a) Identifying the amount Sandy willing to pay for the investment opportunity:
|
Interest |
9% |
||
|
End of year |
Cash flow ($) |
Discounting rate |
Discounted cash flow |
|
1 |
$ 400.00 |
0.92 |
$ 366.97 |
|
2 |
$ 800.00 |
0.84 |
$ 673.34 |
|
3 |
$ 500.00 |
0.77 |
$ 386.09 |
|
4 |
$ 400.00 |
0.71 |
$ 283.37 |
|
5 |
$ 300.00 |
0.65 |
$ 194.98 |
|
Initial investment |
$ 1,904.76 |
b) Identifying the quarterly payments that will be paid by Lee on the loan:
|
Particulars |
Value |
|
Loan Amount |
$ 100,000 |
|
Interest rate |
3% |
|
No of payments |
20 |
|
Quarterly payment |
$ 6,415 |
c) Finding the monthly payments that Dianne will receive from the lottery:
|
Particulars |
Value |
|
Initial Value |
$ 200,000 |
|
Interest rate |
0.833% |
|
No of payments |
150 |
|
Value at the end of 2 years |
$ 244,078 |
|
Monthly payment |
$ 2,857 |
|
% |
8% |
6% |
7% |
||||||||
|
Year |
0 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
|
CFi |
$6,018.52 |
$6,500.00 |
$1,500.00 |
$9,427.00 |
$(2,500.00) |
$10,000.00 |
$25,039.26 |
The relevant significance can be anticipated of the decline in Australian corporate tax rate from 30% to 25%. There are both pros and cons for the decision that is intended by the Australian government regarding corporate tax cut. Many citizens and individuals are detecting that corporate tax cut would not only reduce the benefits that the government can provide to the citizens, but also reduce tax collection amount. However, the government relatively indicated that with the corporate tax cut adequate boost in the economy is anticipated, as corporations would retain more income from there operations, which will be used to invest in more businesses. On the other hand, some of the analyst in Australia indicated that the current multinational and national Companies listed in the exchange have projected higher net profit from previous fiscal years. This indicates that the companies are doing well enough to survive in the competitive market (Dailysignal.com, 2018).
However, the arguments made by individuals regarding the disadvantage of tax cuts are immense, as they point out the flaws in the decision of the government. maximum of the company Multinational Companies listed in Australia has its headquarters outside the country, which indicates that maximum of the revenues and within Australia will be transferred to overseas. This would not help the actual citizens of Australia and hamper government’s ability to support the citizens with initial coverage. Multinational company has been making adequate income and net profit from the operations, while due to lawsuits the losses of the company piled up. Therefore, it could be estimated that the company’s current financial position is adequate, while the lawsuits are actually hampering profits of the company. In this context, Theaustralian.com.au (2018) mentioned that with the low tax rate government will not be able to generate adequate tax revenue for supporting the capital expenditure and suppose that is provided to citizens of Australia. The arguments also stated that banks in the previous fiscal year had profits searching trillion of dollars, which indicates that there is no requirement of corporate tax cut.
On the other hand, the current scenario of the Australian economy is a relatively different from what it is being perceived. the economy is relatively under stress as medium and small-scale industries are be bankrupt due to high tax rate and low provisions for them to survive in the competitive market. This continuous problem that is faced by organizations all over Australia is hampering the overall growth prospectus of the country. The unemployment sheet is estimated to increase our time due to the lack of investment that is conducted by the company. Other countries are relatively having low tax rate, which boost the investments conducted by corporate around the world. This limits Australia to acquire foreign direct investment for improving the position of the citizens, while reducing the living standard. The corporate tax rate is relatively a major issue Australia, as it is not allowing the country to boost its economic condition and increase high investment from multinational. Due to the high tax rate the multinational companies investing more on other countries by taking out the money from Australia. This is an adverse condition for the Australian government, if multinational companies and corporations choose other countries rather than Australia. Therefore, the tax cut is an unavoidable measure that needs to be conducted by the Australian government to boost its current economic condition. As stated by the president of US, Donald Trump, reducing corporate tax rate would eventually allow organization to increase their risk-taking capability, which might help in reducing unemployment within the country (Suarez & Zidar, 2016).
There are some benefits that could be identified with the implementation of Corporate tax cut, which are depicted as follows.
Decrease in unemployment:
With the implementation of low corporate tax rate, the overall production possibility and investment capability of the companies really generally increase. This would eventually attract more companies to invest in Australia. This could eventually Trigger massive employment conducted within the country, while reducing the actual unemployment rate. In addition, the decline in unemployment rate would eventually help in reducing the care provisions that are provided by the government to the unemployed persons. This would eventually help in reducing the expenditure of the government while improving the living standard of individuals.
