Questions:
a.Sandy expects to receive the following stream of cash flows from an investment over the next 5 years:
End of year Cash flow ($)
1 400
2 800
3 500
4 400
5 300
If the relevant rate of interest is 9% per annum on this investment, how much should she pay for this investment opportunity? (4 marks)
b.Lee has taken out a loan of $100,000 with an interest rate of 10% per annum. The loan is to be paid off by 20 equal quarterly payments; the first payment is due today. How much will Lee’s quarterly payment be? (4 marks)
c.Dianne won a lottery prize of $200,000. She invested the entire amount and expects a yearly return of 10% per annum compounded monthly on her investment. Dianne will receive 150 equal monthly payments with the first payment due to be paid to her in exactly 2 years. Find the size of the monthly payments that Dianne will receive. (7 marks)
Question 2 (15 marks)
This question relates to material covered in the Topics 1 to 3. This question addresses the 5th and 6th subject learning outcomes.
Following is an example of a cash flow timeline developed using the Table Function within MS Word. Please use this example as a means to develop a similar timeline in your answer to the following question
1. Using the Table function within MS Word, draw a time line showing the above cash flows and interest rates .
2. What will be the value of all these cash flows at each of the following times:
Time 1
Time 5
Time 10
Answer:
Requirement a:
Sandy would receive a stream of cash flows within the next 4 years. Therefore, it is necessary to determine the discounted values of the expected cash flow stream for computing the present value of the whole investment. The formula of discounted cash flow is shown below:
Where, CF_{n }= Cash flow of n period
r= Interest Rate
n = Period
By using the stated formula, the present value of the investment is calculated below:
ΣDCF = + + + +
= + + + +
= + + + +
=
= 1904.76
As per the above calculations, it can be stated that Sandy has to pay $1,904.76 for the investment option to earn the given cash flow streams.
Requirement b:
Lee has to repay the loan of $100,000 by 20 equal installments. Such equal installments for a specified period are referred as annuity. The formula of annuity is given below:
P =
Where, PV = Present Value of Loan = $100,000
r= Interest Rate per period = (10%/4) = 2.5%
n = Nos. of Quarterly Installments = 20
Therefore, P =
=
=
=
As per the calculations above, the quarterly payment of Lee will be $6,414.71.
Requirement c:
Dianne would receive the monthly payments after two years of investment. Hence, it is necessary to compute the investment value after two years. The future value of the investment can be computed by using the following formula:
FV =
Where, PV = Present value of investment = $200,000
r= Interest Rate per compounding periods = (10%/12 months) = 0.83%
n = Nos. of Compounding Periods = (2 yrs. X12 months) = 24
Hence, FV =
=
=
Now, Dianne would receive $2,44,078.19 through 150 equal monthly installments. The formula used for calculating the monthly payments is as follows:
P =
Where, PV = Investment Value after 2 years = $2,44,078.19
r= Interest Rate per period = (10%/12 months) = 0.83%
n = Nos. of Monthly Installments = 150
Therefore, P =
=
=
=
Dianne would receive $2,856.69 as monthly payments after 2 years from the stated investment.
Answer to Question 2:
Requirement i:
% 

