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Assigment - Accounting principles

Professional Practice in Accounting (Charles Sturt University)

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ACC 515- Assignment 02

Gayan Ranaweera

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Question 01

a.  Sandy expects to receive the following stream of cash flows from an investment over
the next 5 years with 9% interest rate for relevant investment. 

End   of Cash   flow

year ($)
1 400
2 800
3 500
4 400
5 300

 Timeline as follows..,

1 2 3 4 5

400 800 500 400 300

First we need to get present value (PV) of each cash flow (CF).

−n
PV =FV ( 1+i )

Here i = 0.09

CF1.,  n=1

P V 1=FV 1 ( 1+i )−n

P V 1=400 ( 1+.09 )−1  P V 1=$ 366.972

CF2.,  n=2

P V 2=FV 2 ( 1+i )−n

P V 2=800 ( 1+.09 )−2  P V 2=$ 673.344

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CF3.,  n=3

P V 3=500 ( 1+ .09 )−3  P V 3=$ 386.091

CF4.,  n=4

P V 4=400 ( 1+ .09 )−4   P V 3=$ 283.370

CF5.,  n=5

P V 5=300 ( 1+ .09 )−5  P V 4=$ 194.979

    Sandy should pay this amount to investment = PV 1+ PV 2 + PV 3+ PV 4+ PV 5
                                                                                                         =$1,904.756

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. Payment is due on today.

PV annuity due.,

PV PMT *(1+i)
Annuity (due )=¿ ¿¿
i

PMT
100,000= ¿*(1+0.025)
0.025
PMT = 6,258.256

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.

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Value of the investment after 02 years.,

                FV =PV ¿

                               =200,000 ¿

                               =244,078.192

Monthly payments that Dianne will receive.,

PV PMT
Annuity=¿ ¿¿
i

PVi
PMT =
1
1− ¿
¿¿

244,078.192∗0.10
12
PMT =
1
1− ¿
¿¿

PMT =    $ 2,856.691

Question 02

 
Cash Flows Interest Rates  
Year 0     Years 1 - 2 8%    
Year 1            
Year 2 +$ 6,500        
Year 3 +$ 1,500   Years 3 – 8 6%    
Year 4          
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Year 5          
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Year  6
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-$ 2,500        
Year  7  
Assignment 02-ACC515
       
Year 8          
Year 9 +$ 10,000   Years 9 - 10 7%  
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Year 10          
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I.  

% 8% 6% 7%
Yea 0 1 2 3 4 5 6 7 8 9 10
r

CFi $0 +$6,500 +$1,500 -$2,500 +$10,000

II.

Time 01 

  PV =FV ¿

PV 1=10,0 00 ¿
         = +$9345.7944 
PV 1=9345.7944 ¿
¿ 6983.7212
PV 1=6983.7212¿
¿ 5987.4153

PV 1=−2500 ¿
       =-2099.0482

PV 1=−2099.0482 ¿
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       =-1799.5955

Time 05

   FV n=PV ¿

       FV of year 2 cash flow., 
         FV 1=6,500 ¿
         = +$8,188.128

       FV of year 3 cash flow., 
        FV 1=1,500 ¿
         = +$1,685.4

      PV =FV ¿

        PV of year 6 cash flow.,

             PV 1=−2,500 ¿    

= -$2,358.4906

        PV of year 9 cash flow., 

          PV 1=+10,000 ¿    

= +$7,628.9521

Time 10

   FV n=PV ¿

       FV of year 2 cash flow.,
  FV 1=6,500 ¿
         = +$12,031.0464

       FV of year 3 cash flow.,

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  FV 1=1,500 ¿
         = +$2,255.4454

       FV of year 6 cash flow.,

  FV 1=−2,500 ¿
         = -$3,156.1924

       FV of year 9 cash flow.,
  FV 1=10,000 ¿
         = +$10,700

Question 03

The corporate tax is a charge which is initiated to charge taxes against companies’ profits.
Corporate tax is different around the world. It’s directly touch with entire country economy.
Because   of   changing   the   global   economy   time   to   time   corporate   tax   is   changed   by
government. It earns government revenue and raises the economic growth also.

