Accounting and Finance Assignment: Investment Analysis Solution

This finance assignment solution covers key concepts in investment analysis and portfolio management. It begins with financial mathematics problems, calculating monthly deposits needed to reach a future value and evaluating investments using Net Present Value (NPV) at different rates of return. The assignment then explores the real and notional interest rates, and the impact of cash rate changes on the financial market and economy. Further, it delves into personal finance, assessing the preservation of investment value after tax and discussing dividend imputation. The solution also presents calculations of holding period returns for stock data, including calculations of beta, risk, and expected return using the Capital Asset Pricing Model (CAPM). The assignment concludes with portfolio analysis, including the calculation of portfolio beta and return.

Running head: ACCOUNTING AND FINANCE
Accounting and Finance
Name of the Student:
Name of the University:
Author’s Note:

1ACCOUNTING AND FINANCE
Table of Contents
Answer to question 1:......................................................................................................................3
Part (a):........................................................................................................................................3
Part (b):........................................................................................................................................3
Sub part (i):..............................................................................................................................3
Sub part (ii):.............................................................................................................................4
Part (c):........................................................................................................................................5
Sub part (i):..............................................................................................................................5
Sub part (ii):.............................................................................................................................5
Answer to question 2:......................................................................................................................6
Part (a):........................................................................................................................................6
Sub part (i):..............................................................................................................................6
Sub part (ii):.............................................................................................................................6
Sub part (iii):............................................................................................................................7
Sub part (iv):............................................................................................................................7
Part (b):........................................................................................................................................7
Answer to question 3:......................................................................................................................8
Part (a):........................................................................................................................................8
Sub part (i):..............................................................................................................................8

2ACCOUNTING AND FINANCE
Sub part (ii):.............................................................................................................................8
Part (b):........................................................................................................................................9
Part (c):........................................................................................................................................9
Sub part (i) & (ii):....................................................................................................................9
Sub part (iii):............................................................................................................................9
Part (d):......................................................................................................................................10
Sub part (i) & (ii):..................................................................................................................10
Sub part (iii):..........................................................................................................................10
Sub part (iv):..........................................................................................................................11
Sub part (v):...........................................................................................................................11
Sub part (vi):..........................................................................................................................11
Sub part (vii):.........................................................................................................................12
Sub part (viii):........................................................................................................................12
Sub part (ix):..........................................................................................................................13
Sub part (x):...........................................................................................................................13
References and bibliography:........................................................................................................14

3ACCOUNTING AND FINANCE
Answer to question 1:
Part (a):
Number of years (n) = 5
Annual interest rate (i) = 4% compounded monthly
Future Value (FV) = PMT ×
( (1+ 4 %
12 )5× 12
−1
4 %
12 )=$ 60000
Annual installment (PMT) =
$ 60,000
( (1+ 4 %
12 )5× 12
−1
4 %
12 )=$ 904.99
Part (b):
Sub part (i):
End of year Cash flow ($mil) PV Factor PV of cash flow ($mil)
= Cash flow*PV Factor
1 1.8 1
( 1+ 10 % ) 1 1.64
2 3.0 1
( 1+ 10 % ) 2 2.48
3 6.5 1
( 1+ 10 % ) 3 4.88
4 8.4 1
( 1+ 10 % ) 4 5.74

4ACCOUNTING AND FINANCE
5 12.3 1
( 1+ 10 % ) 5 7.64
Total present value of cash inflows 32
Initial Investment 20
Net present value (NPV) = (22.38−20) 2.38
As the NPV is positive, the investment can be purchased at a 10% rate of return.
Sub part (ii):
End of year Cash flow ($mil) PV Factor PV of cash flow ($mil)
= Cash flow*PV Factor
1 1.8 1
( 1+ 15 % ) 1 1.57
2 3.0 1
( 1+ 15 % ) 2 2.27
3 6.5 1
( 1+ 15 % ) 3 4.27
4 8.4 1
( 1+ 15 % ) 4 4.80
5 12.3 1
( 1+ 15 % ) 5 6.12
Total present value of cash inflows 19.03
Initial Investment 20
Net present value (NPV) = (19.03−20) (0.97)

