solution

#FINANCIAL ASSIGNMENT

QUESTION 1   

 In August 2019 Coral Ltd reported net profits after tax of $600,000 for its financial year 2018—19 and announced its net profits after tax expectation for the next financial year, 2019–20, to be  25% higher than this year’s figure. The company operates with a dividend payout ratio of 70%, which it plans to continue. It will pay the annual dividend for 2018–19 on 1 October, 2019, and the dividend for 2019–20 on 1 October, 2020. 

Dan Brown owns 12% of the ordinary share capital of Coral Ltd. In October, 2020, Dan believes he will need $30,000 for consumption and he also wishes to pay off his home loan of $70,000.  If the dividend from Coral Ltd is his sole income, how much can he consume in October 2019? The capital market offers an interest rate of 9% pa. 

Given,

For 2018-19

Net profit = $ 600000

Dividend = 70% of 600000

     = $ 420000

Dan brown dividend = 12% of 420000

            = $ 50400

For 2019

Net profit = $ 600000 + 25% of 600000

      = $ 750000

Dividend = 70% of 750000

     = $ 525000

Dan brown dividend = $ 63000

Dan brown total expenses = $ 30000 +$ 70000

   = $ 100000

Deficit of funds = $63000-$100000

                         = - $37000

So, discounting the deficit amount 

Rate (r) = 9%

= 0.09

Time (t) = 1 year

PV =   ( Investopedia, 2019 )

       =

      =  $ 33944.95

Amount available for Dan brown on 2018-2019 = $50400 - $33944.95

                                                                                 = $ 16455.05

So, Dan brown can consume $ 16455.05 in October 2019.

 

QUESTION 2 

Vivien is considering buying an investment property for $550,000. ANZ Bank requires 10% deposit and offers her a 30-year loan for the balance of the purchase price. She can choose to repay the loan either by equal weekly installments consisting of interest and principal repayment components at an interest rate of 4.55% p.a., compounded weekly, or by equal fortnightly installments at 4.75% p.a., compounded fortnightly 

Explain with calculations which repayment option Vivien should choose. 

If Vivien wants to pay $1,000 a week, using the repayment option you identified in part a., how long will it take her to pay off the loan?

 

Given

Investment property = $550000

Deposit required = $ 550000*10%

                          = $ 55000

Plan 1 (weekly payment)

Loan amount = $550000-$55000

                     = $495000

Time (t) = 30 years * 52 times

              = 1560 times

Interest rate (r) = 4.55%

                = 0.0455/52

                        = 0.0008750

Equal payment (c) =?

 Now,

Annuity PV0 = (Ross, Drew & Walk, A 2016)

495000 = C

495000 = C x 850.820

C = 495000/850.820

C = $ 581.79

PLAN 2 (Fortnightly payment)

Loan amount = $550000-$55000

                        = $495000

Time (t) = 30 years * 24 times

              = 720 times

Interest rate (r) = 4.75%

= 0.0475/24

                 = 0.001980

Equal payment (c) =?

Now,

Annuity PV0 = (Ross, Drew & Walk, A 2016)

495000 = C

495000 = C*383.4832

C = 495000/383.4832

C = 1290.7997

Decision Mr.viven should choose weekly payment option because in weekly payment option he pays $ 21783.578 less than compared to fortnightly payment option

A.   If Vivien wants to pay $1,000 a week, using the repayment option you identified in part a., how long will it take her to pay off the loan?

Given

Loan amount = $550000-$55000

                     = $495000

Weekly equal payment (c) = $ 1000

Interest rate (r) = 4.55%

                        = 0.0455/52

                       = 0.0008750

Time (t) =?

Now,

Annuity PV0 = (Ross, Drew & Walk, A 2016) 

495000 = 1000*

   495000/1000 = 

495*0.0008750 = 

1-0.4331= 

0.5669 = 

Using log on both sides we get,

-t log(0.008750) = log(0.5669)

-t*0.0004 = -0.2465

t = 0.2465/0.004

 = 616.25 times

Now converting the times into year

t = 616.25/52

 = 11.85 years

If viven wants to pay$ 1000 per week as the market interest rate of 4.55% then it will take 11.85 years to pay the whole loan amount

 

QUESTION 3   

 Katherine and Robert had a baby son, Archie, on 31 May, 2019. They want to open a "Bump" savings account with Westpac for their baby and save up to $200,000 by the 
  time he is 18 years old. Westpac’s savings rate is currently at 2.5% p.a., compounded  . Katherine and Robert want to pay a monthly fixed payment at the end of each month for 18 years, starting on 30 June, 2019. 

If Katherine and Robert contribute 30% and 70% respectively to the savings, what is Katherine’s monthly payment?

When Archie is 18 years old, Katherine and Robert will withdraw $100,000 to pay for his higher education. The rest of the savings will be kept in Archie’s account at a deposit rate of 4% p.a., compounded monthly, for another 10 years. Archie will be allowed to withdraw $1,000 at the end of each month for three years starting one month after he turns 18. The rest of the money will be kept in the bank account until he turns 28 and will be used as a gift for the purchase of his own house. Calculate the value of this gift. (8 marks)

 Assume Archie wants to buy a house for $800,000 when he is 28 years old and uses the gift as a deposit for the house. If the loan term is 30 years with equal monthly repayments at a nominal rate of 4.5% p.a., compounded monthly, what will be his monthly repayment amount? (3 marks)

 

Given, 

Future value of annuity (FVA) = $200000

Time (T) = 18 years * 12 times = 216 times

Market rate of interest (r) = 2.5% = 0.0250/12 = 0.002

Equal monthly payment (c) =?

Now,

According to formula

Future value of annuity = (Ross, Drew & Walk, A 2016)

$200000 = (Ross, Drew & Walk, A 2016)

$200000 = (Ross, Drew & Walk, A 2016)

C= 200000/272.9524

C = 732.7285

KAtherine will contribute 30% of the monthly installment = 73207285*30% = 219.8186

Robert will contribute 70% of the monthly installment = 732.7285*70% = 512.9100

When Archie is 18 years old, Katherine and Robert will withdraw $100,000 to pay for His higher education. The rest of the savings will be kept in Archie’s account at a deposit .rate of 4% p.a., compounded monthly, for another 10 years. Archie will be allowed to withdraw $1,000 at the end of each month for three years starting one month after he turns 18. The rest of the money will be kept in the bank account until he turns 28 and will be used as a gift for the purchase of his own house. Calculate the value of this gift.

Given,

Present value (pv) = $200000 - $100000

Market rate of interest (r) = 4% p.a = 0.04/12 = 0.0033

Time (t) = 10 years = 10*12 times = 120times 

After 3 years

Archie will withdraw monthly $1000 for 3 year then,

Monthly installment (c) = $1000 

            Market rate of interest (r) = 4% p.a = 0.04/12 = 0.0033

Time (t) = 3*12 times = 36 times

Future value of annuity =?

Now,

Future value of annuity = (Ross, Drew & Walk, A 2016)  

  Future value of annuity = 1000  Future value of annuity = 1000*38.1589

  Future value of annuity = 38158.9