30/09/2016
28.0
0
35.0
2
4395.6
0
0.47
% 1.07%
-
1.90% 0.89%
31/10/2016
28.9
3
37.5
4
4506.7
0
3.32
% 7.20% 2.53% 6.03%
30/11/2016
29.7
0
35.7
8
4695.8
0
2.66
%
-
4.69% 4.20% -2.48%
31/12/2016
30.3
3
41.2
9
4667.9
0
2.12
%
15.40
%
-
0.59% 11.42%
Expected Return of
Portfolio 4.32%
Beta of Portfolio 0.39
ix:
On the basis of understanding of CAPM and SML, it is best to invest in portfolio as the
risk is very low and return is average.

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References
Australian Taxation Office. (2018). Reducing the corporate tax rate. Retrieved 5 April, 2018,
from https://www.ato.gov.au/General/New-legislation/In-detail/Direct-taxes/Income-tax-
for-businesses/Reducing-the-corporate-tax-rate/
Davis, K. (2016). JASSA: Dividend imputation and the Australian financial system. Retrieved 5
April, 2018, from https://www.finsia.com/insights/news/news-article/2016/04/14/jassa-
dividend-imputation-and-the-australian-financial-system
Eligibility for the lower company tax rate and access to imputation credits clarified. (2018).
Retrieved 5 April, 2018, from
https://harwoodandrews.com.au/news/2017/11/9/eligibility-for-the-lower-company-tax-
rate-and-access-to-imputation-credits-clarified
Irivine, J. (2018). What economists really think about cutting corporate tax. Retrieved 5 April,
2018, from https://www.smh.com.au/money/insurance/what-economists-really-think-
about-cutting-corporate-tax-20180223-h0wj53.html