5ACCOUNTING AND FINANCE
If the expected rate of return rose up to 15% then the NPV becomes negative, hence the
investment should not be purchased
Part (c):
Sub part (i):
Current age = 34 Years
Age of retirement = 67 Years
Number of years to maturity = 67-34 = 33 Years
Balance in share portfolio = $47,000
Rate of return on Share portfolio = 7%
Future value of the share portfolio at the time of maturity = 47000 × ( 1+7 % ) 33 = $438,291
Balance in superannuation account = $78,000
Rate of return = 8%
Future value of the share portfolio at the time of maturity = 78000 × ( 1+8 % ) 33 = $988,732
Annual contribution to the superannuation account = $1,000
Future value of the annuity payment = 1000 × ( ( 1+8 % ) 33−1
8 % )=$145,951
Total future value of the Superannuation account = $988,732+$145,951 = $1,134,682
Total value of financial assets at the age of 67 years = $438,291+$1,134,682 = $1,572,973

6ACCOUNTING AND FINANCE
Sub part (ii):
Number of years to 85 years of age = 85-67 = 18 Years
Rate of return for the pension fund = 5%
Present value of $120,000 in 18 Years = 120000 × 1
( 1+ 5 %
12 )
18× 12 =48880
Present value of fund that will be utilized for pension withdrawals = $1,572,973-$488,880
= $1,524,094
Monthly pension withdrawals (PMT) =
1524094
1− ( 1+ 5 %
12 )
−18× 12
5 %
12
=$ 10,715
Answer to question 2:
Part (a):
Sub part (i):
The quoted interest rate is a nominal interest rate, and the real interest rate is the inflation
adjusted nominal interest rate.
Sub part (ii):
Real rate of interest is the inflation adjusted nominal interest rate, and the notional
interest rate is that rate of interest, which is tax deductible as per section 240 of the Australian
Income Tax Assessment Act. The notional interest is determined by the income tax authority and

7ACCOUNTING AND FINANCE
notified for the applicable period by the income tax department (Kevin, 2015). This is calculated
taking into consideration the current market situation and with the help of arm’s length principle.
The current benchmark ration of notional interest is 5.37%
Sub part (iii):
The current inflation rate in Australia is 1.6% and considering the nominal interest rate,
the Real interest rate can be computed as (4%+1.6%) 5.6%. On the other hand, the Notional
interest rate as has been notified by the Australian Taxation Office is 5.37%
Sub part (iv):
Real interest rate is computed taking into consideration the current inflation rate that
varies time to time. On the other hand, the notional interest rate is also computed taking into
consideration the inflation rate and arm’s length principles, but it prevails for a considerable
period. therefore, if the same assumption and same inflation rate is considered for the
computation of real interest rate and the notional interest rate, then the real interest rate and
notional interest rate could be very close (Ato.gov.au, 2019)..
Part (b):
If the cash rate decreases then the banks can lend their funds at a much lower rate, hence,
the interest rate for loans offered by the banks. It will have a major effect on the financial market
and the economy. As the interest rate for loans will decrease, individuals will be borrowing more
money, which will increase their spending abilities. As a result, it will lead to a demand-pull
inflation in the economy. Due to the decrease in the cash rate households and startup business
organizations might be benefitted as they can avail loans at a lower rate (Ato.gov.au, 2019)..

8ACCOUNTING AND FINANCE
Answer to question 3:
Part (a):
Sub part (i):
Rate of return on bank guaranteed investment = 1%
Inflation rate = 2.5%
Real Interest Rate = 1%+2.5% = 3.5%
Marginal tax rate = 32.5%
Medicare levy = 2%
Effective tax rate = 32.5 %+( 32.5%*2%) = 32.5%+0.65 = 33.15%
Net Return on Investment = 3.5% * (1-33.15%) = 2.34%
As the net return from investment after tax is more than the nominal interest rate, it can
be concluded that, Bradley is preserving the real dollar value of his investment.
Sub part (ii):
Risk and return are complementary to every investment options, as much as the risk is
assumed the higher return is expected. The market rate of return for the investment is much
higher than the bank guaranteed interest rate. The bank guaranteed interest rate is a risk free rate
of interest, and hence it is as low as 1% only. On the other hand, the market rate is higher than
1% but it assumes higher risk coefficient.

