BUSS 5233: Corporate Finance Ordinary Annuity to Achieve Goal - Accounting and Finance Assignment Help

Assignment Task:

Task:

Question 1

You would like to have $150,000 in 10 years from now to fund the education expenses of a family member. You wish to deposit money into a bank account to achieve this goal. The money will earn interest at 5% per annum compounded annually.

(a) How much must you deposit annually as an ordinary annuity to achieve your goal?
(b) Instead of making annual deposits, how much would you need to deposit as a lump-sum today to reach your goal? 
(c) Suppose that at the beginning of the first year, you deposit $20,000 in the bank towards your goal of $150,000 at the end of 10 years. In addition to this deposit, how much must you deposit each year as an ordinary annuity to obtain your goal? 

Question 2

An employee of a company wants to accumulate $500,000 to be able to retire. The employee wants to deposit money on a regular basis into their investment account.

(a) Suppose the employee deposits $3,000 at the end of each year into their investment account. With annual compounding, what annual percentage rate will need to be earned for the employee to be able to retire in 25 years after opening their account? (2 marks)

(b) Assume the employee deposits $50,000 at the beginning of the first year into their investment account and deposits $3,000 at the end of each year. With annual compounding, what annual percentage rate will need to be earned for the employee to be able to retire 25 years after opening their account? (3 marks)

(c) If the employee deposits $3,000 at the end of each year into their investment account, how long would it take for the employee to accumulate $500,000 to be able to retire assuming an interest rate of 5% per annum with monthly compounding? (3 marks)

Question 3 

An investor invests $1,000 per year at the end of each year, with the first deposit at age 20 and the last deposit at age 30. Assume an interest rate of 3% per annum compounded annually. No more deposits are made after age 30 and the investor accesses the money at age 60. Another investor begins investing at age 30 and invests $1,000 per year at the end of each year, with the last deposit at age 60.

Assume an interest rate of 3% per annum compounded annually.
(a) Calculate the future value (FV) of each investment. Who has the larger amount of money at age 60? (5 marks)
(b) Explain why compound interest is a long-term creator of wealth. (3 marks)

Question 4 
The dividend payments for a listed company are expected to grow at 6% per year. Suppose the investor’s required rate of return is 10% per annum.

(a) Calculate the value of a share in the company if this year’s dividend (the current dividend) is $3 per share.
(b) Using your answer to part (a), if the market price of a share in the company is $70, would you buy shares in the company? Explain your answer.
(c) Calculate the value of a share in the company if last year’s dividend is $3 per share.

(d) Calculate the value of a share in the company if next year’s dividend is $3 per share.
 

Question 5 
Consider a security whose value, at the end of each year, is given in the following table:

Year Value of the Security
0 $200.00
1 $202.95
2 $203.81
3 $201.34
4 $202.72
5 $203.50

Note that the year 0 value of the security is the initial value.
(a) Calculate the annual holding period returns for the security. 
(b) Calculate the arithmetic average annual rate of return and the geometric average annual rate of return for the security. 
(c) Explain the relevance of the geometric average annual rate of return for an investor in the security.

Question 6
The rate of return for bonds issued by the Australian Commonwealth Government Treasury is given as 2% per annum. Suppose a listed company A has a beta value of 0.8. The investors’ required rate of return for the company’s shares is given as 10% per annum.

(a) What type of risk is measured by the beta value? (1 mark)
(b) Determine the return for the share market. (3 marks)
(c) Explain why Australian Commonwealth Government Treasury bond returns are low for currently issued bonds. (2 marks)

Question 7 

Consider an Australian company B which has an after-tax income of $140,000 in the 2020-2021 financial year, all of which will be distributed to shareholders as dividends. Suppose you are an 80% shareholder in the company. Assume that your dividend income from the company is your only taxable income for the financial year.

(a) Calculate your franking credit. (2 marks)
(b) Calculate your after-tax dividend. (3 marks)
(c) What is the main advantage for shareholders of a dividend imputation system compared to a classical taxation system? (3 marks)

Question 8
Company C had sales revenue in the last financial year of $1,000,000 and interest income of $30,000. Cost of sales were $400,000, operating expenses totalled $100,000 and the company incurred interest expense of $80,000. Assume a 30% company tax rate.

(a) Determine the tax liability for the company and identify the type and amount of dividends the company is able to pay. (5 marks)

(b) If the company is entitled to an additional tax deduction of $100,000, then determine the tax liability for the company and identify the type and amount of dividends that the company is able to pay.

Question 9 
Explain why the cash rate in Australia is currently at a record low. Is the cash rate likely to become negative this year? Remember to give references in your references list at the end of your assignment.

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