Increase in wage rate:
Decline in corporate tax rate would also help in increasing the number of employees that is being acquired by companies. This would eventually increase competitiveness in the market and lead to increase in wage rate. In addition, it could directly help in boosting the living standard of citizens in Australia, a higher wage rate will eventually increase the overall accumulation of tax by the government. Zellner & Ngoie (2015) mentioned that high income indicates a higher tax income for the government, which could boost their current capital expenditure condition.
Increase Foreign direct investments:
Low corporate tax rate would eventually attract more companies around the world to invest in Australia, which would eventually increase foreign direct Investments in the country. This rising investment in the country would eventually help in raising amount of taxes that will be acquired by the Australian government. This would eventually help in improving the capability to conduct capital expenditure and maintaining the flow of support to their citizens. Moreover, the low corporate tax rate would eventually motivate the existing multinational companies to invest more in Australia, which could reap higher benefits for their organizations (Dailysignal.com, 2018).
Investment in new ventures and business:
The low corporate tax rate would also allow new and small companies to flourish due to the reduced tax burden. This would eventually increase the investment in new ventures and businesses that is conducted by companies and investors. moreover, the decision of the corporate tax cut would also help in supporting small scale and medium scale businesses by reducing the cash outflow from the business. The decision would eventually support small companies and allow them to survive in the competitive market.
i) Calculating monthly holding period:
ii) Calculating average monthly holding period return:
|
Particulars |
National Australia Bank |
AORD |
BHP Billiton |
|
AV monthly holding period return |
1.11% |
0.62% |
4.66% |
iii) Calculating annual holding period return:
|
Particulars |
National Australia Bank |
AORD |
BHP Billiton |
|
Annual holding period return |
12.59% |
71.87% |
7.01% |
iv) Calculating standard deviation of companies and market:
|
Particulars |
National Australia Bank |
AORD |
BHP Billiton |
|
Standard deviation |
0.0495 |
0.0752 |
0.0352 |
v) Plotting risk and return in graph:
vi) Finding expected return of NAB and BHP:
|
Particulars |
BHP Billiton |
National Australia Bank |
|
Market return |
6.500% |
6.500% |
|
Risk free rate |
2.950% |
2.950% |
|
Beta |
0.90 |
1.23 |
|
CAPM (Expected return) |
6.145% |
7.317% |
vii) Constructing a graph of SML with NAB and BHP:
viii) Calculating portfolio with BHP-70% and NAB-30%:
|
Particulars |
BHP Billiton |
National Australia Bank |
|
Market return |
6.500% |
6.500% |
|
Risk free rate |
2.950% |
2.950% |
|
Beta |
0.90 |
1.23 |
|
CAPM |
6.145% |
7.317% |
|
Weight |
70.000% |
30.000% |
|
Portfolio beta |
1.00 |
|
|
Portfolio return |
6.496% |
ix) Providing explanation on relevant choice for Stock or Portfolio:
The above calculation mainly depicts the overall returns and risk attributes of stock and portfolio, which could help in selecting the best possible option for investment. In addition, from the overall evaluation investment in portfolio is the best possible provision, as it allows the investor to generate adequate return with a risk of only 1 beta. Therefore, investment in portfolio could help in generating high level of returns from investment.
References:
Au.finance.yahoo.com. (2018). Au.finance.yahoo.com. Retrieved 6 April 2018, from https://au.finance.yahoo.com/world-indices
Dailysignal.com. (2018). The Daily Signal. Retrieved 6 April 2018, from https://www.dailysignal.com/2018/02/09/corporate-tax-cuts-benefit-consumers-little-guy/
Suarez Serrato, J. C., & Zidar, O. (2016). Who benefits from state corporate tax cuts? A local labor markets approach with heterogeneous firms. American Economic Review, 106(9), 2582-2624.
Theaustralian.com.au. (2018). Theaustralian.com.au. Retrieved 6 April 2018, from https://www.theaustralian.com.au/national-affairs/treasury/oecd-finds-company-tax-cuts-benefit-people-at-all-income-levels/news-story/497e3ae7c4ae6da633a7b2643078f475
Zellner, A., & Ngoie, J. K. (2015). Evaluation of the effects of reduced personal and corporate tax rates on the growth rates of the US Economy. Econometric Reviews, 34(1-2), 56-81.
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