9ACCOUNTING AND FINANCE
Part (b):
When companies are paying dividends to their shareholders after paying tax on their
profit, they can pass on the tax credit to the shareholders; this system of imputation of tax to the
dividend is known as dividend imputation system. If such tax credit is passed on to the
shareholder, the dividend is called franked dividend and if no such credit is passed on to the
shareholders, then it is known as un-franked dividend. Shareholders can claim deduction for such
taxes imputed to the dividend (Ato.gov.au, 2019).
Part (c):
Sub part (i) & (ii):
Date Open Close
Monthly
Holding
Period Return
($) = Close -
Open
Monthly
Holding
Period Return
in %
17-Jul 3.79 4.14 0.35 9.23%
17-Aug 4.15 5.04 0.89 21.45%
17-Sep 5.1 5.86 0.76 14.90%
17-Oct 5.92 7.62 1.7 28.72%
17-Nov 7.34 7.59 0.25 3.41%
17-Dec 7.6 7.37 -0.23 -3.03%
18-Jan 7.4 8.29 0.89 12.03%
18-Feb 8.32 12.23 3.91 47.00%
18-Mar 12.21 11.46 -0.75 -6.14%
18-Apr 10.96 11.31 0.35 3.19%
18-May 11.36 9.93 -1.43 -12.59%
18-Jun 9.7 10.52 0.82 8.45%
Average Monthly Holding Period Return 10.55%
Sub part (iii):
Opening price as on July 2017 = 3.79

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Closing price as on June 2018 = 10.52
Annual holding period Return ($) = 10.52 – 3.79 = 6.37
Annual holding period return (%) = 6.37/3.79 = 177.57%
Part (d):
Sub part (i) & (ii):
Date Open Close
Monthly
Holding
Period Return
($) = Close -
Open
Monthly
Holding
Period Return
in %
17-Jul 5,764.00 5,773.90 9.9 0.17%
17-Aug 5,773.90 5,776.30 2.4 0.04%
17-Sep 5,776.30 5,744.90 -31.4 -0.54%
17-Oct 5,744.90 5,976.40 231.5 4.03%
17-Nov 5,976.40 6,057.20 80.8 1.35%
17-Dec 6,057.20 6,167.30 110.1 1.82%
18-Jan 6,167.30 6,146.50 -20.8 -0.34%
18-Feb 6,146.50 6,117.30 -29.2 -0.48%
18-Mar 6,117.30 5,868.90 -248.4 -4.06%
18-Apr 5,868.90 6,071.60 202.7 3.45%
18-May 6,071.60 6,123.50 51.9 0.85%
18-Jun 6,123.50 6,289.70 166.2 2.71%
Average Monthly Holding Period Return 0.75%
Sub part (iii):
Opening price as on July 2017 = 5,764.00
Closing price as on June 2018 = 6,289.70
Annual holding period Return ($) = 6289.70-5764.00 = 525.70
Annual holding period return (%) = 525.70/5764.00 = 9.12%

11ACCOUNTING AND FINANCE
Sub part (iv):
1-Jan
1-Feb
1-Mar
1-Apr
1-May
1-Jun
1-Jul
1-Aug
1-Sep
1-Oct
1-Nov
1-Dec
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
R(A2M)
R(Market)
Sub part (v):
Coefficient of Risk R(A2M) R(Market)
Variance 0.02643 0.00047
Standard Deviation 0.16258 0.02169
Sub part (vi):
As per the given case study, the A2M is having a beta of 1.04, which implies the stock
price of the A2M is more volatile than the market. The stock price of the A2M moves 1.04 time
of the movement in the market index.
As the beta of the A2M is more than one, the stock is more volatile than the market,
hence it more risky than the market risk coefficient (Chandra 2017).
Sub part (vii):
Market Return 9.50%
Risk Free Rate 2.29%