Financial Management: Accounting and Finance Assessment

Desklib provides solved assignments and past papers to help students succeed.

ACCOUNTING AND FINANCE

Table of Contents
INTRODUCTION...................................................................................................................3
QUESTION – 1.......................................................................................................................3
QUESTION – 2.......................................................................................................................6
Calculation of Real rate of interest for James..............................................................................7
Persons who might get benefits from this Decrease....................................................................8
Persons who might not get Benefits from this Decrease.............................................................8
QUESTION – 3.......................................................................................................................9
Calculation of income from Investment......................................................................................9
Benefits of Risks to Bradley........................................................................................................9
Applicability of Australian credit system in Australia..............................................................10
References..............................................................................................................................15
2

ASSESSMENT – 2
INTRODUCTION
In this Assessment, the objective is to understand the congruence of accounting, finance and
treasury functions and the crucial role of financial management on the contemporary
organizations. It develops the ability to analyses the financial problem and solving it by
application of knowledge and tools covered in the subject topics. It enables the one to
demonstrate appropriate communication skills in the context of corporate finance and also
specific technical competencies and skills in utilizing quantitative techniques in financial
analysis.
QUESTION – 1
( a )
Future value = $ 60000
Time (n) = ( 5 * 12 )
= 60 months
Rate (i) = ( 0.04 / 12 )
= 0.003333333
Future Value = Present Value * ( 1 + i )n – 1
i
60000 = Present Value * ( 1 + 0.003333333 )60 – 1
0.003333333
60000 = Present Value * 66.2989
Present value = 60000 / 66.2989
Present Value = $ 905 (approx.)
Before the daughter commences the university $ 905 needs to be deposited in the bank
account each month in order to save $ 60000.
( b )
( i )
( $ mil )
Years 1 2 3 4 5 Total
Inflow 1.8 3 6.5 8.4 12.3 32
PV factor
@ 10% 0.90909 0.82645 0.75131 0.68301 0.62092
Present
value of
cash flows 1.63636 2.47934 4.88355 5.73731 7.63733 22.374
3

Total Cash Inflow 22.3739
Initial Outflow 22
Profit 0.37389
Profit(%) 1.69952
The profit earned at 10% rate of return case is 1.70% that is why this project could be
accepted, .i.e. this investment could be purchased.
( ii )
( $ mil )
Years 1 2 3 4 5 Total
Inflow 1.8 3 6.5 8.4 12.3 32
PV Factor
@ 15% 0.86957 0.79051 0.71865 0.65332 0.59392
Present
Value Of
Cash
Flows 1.56522 2.37154 4.67122 5.48786 7.30527 21.401
Total Cash Inflow 21.4011
Initial Outflow 22
Profit -0.5989
Profit(%) -2.7222
There is a loss of 2.72% at 15% rate of return that is why this project should not be
accepted, .i.e. this investment should not be purchased.
( c ) Part - 1
Number of years = (67 – 34)
(I) Future value of the share portfolio:
Present value = $ 47000
Rate ( i ) = 0.07
Time ( n ) = 33 years
Future Value = Present value * ( 1 + i )n
i
Future Value = 47000 * ( 1 + 0.07 ) 33
0.07
Future Value = 47000 * 9.33
Future Value = $ 438290.97
(II) Future value of Superannuation balance $ 78000
Present value = $ 78000
Rate ( i ) = 0.08
4

Time ( n ) = 33 years
Future Value = Present value * ( 1 + i )n
i
Future Value = 47000 * ( 1 + 0.07 ) 33
0.08
Future Value = 47000 * 12.676
Future Value = $ 988731.87
(III) Future Value of $ 1000 deposited every month
Present value = $ 1000
Rate ( i ) = 0.08 / 12
Rate ( i ) = 0.006667
Time ( n ) = 33 * 12
Time ( n ) = 396 months
Future Value = Present value * ( ( 1 + i )n – 1
i
Future Value = 1000 * ( 1 + 0.006667 ) 396 - 1
0.006667
Future Value = 1000 * 1933.65
Future Value = $ 1933645
Consolidated figures at Brant Jerome retirement .i.e. at the age of 67
Particulars Amount
Future value of the share portfolio $ 438290.97
Future value of Superannuation balance $
78000
$ 988731.87
Future Value of $ 1000 deposited every
month
$ 1933645.00
Total $ 3360668.19
Part – 2
Loan Amount 78000
Interest Rate 7%
Period (In
terms) 85 85
Compounded Period 12
Monthly Payment
$1,166.4
9
5

