Scribd Logo
Upload

Welcome to Scribd!

  • 74 views

    Tutorial 7 Solutions PDF

    Uploaded by

    musuota
    The document discusses gearing strategies and provides examples of calculating returns from investments using different levels of gearing. Key points: 1) Positive gearing occurs when investment income exceeds interest expenses, while negative gearing is when expenses are greater than income. 2) Risks of gearing include lower than expected returns, higher costs, loan terms changing, inability to meet margin calls, or needing to sell assets at a loss. 3) Examples show an investor's dollar and percentage returns from a $50,000 investment using 0%, 50%, and 90% gearing over one year, with higher gearing yielding higher returns but more risk.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Tutorial 7 Solutions PDF

    Uploaded by

    musuota
    74 views4 pages
    The document discusses gearing strategies and provides examples of calculating returns from investments using different levels of gearing. Key points: 1) Positive gearing occurs when investment income exceeds interest expenses, while negative gearing is when expenses are greater than income. 2) Risks of gearing include lower than expected returns, higher costs, loan terms changing, inability to meet margin calls, or needing to sell assets at a loss. 3) Examples show an investor's dollar and percentage returns from a $50,000 investment using 0%, 50%, and 90% gearing over one year, with higher gearing yielding higher returns but more risk.

    Original Title

    Tutorial 7 Solutions.pdf

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses gearing strategies and provides examples of calculating returns from investments using different levels of gearing. Key points: 1) Positive gearing occurs when investment income exceeds interest expenses, while negative gearing is when expenses are greater than income. 2) Risks of gearing include lower than expected returns, higher costs, loan terms changing, inability to meet margin calls, or needing to sell assets at a loss. 3) Examples show an investor's dollar and percentage returns from a $50,000 investment using 0%, 50%, and 90% gearing over one year, with higher gearing yielding higher returns but more risk.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    74 views4 pages

    Tutorial 7 Solutions PDF

    Uploaded by

    musuota
    The document discusses gearing strategies and provides examples of calculating returns from investments using different levels of gearing. Key points: 1) Positive gearing occurs when investment income exceeds interest expenses, while negative gearing is when expenses are greater than income. 2) Risks of gearing include lower than expected returns, higher costs, loan terms changing, inability to meet margin calls, or needing to sell assets at a loss. 3) Examples show an investor's dollar and percentage returns from a $50,000 investment using 0%, 50%, and 90% gearing over one year, with higher gearing yielding higher returns but more risk.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 4

    Tutorial 7 (Week 9)

    Ch08
    PROFESSIONAL APPLICATION QUESTIONS:

    8.1 What is the difference between positive and negative gearing?


    Positive gearing is where the annual income generated from an investment is greater than the interest and other tax
    deductible expenses. Negative gearing is where the annual income generated from an investment is less than the
    interest and other tax deductible expenses.

    8.2 What are the risks associated with gearing?


    • The anticipated annual income is less than expected
    • The anticipated annual expenses are higher than expected.
    • If the loan must be rolled over, the lender may change the rules or conditions of the loan which will affect the
    benefits of the gearing exercise.
    • The investor might lose their job and struggle to generate the cash flow necessary to service the outgoings,
    particularly loan repayments.
    • Circumstances may force the investor to sell the asset in less than favourable conditions.
    • Asset specific factors can adversely affect the investment asset.
    • The asset does not generate the capital gain anticipated.

    8.3 An investor wishes to buy some shares by using a combination of their own money and borrowed funds.
    They are unsure whether they should take out a margin loan which is secured against the shares or take out
    a mortgage against the family home. What are the advantages/disadvantages of each approach?
    Margin Loan Mortgage

    Advantages No recourse to non-investment assets. Lower interest rate than margin loan.

    Existing investment assets can be used Margin calls not required – security
    as additional security if required. offered for loan is less price volatile.

    Disadvantages Higher interest rate than mortgage. Family home could be at risk.

    Need capacity to meet margin calls


    when made – security offered for loan
    is price volatile.