8% 
6% 
7% 

Year 
0 
1 
2 
3 
4 
5 
6 
7 
8 
9 
10 
























CFi 
$0 
$0 
$6500 
$1500 
$0 
$0 
$2500 
$0 
$0 
$10000 
$0 
Requirement ii:
The formula, used for calculating the value of cash flows, is as follows:
Where, CF_{n }= Cash flow of n period
r= Interest Rate
n = Period
Value of Cash Flow on Time_{1 }:
ΣDCF_{1} =
= = $0
Value of Cash Flow on Time_{5 }:
ΣDCF_{5} = = + + + +
= + + + +
= + + + +
=
Answer to question 3:
The Australian government on 1^{st} September introduced the treasury laws amendment bill that proposed the reduction of corporate tax rate for all the reporting entities from 30% to 25% (www.ato.gov.au 2018). For larger companies, government would bring into tax cut and witnessing overtime reduction in rates. Reduction rate in corporate tax rate is done for proposing and encouraging investment mainly highly mobile foreign direct investment. This reduction in taxation rate would help in lowering would help in increasing income for Australians in the longrun. Such acceleration in investment is done by building more productive and larger capital stock and generating knowledge spillovers and technology. Not only higher growth would be encouraged by building a more productive and larger capital stock, but it will also help in generating higher wages. It was indicated by some views on taxation of company that the corporate taxation rate should be reduced to 25% with the timing that is subjected to fiscal and economic circumstances. At the same time, there should be introduction of making arrangements for charging for the use of nonrenewable sources of energy. It is indicated by the theoretical concepts that lowering the taxation rate would help in stimulating wages and investments. A large chunk of reduction in taxation rate of company would be met immediately by increasing the burden through personal income taxation. The reason is attributable to the fact that lowering Australian corporate taxation rate would immediately result in lowering franking credits for domestic shareholders that helps in offsetting their liabilities of personal income taxation (Stewart, 2017).
Nevertheless, the benefits attributable from any reduction in corporate taxation rate of Australia would largely go to owner of capital and foreign investors resulting from unique system of dividend imputation of Australia. Australia is one of the few countries having the unique system of dividend imputation that effectively helps in lowering the taxation rate and in this regard, local companies operating in country are delivered with franking credits indicating that if the company is paying higher taxation rate or more amount of tax less amount then investors would be paying less (Faff, 2015). Dividend imputation is basically a mechanism that helps in providing some tax payers credits to residents for company tax that deemed to have been paid on behalf of company. Dividends are attached to the franking credits are the actual mechanisms for making delivery of tax credits to residents (Davis, 2016). For the tax residents of Australia, from the perspective of investment, the company taxation rate is irrelevant. Therefore, the impact of corporate tax rate is quite different because of system of tax imputation of Australia. For the Australian tax holders, the company tax rate is effectively a withholding tax as the amount is returned when the dividend payment is done. Reduction in corporate tax rate would have a direct benefits attributable to foreign investors and lower rate would attract new foreign investors to Australia. Moreover, arrangement by other foreign investors to make little payment or no taxation in Australia and reducing that the statutory rate does not impact them. A lower taxation rate would encourage investment and investment as potential returns generated would be higher (Loughran & McDonald, 2016). It is so because in the competitive global market, higher taxation rate would discourage investment in Australia and thereby dislocating economic activity.
If the corporation tax is highly disproportional, it is indicative of the fact that there will be lower business creation and fewer jobs. Amount of lower investment in capital would mean lower productivity and income for workers. For consumers, lower taxation rate would mean lower price and higher amount of product and services. Over the subsequent years, lower corporate taxation rate is correlated with skyrocketing revenue and revenue of government will also increase due to reduction in corporate tax rate of company (Adler & Stringer, 2016).
Answer to Question 4:
Requirement i:
The monthly holding period returns are calculated by using the formula, stated below:
R_{i} =
Where, = Current Month’s Closing Stock Price
= Previous Month’s Closing Stock Price
Requirement ii:
The average monthly holding period returns are calculated by using the formula, stated below:
Average Monthly Returns =
By using the above formula, the Average monthly holding period returns of NAB, BHP and All Ordinary Index are calculated in the following table:

NAB 
BHP 
AORD 

Date 
Closing Price 
Return 
Closing Price 
Return 
Closing Price 
Return 
31012016 
24.19 

15.57 

4947.90 

29022016 
26.24 
8.47% 
16.86 
8.29% 
5151.80 
4.12% 
31032016 
27.19 
3.62% 
20.68 
22.66% 
5316.00 
3.19% 
30042016 
27.15 
0.15% 
19.08 
7.74% 
5447.80 
2.48% 
31052016 
25.43 
6.34% 
18.65 
2.25% 
5310.40 
2.52% 
30062016 
26.54 
4.36% 
19.52 
4.66% 
5644.00 
6.28% 
31072016 
27.34 
3.01% 
20.43 
4.66% 
5529.40 
2.03% 
31082016 
27.87 
1.94% 
22.38 
9.54% 
5525.20 
0.08% 
30092016 
28.00 
0.47% 
23.07 
3.08% 
5402.40 
2.22% 
31102016 
28.93 
3.32% 
24.41 
5.81% 
5502.40 
1.85% 
30112016 
29.70 
2.66% 
25.06 
2.66% 
5719.10 
3.94% 
31122016 
30.33 
2.12% 
26.64 
6.30% 
5675.00 
0.77% 







Average Monthly Return 
2.14% 
5.24% 
1.29% 
Requirement iii:
The formula of annual holding period return, used in the following table is as follows:
Annual Holding Period Returns = – 1
Where, = Monthly Return of Last month
= Monthly Return of First month

NAB 
BHP 
AORD 

Date 
Closing Price 
Return 
Closing Price 
Return 
Closing Price 
Return 
31012016 
24.19 

15.57 

4947.90 

29022016 
26.24 
8.47% 
16.86 
8.29% 
5151.80 
4.12% 
31032016 
27.19 
3.62% 
20.68 
22.66% 
5316.00 
3.19% 
30042016 
27.15 
0.15% 
19.08 
7.74% 
5447.80 
2.48% 
31052016 
25.43 
6.34% 
18.65 
2.25% 
5310.40 
2.52% 
30062016 
26.54 
4.36% 
19.52 
4.66% 
5644.00 
6.28% 
31072016 
27.34 
3.01% 
20.43 
4.66% 
5529.40 
2.03% 
31082016 
27.87 
1.94% 
22.38 
9.54% 
5525.20 
0.08% 
30092016 
28.00 
0.47% 
23.07 
3.08% 
5402.40 
2.22% 
31102016 
28.93 
3.32% 
24.41 
5.81% 
5502.40 
1.85% 
30112016 
29.70 
2.66% 
25.06 
2.66% 
5719.10 
3.94% 
31122016 
30.33 
2.12% 
26.64 
6.30% 
5675.00 
0.77% 







