COVER PAGE

NAME:
ID:
SUBJECT:
Question 1

Part (a): The question will be solved by using annuity formula. A series of periodic payments will be made in
the bank to arrive at the target amount of $60,000. The monthly payment amount can be calculated using
the following formula:

Payment per month = Future Value / {( 1 + r ) n -1 } / r

Future Value = $60,000

R = 4%/12 = 0.00333
N = 5 * 12 = 60

By putting the values, in the formula above

Payment per month = 60,000 / {(1+0.00333) 60 -1} / 0.003333

Payment per month = $905
I will have to deposit $905 monthly to save for my daughter’s university.

Part (b) i.: The question will be solved by using present value formula. The discount rate at which present
value will be zero will be the rate of return of company.

End of Year Cash Flow Discount Rate Present Value

0 (22) 10.5% (22.00)
1 1.8 10.5% 1.63
2 3.0 10.5% 2.46
3 6.5 10.5% 4.82
4 8.4 10.5% 5.63
5 12.3 10.5% 7.47
Total 0.00

The net present value is zero at 10.5% so the rate of return of company is 10.5%.

Since the expected rate of return is 10% per annum which is lower than 10.5% the actual rate of return
based on cash flow, therefore, I would purchase the investment.

ii. Now the expected rate of return is 15%, therefore, I would not purchase the project as the actual rate of
return is 10.5% and is less than 15%.

Part (c): (i): The value of Brant’s financial assets will be the sum of share portfolio and superannuation
account.

The value of share portfolio, after 33 years that is when Brant will be 67, can be calculated using following
formula:
Future Value = Present Value ( 1 + i ) n
Future Value = 47,000 (1+7%) 33
Future Value = $438,290.97

The value of superannuation account ($78,000), after 33 years that is when Brant will be 67, can be
calculated as follows:

Future Value = Present Value ( 1 + i ) n

Future Value = 78,000 (1+8%) 33
Future Value = $988,731.87

The value of superannuation account ($1,000 per month), after 33 years that is when Brant will be 67, can
be calculated as follows:

Future Value = Payment per Month * {(1+r) n -1} / r

Future Value = 1,000 * {(1+8%) 33 -1} / 8%
Future Value = $1,933,645.35

Total Value of Brant’s financial assets when he retires at age of 67 will be $438,290.97 + $988,731.87 +
$1,933,645.35 = $3,420,668.19

(ii) The monthly pension amount that Brant will receive on his retirement can be calculated as follows:

Present Value = P * {1 - (1+r) -n} / r

$3,420,668.19 - $120,000 = P * {1 - (1+5%) -18} / 5%
$3,300,668.19 = P * {1 - (1+5%) -18} / 5%
Monthly pension amount = $23,205
Question 2

Part (a): 1.The interest rate of 4% that bank has quoted is notional rate of interest as it does not take
impact of inflation.

Part (a): 2.The following are the difference between real rate of interest and notional rate of interest:
(Investopedia, 2019)

Point of Difference Real Rate of Interest Notional Rate of Interest

1. Inflation effect It take the effect of inflation. It does not adjust itself for the effect of
inflation.
2. Formula The formula to calculate real rate of The formula to calculate notional rate of
interest is: interest is:
Real Rate = Nominal Rate – Inflation Nominal Rate = Real Rate + Inflation
3. Zero It can be less than zero if inflation is It cannot be less than zero.
greater than notional rate.
4. Actual Return It indicates actual return what an investor It does not indicate actual return what an
will get. investor will get.

Part (a): 3.The notional rate of interest for James is 4% as quoted by bank.

Assuming there is 1% inflation in the economy, the real rate of interest for James can be calculated by using
the below formula:

Real Rate = Nominal Rate – Inflation

Real Rate = 4% - 1%
Real Rate = 3%

Part (a): 4.The real rate of interest and notional rate of interest can be same if there is no inflation in the
economy.

Part (b): There will be numerous effects on the economy for decrease in 0.25% cash rate. Some sectors will
be effected in a positive way and some sectors will be effected in a negative manner. The decrease in cash
rate will help in reducing the unemployment in the economy as well as increase the inflation.