Australia corporate tax rate is very high than other countries which has competitive economy.
The corporate tax is 30% for many years in Australia. So far Australia government performed
well with this tax rate, but time to time there were little up and downs. But overall it is better.
Large scale companies normally pays taxes according to the government conditions, but they
are doing so many activities to deduct the tax portion which should be paid to government.
And there are lot of foreign companies who invested in Australia past years. They are also
affected if there is corporate tax up and downs. Corporate tax is directly affected to company
profit and shareholder income. That means dividend imputation system. Dividend imputation
is   a   procedure   in   Australia   and   several   other   countries   which   stops   to   pay   the double
taxation of cash payouts from a corporation to its shareholders. If a company has already paid
the required income tax on their income it distributes as dividends. The shareholder then does
not have to pay tax on the dividend income. 

If   Australia   reduce   tax   rate   30%   to   25%,   there   will   be   huge   difference   everything.   It’s
affected to dividend imputation system also. Sometimes tax reduction is caused to get more
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business to Australia, but sometimes it may be changed. Mainly this tax reduction is affected
to foreign investments. Because benefits go directly to shareholders of foreign companies. It
will be a little boost of economy also. But in other hand this will be caused to demotivate
local companies and their shareholders. Corporate tax cuts may be lead to a surge in local
investment. Under this system local shareholders are owed tax credits on dividends paid by
local companies, which can then be used to offset tax on other income. Sometimes this will
be a disaster because foreign companies get the benefits without increase their investments. It
will   be   led   to   downsize   local   business   culture   and   it   will   be   caused   to   reduce   the   local
investments. This can be happened. But in other hand there will be positive side also. More
foreign companies are motivated to invest in Australia. So there will be new businesses and
more opportunities to Australian government as well as Australian people. It can be positive
way to go for more globalisation as well as new business culture which people can go for
more   opportunities.   It   will   initiate   new   job   opportunities   in   Australia.   So   it   will   reduce
unemployed rate in Australia. But at the same time Australian government should think about
local companies’ survival. Because it may be caused to downsize local business culture. It
may be massive impact to Australian government. So when it is reduced to 30% to 25%,
there   should   be   backup   plan   to   save   local   companies.   But   this   is   not   to   reduce   local
companies’ profit. This will be good option to creates competitiveness between local and
foreign companies. The result of that, benefits go to people and they can enjoy it. 

But anyway if other countries cut tax rate Australia also have to move, because they should
move   forward   with   other   external   factors.   They   can’t   stick   at   the   same   place   and   move
forward with what they want. It will be caused to damage their reputation and they will be
missed   new   opportunities.   Actually   cut   corporate   tax   rate   is   beneficial   for   Australian.
Because  it will bring  economic  growth  as well as  personal income  growth  of  Australian
people. 

Question 04

i)/ii)/iii)

National Australia Bank (NAB)

Mont
h Open Close Dividend $ Change % Change

Jan 26.69 24.19 -2.5 -9.363%

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Feb 24.19 26.24 2.05 8.475%

Mar 26.24 27.19 0.95   3.620%

Apr 27.19 27.15 -0.04 -0.147%

May 27.15 25.43 1.41 -0.31 -1.126%

Jun 25.43 26.54 1.11 4.365%

Jul 26.54 27.34 0.80 3.014%

Aug 27.34 27.87 0.53 1.939%

Sep 27.87 28.00 0.13 0.466%

Oct 28.00 28.93 0.93 3.321%

Nov 28.93 29.70 1.41 2.18 7.550%

Dec 29.70 30.33 0.63 2.121%

Avg. Monthly Holding 
$0.54 2.020% return
$6.47 24.242% Annual Holding return

BHP Billiton (BHP)

Mont
h Open Close Dividend $ Change % Change
Jan 15.35 15.57 0.22 1.433%

Feb 15.57 16.86 1.29 8.285%

Mar 16.86 20.68 0.3053 1.24 7.382%

Apr 20.68 19.08 -1.60 -7.737%

May 19.08 18.65 -0.43 -2.254%

Jun 18.65 19.52 0.87 4.665%

Jul 19.52 20.43 0.91 4.662%

Aug 20.43 22.38 1.95 9.545%

Sep 22.38 23.07 0.2646 1.04 4.659%

Oct 23.07 24.41 1.34 5.808%

Nov 24.41 25.06 0.65 2.663%

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Dec 25.06 26.64 1.58 6.305%

Avg. Monthly Holding 
$0.76     3.785% return
$11.86 77.263% Annual Holding return