QUESTION – 2
( A )
( 1. )
Real rate of interest is the interest rate that considers inflation or adjusted to remove the
effects of inflation to reflect the actual cost of funds. Real rate shows actual percentage
return of security which is calculated by subtracting inflation from the nominal rate.
Inflation, compounding and other changes affect the Real rate of interest.
Notional rate refers to the interest rate which does not considers the effects of inflation.
Under Nominal rate of interest percentage yield of loan is calculated without considering
the effect of inflation.
Notional rate of interest can also be defined as advertised interest rate on a loan without
taking into account any compounding of interest.
( 2. )
Difference between Real rate of interest and Notional Rate of interest
Basis of
Difference
Real Rate of interest Notional Rate of Interest
Meaning Real rate of interest is the
rate which is calculated after
allowing inflation
Notional rate of interest is the rate
actually paid on a loan which is taken
from any Financial institution or on
any Investment.
Applicability Used in cases where
inflations affects the amount.
Used in financial institutions for
calculating the loan amount and for
investment purpose.
Formula Real rate of interest is
calculated by subtracting
inflation from Nominal rate
Real rate of interest=
Notional rate – Inflation
Notional rate of interest is calculated
by adding Inflation in Real rate of
interest.
Notional rate of interest= Real rate of
interest + Inflation
Inflation
Effect
Real rate of interest is
affected by Inflation.in case
when the inflation is higher
than the Notional rate then
real rate will become
negative and when inflation
is lower than Notional rate
then real rate will be
positive.
In case of Notional rate of interest
there is no effect of inflation as it
does not considers inflation into
account
Calculation Real costs to the funds to
Borrower can be calculated
with the Help of Real rate of
interest.
Amount of loan can be calculated
with the Help of Notional rate of
interest.
Predictabilit
y
The real rate of interest
gives investors the idea of a
Notional rate of interest
Does not give actual idea as it does
6

real rate that they will
receive Inflation.
not take inflation into consideration.
( 3. )
Calculation of Real rate of interest for James
Real Rate of interest = Notional interest rate – Inflation
Here,
Notional rate of Interest = 4% Per Annum
Less: Inflation rate as of today= 1.90% Per Annum
Real rate of interest = 2.1 %
( 4. )
Yes it is possible for the real rate interest to equal to the Nominal rate of interest if the
rate of inflation is zero or the inflation is completely removed from the society. The basic
Difference between real rate of interest and Nominal rate of interest is that Real rate of
Interest takes Inflation into consideration; on the Other hand Nominal rate of Interest
does not take inflation into consideration.so if the rate of inflation changes to zero than
real Rate of Return will become Equal to Notional Rate of Return.
( B )
Cash rate is a rate which is used for managing National Monetary Policy. It is a
benchmark for mortgage, saving account and exchange rate. Cash rate shows the Interest
rate on “Overnight” Funds. Overnight funds are the funds which Commercial banks lends
to other banks on a overnight basis to meet their daily cash requirement.
Changes in Cash Rate effects different parts of the economy like inflation, investment,
Employment and spending.
Effects of Decrease in Cash rate on Economy and Financial Market
Reduces the incentive for Household to save - If the Reserve Bank of Australia
reduces the cash rate it will directly affects the incentives of Households. Because as
the cash rate reduces the households starts borrowing money from Banks. It increases
the Expenditure of Households. Household’s starts spending on durable goods such
as households Electronic Appliances, Hosing, clothing etc. and this will give rise to
Higher Household Consumption and investment.
Increases Spending on Durable Goods - Business sector is responsible for
Maintaining Balance in the Economy. Business sector is also known as Backbone of
Economy. As the Cash rate is Decreased by the Reserve bank of Australia now the
businesses starts Borrowings money from Commercial Institutions and increase their
investment on Capital Assets like Furniture, building and other fixed assets. In short ,
Decrease in Cash rate would increase the investment of Business.
7