As the graph of employment in the country depicts the position of the economy, the decrease in cash rate
might be done to improve the performance of the economy.

The variation in cash rate also affect house loan interest rates, as it is carefully bring into consideration
when the bank grants house loans.

The variation in cash rates also affects the amount of general public’s money in savings account. If the cash
rate increases, the public will deposit more of its cash in savings account whereas if cash rate decreases
public will not be inclined to deposit its money.
Question 3

Part (a): i. Assuming Bradley has invested $100 in bank guaranteed investments which earns him a return
of 1%. His interest income from investment will be $1. The tax of 32.5% plus medicare levy of 2% will be
34.5% and will be $0.345 of $1. The remaining profit will be $0.655. The inflation of 2.5% will be $2.5 of
investment. The total net figure will be $(1.845). Therefore, the calculation shows he is not preserving the
total dollar value of his investment.

ii. There are numerous advantages of risk besides the disadvantages.

First and foremost, a risk can lead to potential huge gains. As it is always said that where there is more risk
there is more return. Therefore, risk in investments can lead to huge returns.

The process of investing is easy as well as there is limited liability.

The risky stock investments can lead out to high returns in form of capital gains and dividends.

The high return investments can preserve the value of money against the inflation as compared to low risk
investments.

Part (b): The Australian dividend imputation credit system is a system as per which the tax payable on
dividend by shareholders of a company can be reduced by certain amount depending on the amount of tax
paid by the company. It is a mechanism by which shareholders are given benefit as previously income
earned by them through dividend is taxed twice, once as the income of the company and secondly as the
income of the shareholder. By way of dividend imputation system, now the shareholder is given credit for
the amount taxed.

The proportion of dividends that will be franked depends on the decision of the company. A company may
choose to frank complete dividend as well may also choose not to frank any part of the dividend. The
corporations pay a nominal tax as a franking credit.

As per the tax laws, the Australian residents can take the advantage of franking credit to reduce their tax
burden. The result is elimination of double taxation of income.

The overseas investors i.e. international investors cannot benefit from the franking credits as this facility is
available only for Australian residents. (The Conversation, 2019)

Part (c): (i)

Date Open Close Monthly Return ($) Monthly Return (%)

A B C=B–A D=C/A
July 2017 3.790 4.140 0.350 9.230%
August 2017 4.150 5.040 0.890 21.450%
September 2017 5.100 5.860 0.760 14.900%
October 2017 5.920 7.620 1.700 28.720%
November 2017 7.340 7.590 0.250 3.410%
December 2017 7.600 7.370 -0.230 -3.030%
January 2018 7.400 8.290 0.890 12.030%
 February 2018 8.320 12.230 3.910 47.000%
March 2018 12.210 11.460 -0.750 -6.140%
April 2018 10.960 11.310 0.350 3.190%
May 2018 11.360 9.930 -1.430 -12.590%
June 2018 9.700 10.520 0.820 8.450%

ii. Average Monthly Return (%) = 10.55%

iii. Annual Holding Period Return ($)

Value of share at end of year – Value of share at beginning of year
10.52 – 3.79 = 6.73

Annual Holding Period Return (%) = 6.73 / 3.79 = 177.57%

Part (d): i.

Date Open Close Monthly Return Monthly Return (%)

A B C=B–A D=C/A
July 2017 5,764.000 5,773.900 9.900 0.170%
August 2017 5,773.900 5,776.300 2.400 0.040%
September 2017 5,776.300 5,744.900 -31.400 -0.540%
October 2017 5,744.900 5,976.400 231.500 4.030%
November 2017 5,976.400 6,057.200 80.800 1.350%
December 2017 6,057.200 6,167.300 110.100 1.820%
January 2018 6,167.300 6,146.500 -20.800 -0.340%
February 2018 6,146.500 6,117.300 -29.200 -0.480%
March 2018 6,117.300 5,868.900 -248.400 -4.060%
April 2018 5,868.900 6,071.600 202.700 3.450%
May 2018 6,071.600 6,123.500 51.900 0.850%
June 2018 6,123.500 6,289.700 166.200 2.710%

ii. Average Monthly Holding Period Return (%) = 0.75%

iii. Annual holding period return (%) = (Value at end of year – Value at beginning of year) / Value at
beginning of year = (6,289.70 - 5,764.00) / 5,764.00 = 9.12%

iv. In excel file

v. Calculation of risk for 2018 measured by standard deviation for A2M

Calculation of arithmetic mean for return =

Date Monthly Return (%)