Market (MKT)
Date Open Close $ Change % Change
5056.6
0 4947.90 -108.70 -2.15%
Jan
4947.9
0 5151.80 203.90 4.12%
Feb
5151.8
0 5316.00 164.20 3.19%
Mar
5316.0
0 5447.80 131.80 2.48%
Apr
5447.8
0 5310.40 -137.40 -2.52%
May
5310.4
0 5644.00 333.60 6.28%
Jun
5644.0
0 5529.40 -114.60 -2.03%
Jul
5529.4
0 5525.20 -4.20 -0.08%
Aug
5525.2
0 5402.40 -122.80 -2.22%
Sep
5402.4
0 5502.40 100.00 1.85%
Oct
5502.4
0 5719.10 216.70 3.94%
Nov
5719.1
0 5675.00 -44.10 -0.77%
Dec
Avg. Monthly Holding 
51.53 1.01%
return
Annual Holding return

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Monthly Returns - NAB, BHP, MKT

15.00%

10.00%

5.00%
NAB
BHP
0.00% MKT

-5.00%

-10.00%

-15.00%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

iv) 
Standard deviation calculations

(x- (x- MK (x- (x-

NAB (x-x*) x*)^2 BHP (x-x*) x*)^2 T x*) x*)^2
- -
Jan 9.36% 11.38% 0.0130 1.43% -2.36% 0.0006
Feb 8.48% 6.46% 0.0042 8.29% 4.50% 0.0020
Mar 3.62% 1.60% 0.0003 7.38% 3.59% 0.0013
- - -
Apr 0.15% -2.17% 0.0005 7.74% 11.53% 0.0133
Ma - -
y 1.13% -3.15% 0.0010 2.25% -6.04% 0.0036
Jun 4.37% 2.35% 0.0006 4.67% 0.88% 0.0001
Jul 3.01% 0.99% 0.0001 4.66% 0.87% 0.0001
Aug 1.94% -0.08% 0.0000 9.55% 5.76% 0.0033
Sep 0.47% -1.55% 0.0002 4.66% 0.87% 0.0001
Oct 3.32% 1.30% 0.0002 5.81% 2.02% 0.0004
Nov 7.55% 5.53% 0.0031 2.66% -1.13% 0.0001
Dec 2.12% 0.10% 0.0000 6.31% 2.52% 0.0006
2.02% 3.79%
Sum (x-x*)^2 0.0230 0.0255
n-1 11 11 11
Sum (x-x*)^2/n-1 0.0021 0.0023 0.0012
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Standard Deviation 0.0457 0.0482 0.0352

Standard deviation of NAB 0.045697, BHP 0.048176 & MKT 0.035162

v) Plot Risk and return

Risk & Return

90.00%
80.00% 77.26%
70.00%
60.00%
% Return

50.00%
40.00%
30.00%
24.24%
20.00%
10.00%
0.00%
3.40% 3.60% 3.80% 4.00% 4.20% 4.40% 4.60% 4.80% 5.00%
% Deviation

vi)
RE i=Rf + β i ( RM −Rf )

RE NAB =Rf + β NAB ( RM −Rf )

¿ 0 .0295+ 1. 23 ( .065−. 0295 )
¿ 0 .073165

RE BHP=Rf + β BHP ( RM −Rf )

¿ 0 .0295+ 0 .90 ( . 065−. 0295 )
¿ 0 .6145

vii) 

viii)

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REPortfolioNAB , BHP =W NAB ( RE NAB ) +W BHP ( REBHP )

¿.3 ( . 073165 ) +.7 (.06145 )
¿0 .0219495+0.043015
¿6 . 496 %
β PortfolioNAB ,BHP =W NAB ( β NAB ) +W BHP ( β BHP )
¿.3 ( 1 .23 )+. 7 ( 0 . 90 )
¿0 .369+0. 63
¿0 . 999

ix)

Reference List

XXXX.   or   XXXXX.   (Year).  Dividend   Imputation.   Retrieved

 from    https://www.investopedia.com/terms/d/dividendimputations.asp  

XXXX.   or   XXXXX.   (Year).  Corporate   Tax.   Retrieved

from https://www.investopedia.com/terms/c/corporatetax.asp 

XXXX. or XXXXX. (Year). Australia joins global push to cut corporate tax rate. Retrieved
from  https://www.ft.com/content/2583a300-0c81-11e8-8eb7-42f857ea9f09 

Greg Jericho.  (Year). Will company tax cuts really boost jobs or investment? The evidence is
thin.  Retrieved   from 
https://www.theguardian.com/business/grogonomics/2017/feb/14/the-governments-
company-tax-cut-policy-has-two-major-problems 

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