Shows fluctuation in assets Prices fluctuation - Reduction in Cash Rate Directly
Effects the Prices of Assets. Because if there is Decrease in interest rate it
automatically increases the Present Discounted Value of Assets. And an increase in
Assets pricing increase the Wealth of Households. Household’s starts spending more
shares in Investment.
Effect the Exchange Rate - Exchange rate can be defined as the rate of price of one
currency in terms of another Currency. Exchange rates are of two types fix and
floating. Fixed Exchange rate is decided by Central Bank of Country Whereas
Floating Exchange rate are decided by mechanism of market Demand and Supply.
Exchange Rate has a Direct Effect on Inflation. Decrease in exchange rate increases
the completion in the foreign Market because Domestic producers will reduce their
prices in the foreign market to compete with foreign competitors. Decrease in cash
rate effects exchange rate which directly effects inflation through higher import
pricing.
Effect on Loans and Mortgages - Decrease in Exchange rate also have Effect on
loans and Mortgages. Loan is a sum of money which is Borrowed by an individual or
Business from any lender. Here the Lender can be an individual person or any
financial institution. If there is decrease in Cash rate then Households starts taking
loans from the Financial Institution.
Persons who might get benefits from this Decrease
The persons who have taken loans from the financial institutions are the first persons who
Might get benefit from this Decrease. They Can Save Thousands of Dollars over the life
span of loan. For Example if a person has 25 years left on his Mortgage and the person
still own 400,000 Dollar and the current interest rate is 4.30 percent and after drop it will
become 4.05%
Now if we calculate the difference in monthly repayments there will be a difference of 56
dollar because earlier the person has to pay monthly repayment of 2,178 Dollar but after
the reduction in cash rate he is liable to pay 2,1 22 Doller.so ultimately it is benefit For
the Household.
Persons who might not get Benefits from this Decrease
Financial institutions will not get Benefit from decrease in Cash rate. Reduction in Cash
rate will Directly affects the Financial institutions, because sometimes they takes
overnights loans to funding their various Transactions. And cash rate is charged on this
overnight Loans Now if Reserve bank of Australia reduces the cash rates these financial
institutions starts taking more amount of loans to fund their own transactions as the
interest rate attached to them has reduced. This will increase the risk through lending to
more businesses and individuals.
8

QUESTION – 3
( A )
( i )
Calculation of income from Investment
Return rate = 1 %
Marginal tax rate = 32.5 %
Medicare levy = 2 %
Income from Investment = [ ( ( 1 + return ) / (1 + inflation) ) – 1 ] * 100.
Income from Investment = [ ( ( 1 + 0.01 ) / (1 + 0.025) ) – 1 ] * 100
Income from Investment = ( ( 1.01 / 1.025 ) – 1 ) * 100
Income from Investment = ( - 0.015 ) * 100
Income from Investment = 1.15 (This is the amount of Income from Investment)
Real Dollar value is the adjusted value of the currency which is used to compare dollar
values from one period to another. Because of Inflation purchasing power of Dollar
changes time to time so to compare the dollar value from one year to another current
value of dollar has to be converted into constant value of Dollar.
In the case of Bradley the current rate of inflation is 2.5% per annum and he pays tax at
32.5 %plus medical Levy on his income from Investment which is 101.5 Dollar now
suppose if the Inflation rate rises to 2.7% per annum from 2.5% Per annum then then the
prices of investment automatically increases in the market and Real dollar value
considers the effect of inflation so in this case Bradley is not able to maintain the effect of
Inflation.
( ii )
Benefits of Risks to Bradley
In this case Bardely has only trust in bank Guaranteed investment because these
investment gives 1 % return on investment and the risk attached to these investment is
very less. And if we considered investment in other securities the amount of risk can be
high or low now in this case barley is Earning 1.15 Dollar as the income from
investment. But if he invests the same amount in shares of the company or in the
Property business he can earn more amount of profit as compared to bank guaranteed
investments.
( B )
Australian Dividend imputation credit system is a corporate tax system in which credit is
paid to the shareholders by corporates along with their dividend Payments. This system is
also known as franking credit.
Before 1987 companies in Australia has to Pay company tax on its profits at a flat rate of
49% and in case if the company is paying dividend to the shareholders then it is taxable
again as income for the shareholders.
This Results in the problem of double taxation first by company at corporate rate and
then on dividend income of shareholders. So to remove the problem of Double Taxation
9