January 2018 12.030%
February 2018 47.000%
 March 2018 -6.140%
April 2018 3.190%
May 2018 -12.590%
June 2018 8.450%
Arithmetic Mean 8.660%

Now inputting the figures into the formula:

{(12.03-8.66)2 + (47.00-8.66)2 + (-6.14-8.66)2 + (3.19-8.66)2 + (-12.59-8.66)2 + (8.45-8.66)2} / 6 = 2181.879/6 =

363.646

Taking square root,

Standard deviation = 19.069

Calculation of risk for 2018 measured by standard deviation for MKT:

Calculation of arithmetic mean for return =

Date Monthly Return (%)

January 2018 -0.340%
February 2018 -0.480%
March 2018 -4.060%
April 2018 3.450%
May 2018 0.850%
June 2018 2.710%
Arithmetic Mean 0.360%

Now inputting the figures into the formula:

{(-0.34-0.36)2 + (-0.48-0.36)2 + (-4.06-0.36)2 + (3.45-0.36)2 + (0.85-0.36)2 + (2.71-0.36)2} / 6 = 36.042/6 =

6.007

Taking square root,

Standard deviation = 2.450

vi. The beta of a stock indicates its volatility with respect to the share market. It measures how much a
stock is volatile when it seen with respect to the market. Stocks with beta more than 1.0 are considered
risky and more volatile as compared to stocks having beta less than 1.0. However, the stocks with beta
greater than 1 also offer potential opportunity for high gains.

The A2M’s beta of 1.04 means that the share of A2M is more volatile as compared to the stock market. It is
highly likely that the share will move 1.04% with every 1% change in the market.

vii. The expected return for A2M using CAPM formula can be calculated as follows:

Expected Return = Risk Free Rate + (Beta x Market Risk Premium)

Expected Return = 2.29% + {1.04 x (9.55%-2.29%)}
Expected Return = 9.84%

viii. In excel file

ix. In excel file

x. Estimated Return = 9.84% * 40% + 9.55% * 60% = 9.66%

Beta = 1.04 * 40% + 1 * 60% = 1.016

References

CALCULATING PRESENT AND FUTURE VALUE OF ANNUITIES

Investopedia. (2019). Calculating Present and Future Value of Annuities. [online] Available at:
https://www.investopedia.com/retirement/calculating-present-and-future-value-of-annuities/ [Accessed
29 Aug. 2019].

PRESENT VALUE OF AN ANNUITY

Investopedia. (2019). Present Value of an Annuity. [online] Available at:
https://www.investopedia.com/terms/p/present-value-annuity.asp [Accessed 29 Aug. 2019].

REAL INTEREST RATE DEFINITION

Investopedia. (2019). Real Interest Rate Definition. [online] Available at:
https://www.investopedia.com/terms/r/realinterestrate.asp [Accessed 29 Aug. 2019].

WHAT IS CAPM - CAPITAL ASSET PRICING MODEL - FORMULA, EXAMPLE

Corporate Finance Institute. (2019). What is CAPM - Capital Asset Pricing Model - Formula, Example.
[online] Available at: https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-capm-
formula/ [Accessed 29 Aug. 2019].

WORDS THAT MATTER. WHAT’S A FRANKING CREDIT? WHAT’S DIVIDEND IMPUTATION? AND WHAT'S
'RETIREE TAX'?
The Conversation. (2019). Words that matter. What’s a franking credit? What’s dividend imputation? And
what's 'retiree tax'?. [online] Available at: http://theconversation.com/words-that-matter-whats-a-
franking-credit-whats-dividend-imputation-and-whats-retiree-tax-111423 [Accessed 29 Aug. 2019].