    8.4 Outline three ways that an investor can satisfy a margin call.
    • Contributing cash to reduce the outstanding loan balance.
    • Pledging additional assets as security.
    • Selling investment assets and using the proceeds of the sale to reduce the outstanding loan balance.
    PROFESSIONAL APPLICATION EXERCISES:

    8.11 Your client, Jason, wants to start a share portfolio using the $50 000 in equity that he has already saved
    and possibly combine this with some borrowed funds. Assume the following:
     interest rates at 8%
     grossed-up dividend income of 6%
     annual capital gain of 4%
     MTR 37%.
    What will be Jason’s net return in both dollar and percentage terms for the following levels of gearing if
    he sells the investment asset a year and 1 day after he buys it?
    a. 100% equity ($50 000 in equity)
    b. 50% equity ($50 000 in equity and $50 000 in debt)
    c. 10% equity ($50 000 in equity and $450 000 in debt)
    100% Equity 50% Equity 10% Equity
    Capital $ 50,000 $ 50,000 $ 50,000
    Debt $ - $ 50,000 $ 450,000
    Investment $ 50,000 $ 100,000 $ 500,000

    Income $ 3,000 $ 6,000 $ 30,000


    Less interest $ - $ 4,000 $ 36,000
    Net income $ 3,000 $ 2,000 -$ 6,000
    Tax payable $ 1,110 $ 740 -$ 2,220
    Income after tax $ 1,890 $ 1,260 -$ 3,780

    Capital gain $ 2,000 $ 4,000 $ 20,000


    Assessable gain $ 1,000 $ 2,000 $ 10,000
    CGT $ 370 $ 740 $ 3,700
    Capital gain less CGT $ 1,630 $ 3,260 $ 16,300

    Total return after tax $ $ 3,520 $ 4,520 $ 12,520


    Total return after tax % 7.0% 9.0% 25.0%

    8.13 Your client, Malala, has the following portfolio which he has financed through a $200 000 margin loan.
    What is her safety margin?

    Safety margin = 1 – (200,000/228,000)


    = 12%
    8.14 Assume that the stock market has suffered considerable falls. Malala’s portfolio from exercise 8.13 is
    now:

    Her lender has made a margin call. Malala does not have any cash to meet the margin call nor does she
    have any additional assets to pledge as security. For each of the shares in her portfolio, calculate how
    much she would need to sell to satisfy the margin call.
    Cash required = 200,000 – 190,750 = 9,250
    Company Market value LVR Security Need to sell
    9,250/1-0.75)
    AGK $ 70,000 75% $ 52,500 $ 37,000 or
    BOQ $ 65,000 70% $ 45,500 $ 30,833 or 9,250/1-0.70)
    DOW $ 85,000 65% $ 55,250 $ 26,429 or 9,250/1-0.65)
    CSL $ 50,000 75% $ 37,500 $ 37,000 9,250/1-0.75)
    $ 270,000 $ 190,750

    Safety margin -5% 1 – (200,000/190,750)

    Loan $ 200,000
    Security $ 190,750
    Cash required $ 9,250

    8.17 Wal is a sheep farmer from out west. When he shears his flock in 3 months’ time he will have
    approximately 9,000 kilograms of wool. The current price of the SFE Greasy Wool Futures 21 micron
    contract is $11.20 per kilogram for delivery in three months. Wal decides to sell four SFE Greasy Wool
    Futures 21 micron contracts at $11.20 per kilogram.
    What is Wal’s gain/loss on the futures contract in dollar terms if in three months’ time the price of wool
    is:

    (Note: 1 SFE Greasy Wool Futures 21 Micron contract = 2,500kg; see pg. 333 of the text book)
     $13.75
    Loss = 11.20 – 13.75 = (2.55)
    (2.55) * 10,000 = $(25,500)

     $10.12
    Gain = 11.20 – 10.12 = 1.08
    3.63 * 10,000 = $10,800

     $11.20
    Break even = 11.20 – 11.20 = $0
    8.18 From exercise 8.17 what is Wal’s overall gain/loss when his physical position is netted against his futures
    position for each of the prices listed above?

    13.75 – 11.20 = 2.55

    2.55 * 9,000 = 22,950

    You might also like

    pFad - Phonifier reborn

    Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

    Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


    Alternative Proxies:

    Alternative Proxy

    pFad Proxy

    pFad v3 Proxy

    pFad v4 Proxy