Franking credit system is introduced By Australian Government, which is also known as
Australian Dividend imputation credit system or Franking Credit.
Applicability of Australian credit system in Australia
There are many companies in Australia which pays credit to shareholders along with
their dividend payment. Australian companies that are paying Australian company tax
have the authority to declare how much tax is paid is associated with any dividend it
pays. The dividend which have Maximum imputed tax amount are called Franked
dividend and any other dividend paid by the company is called unfranked dividend. Now
the Australian resident Shareholders who received franked dividend from the company
can declare the dividend on their tax returns, and they are entitled to claim back tax credit
on these Franked Dividend.
For Example
If a company makes a profit of 200 dollar and pays a company as 60 dollar as per 2006
Rates and records 60 Dollar in Franking account. Now this 60 Dollar is paid to the tax
office
This company has now left with 140 Dollar to pay a dividend which can be paid either in
same year or in later years if a company pays 140 Dollar as dividend as shareholder then
it could attach 60 dollar of Franking Credit and when the franking credit is paid the
franking account is debited by 60 dollar.
Eligible shareholder receiving Franked dividend can declare his income as cash amount
with franked dividend and this amount can be credited with franking credit against their
final tax bill. This way the tax which is paid by shareholders on dividend received is paid
is return back to the Shareholders.
Franking Credit is calculated as,
(Dividend Amount / ( 1 - Company tax rates ) - Dividend Amount
For Example, If a company pays 30% company tax rate and distribute 8 Dollar as
dividend to shareholders
Then Franking credit can be calculated as,
(Dividend amount / ( 1 - Company tax rates ) - Dividend amount
Franking Credit = ( 8.00 / ( 1 - 0.3 ) ) - 8.00
= ( 8.00 / 0.7 ) ) - 8.00
= ( 11.42 - 8.00 )
= 3.42 ( This is the amount of Franking Credit )
The shareholder is credited with 3.42 Dollar
10

Analysis of how the receipts of franking credit will results in Differing Results for
Australian resident and international investors:
Available to only Australian resident not to International Investors. - One of the major
Drawback of Franking credit or the Australian imputation credit system is that this credit
is Available to only Australian Residents only. International investors cannot claim
Franking Credit. In simple words if Australian residents are receiving cash dividend
from the company along with Franking credit then they can claim the Franking credit by
showing it in the tax return on the other hand if the international investors are receiving
dividend from the company then are not liable for refund of tax paid on dividend.
International investors has to Declare income as the cash part of dividend amount
received and have to ignore the Franking credit on the tax return.
( C )
( i )
MONTHLY SHARE PRICE DATA OF A2 MILK COMPANY
Date Open Close
Adjusted
Close
Monthly
Return
Monthly
Holding Period
Return ($)
Monthly Holding
Period Return
(%)
Jul-17 3.79 4.14 4.14 0.35 9%
Aug-17 4.15 5.04 5.04 21.74% 0.89 21%
Sep-17 5.1 5.86 5.86 16.27% 0.76 15%
Oct-17 5.92 7.62 7.62 30.03% 1.7 29%
Nov-17 7.34 7.59 7.59 -0.39% 0.25 3%
Dec-17 7.6 7.37 7.37 -2.90% -0.23 -3%
Jan-18 7.4 8.29 8.29 12.48% 0.89 12%
Feb-18 8.32 12.23 12.23 47.53% 3.91 47%
Mar-18 12.21 11.46 11.46 -6.30% -0.75 -6%
Apr-18 10.96 11.31 11.31 -1.31% 0.35 3%
May-18 11.36 9.93 9.93 -12.20% -1.43 -13%
Jun-18 9.7 10.52 10.52 5.94% 0.82 8%
Average Monthly Return = 10.08%
Average Monthly Return Compounded Annually = 216.64%
Standard Deviation = 17.8%
11

MONTHLY SHARE PRICE INDEX FOR AUSTRALIAN ALL ORDINARIES
Date Open Close
Adjusted
Close
Monthly
Return
Monthly
Holding
Period
Return ($)
Monthly
Holding Period
Return (%)
Jul-17 5764.00 5773.9 5773.9 9.90 0.17%
Aug-17 5773.90 5776.3 5776.3 0.042% 2.40 0.04%
Sep-17 5776.30 5744.9 5744.9 -0.544% -31.40 -0.54%
Oct-17 5744.90 5976.4 5976.4 4.030% 231.50 4.03%
Nov-17 5976.40 6057.2 6057.2 1.352% 80.80 1.35%
Dec-17 6057.20 6167.3 6167.3 1.818% 110.10 1.82%
Jan-18 6167.30 6146.5 6146.5 -0.337% -20.80 -0.34%
Feb-18 6146.50 6117.3 6117.3 -0.475% -29.20 -0.48%
Mar-18 6117.30 5868.9 5868.9 -4.061% -248.40 -4.06%
Apr-18 5868.90 6071.6 6071.6 3.454% 202.70 3.45%
May-18 6071.60 6123.5 6123.5 0.855% 51.90 0.85%
Jun-18 6123.50 6289.7 6289.7 2.714% 166.20 2.71%
Average Monthly Return = 0.804%
Average Monthly Return Compounded Annually = 10.09%
Standard Deviation = 2.3%
1 2 3 4 5 6 7 8 9 10 11 12-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
A2M
AAO
MONTHLY RETURN
A2M
AAO
12