Annual Holding Period Return 
1.90% 
4.58% 
1.15% 
Requirement iv:
The formula for Standard Deviation, used below, is as follows:

NAB 
BHP 
AORD 

Date 
Closing Price 
Return 
Closing Price 
Return 
Closing Price 
Return 
31012016 
24.19 

15.57 

4947.90 

29022016 
26.24 
8.47% 
16.86 
8.29% 
5151.80 
4.12% 
31032016 
27.19 
3.62% 
20.68 
22.66% 
5316.00 
3.19% 
30042016 
27.15 
0.15% 
19.08 
7.74% 
5447.80 
2.48% 
31052016 
25.43 
6.34% 
18.65 
2.25% 
5310.40 
2.52% 
30062016 
26.54 
4.36% 
19.52 
4.66% 
5644.00 
6.28% 
31072016 
27.34 
3.01% 
20.43 
4.66% 
5529.40 
2.03% 
31082016 
27.87 
1.94% 
22.38 
9.54% 
5525.20 
0.08% 
30092016 
28.00 
0.47% 
23.07 
3.08% 
5402.40 
2.22% 
31102016 
28.93 
3.32% 
24.41 
5.81% 
5502.40 
1.85% 
30112016 
29.70 
2.66% 
25.06 
2.66% 
5719.10 
3.94% 
31122016 
30.33 
2.12% 
26.64 
6.30% 
5675.00 
0.77% 







Annual Holding Period Return 
1.90% 
4.58% 
1.15% 
Requirement iv:
The formula for Standard Deviation, used below, is as follows:
S =
Where, = Monthly Returns
= Average Monthly returns
n= Nos. of Monthly Returns

NAB 
BHP 
AORD 

Date 
Closing Price 
Return 
Closing Price 
Return 
Closing Price 
Return 
31012016 
24.19 

15.57 

4947.90 

29022016 
26.24 
8.47% 
16.86 
8.29% 
5151.80 
4.12% 
31032016 
27.19 
3.62% 
20.68 
22.66% 
5316.00 
3.19% 
30042016 
27.15 
0.15% 
19.08 
7.74% 
5447.80 
2.48% 
31052016 
25.43 
6.34% 
18.65 
2.25% 
5310.40 
2.52% 
30062016 
26.54 
4.36% 
19.52 
4.66% 
5644.00 
6.28% 
31072016 
27.34 
3.01% 
20.43 
4.66% 
5529.40 
2.03% 
31082016 
27.87 
1.94% 
22.38 
9.54% 
5525.20 
0.08% 
30092016 
28.00 
0.47% 
23.07 
3.08% 
5402.40 
2.22% 
31102016 
28.93 
3.32% 
24.41 
5.81% 
5502.40 
1.85% 
30112016 
29.70 
2.66% 
25.06 
2.66% 
5719.10 
3.94% 
31122016 
30.33 
2.12% 
26.64 
6.30% 
5675.00 
0.77% 







Standard Deviation 
3.60% 
7.54% 
2.99% 
Requirement vi:
The CAPM Formula for Expected Return is as follows:
E_{r } = r_{f } + (β x r_{mp})
Where, r_{f } = Risk Free Rate
β= Beta
r_{mp} = Market Risk Premium

NAB 
BHP 
Beta 
1.23 
0.9 
Risk Free Rate 
2.95% 
2.95% 
Market Return 
6.50% 
6.50% 
Expected Return 
7.32% 
6.15% 
Requirement viii:
The formula of Portfolio Return & Portfolio Beta are given below:
P_{r } = (w_{1 }x r_{1}) + (w_{2 }x r_{2})
β_{p} = (w_{1 }x β_{1}) + (w_{2 }x β_{2})
Where, w_{1 }= Weightage of NAB
w_{2 }= Weightage of BHP
r_{1} = Average Monthly Return of NAB
r_{2} = Average Monthly Return of BHP
β_{1} = Beta of NAB
β_{2} = Beta of BHP

NAB 
BHP 
Beta 
1.23 
0.9 
Portfolio Weightage 
30% 
70% 
Portfolio Return 
4.312% 

Portfolio Beta 
1.00 
Requirement ix:
Based on analysis of CAPM and SML, the portfolio of assets in which the investor would be making investment is in the shares of BHP Billiton and shares of NAB (Beaumont, 2015) It can be seen from the computation that return generated by the portfolio would be 4.312% with value of portfolio beta is 1. However, the average return generated by shares of BHP is more than that of BHP Billiton Limited. On other hand, the deviation of return generated from the shares of BHP Billiton is more than that of NAB. Therefore, returns generated by individual stocks has its own risks and returns and making a portfolio of both the assets would lead to generation of average monthly return of 1.29% and with annual holding period of 1.15% and variation of 2.29%.
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