DECISION MAKING

QUESTION

1.  Ensure your assignment is identified with your name and student ID number and you
should also insert your name and student ID number in the footer of the document
containing your answers before saving and submitting it.

2. Each student is required to complete and submit their own assignment answers.
All assignments will be checked and any evidence of plagiarism (copying the answers of
other students) will constitute academic misconduct and be subject to the significant
penalties specified by university policies.

3. This assignment should not require research beyond the course materials. However, as it
comprises calculations that utilise the published work of others to complete, you must
provide appropriate reference acknowledgement at the end of your assignment document.
For example, providing a correct reference citation for the course textbook would be
sufficient. Unless you include a direct quotation from a published work in your assignment
answers, you are not expected to provide in-text references.
4. Your answers for the assignment questions are to be type written and submitted by the due
date. Extensions beyond the due date will only be granted in exceptional circumstances
and must be requested by email and approved in advance of the due date by the course
coordinator.
5. Ensure your answers fully document the working used for each question as some marks
are awarded for evidence that the correct process has been used. For example, to calculate
the present value of a future amount the following documentation is required
1,000 +/- FV, 8 N, 2.5 I/Y, COMP PV giving $820.75, whereas just providing the correct
answer will only receive minimum marks

6. For question 3 you need to fully document each of the calculations supporting your
answers.

———————– Page 2———————–

Question 1 [4 marks]
If the financial decision making objective for a company is to maximise the after-tax
wealth of its shareholders, briefly  explain  (max. 250 words) how the extent that an
Australian company and its shareholders are (a) fully integrated or (b) not integrated
by the dividend imputation system influences the way this financial decision making
objective should be achieved.

Question 2 [3 marks]

You have just won the Golden Basket lottery which gives you the choice of your prize
being   either   a   house   and   land   package   with   a   current   market   value   of   $500,000   or
receiving cash totalling $550,000 that will be paid to you in four instalments over a
four year period.

If you choose the cash alternative the first instalment of $200,000 will be paid to you
immediately with the second instalment of $150,000 to be paid at the end of two years
after the first instalment. The third instalment of $100,000 will be paid at the end of
one  year  after   the   second   instalment   and   the   fourth   instalment   of   $100,000   will   be
paid at the end of two years after the third instalment is paid.

If you use the nominal interest rate of 7.25 percent per annum that currently applies
for a monthly repayment housing loan as your time value of money, use appropriate
calculations to determine whether  you  should accept the house and land package or
the cash instalment alternative.

Question 3 [13 marks]
You have the following recent historical data to analyze the ordinary shares of the
Bopangoan stock exchange listed company –Jantex PLC relative to the market as
represented by the Bopango All Shares Price and Dividend Index (BASPDI)

Jantex PLC                                        BASPDI
Year    Share Price at 31 Dec       Total DPS ($B) paid                  Index Value at
($ Bopango)                 during the year to 31 Dec            31 Dec
2005              21.95                          1.85                           7,643
2006              22.47                         2.00                            8,421
2007              25.00                         2.10                            9,678
2008              24.08                         2.00                           10,452
2009              21.04                           0                             6,754
2010              20.18                          0.50                           7.635
2011              21.67                          0.50                           7,778

1      For Jantex PLC calculate:
(i)   The annual holding period return (% expressed as decimal) for each year
ended 31 December 2006, 2007, 2008, 2009, 2010, 2011.
Round your answers to four decimal places.
For example, 0.12854 = 0.1285, -0.02487 = -0.0249
(ii)  The arithmetic average holding period return for the period 2006-2011.
Round your answer to four decimal places.
(iii) The sample data variance of the annual holding period returns for the
period 2006-2011. Round your answers to four decimal places.

BANK 2007 Business Finance SP2 2012 Assignment 1                                                 2

———————– Page 3———————–

(iv)  The sample data standard deviation of the annual holding period returns
for the period 2006-2011. Round your answers to four decimal places.

2     For the Bopango All Shares Price and Dividend Index (BASPDI) calculate:
(i)   The annual holding period  return (% expressed as decimal) for each year
from 2006-2011. Round your answers to four decimal places.
(ii)  The arithmetic average holding period return for the period 2006-2011.
Round your answer to four decimal places.
(iii) The sample data variance of the annual holding period returns for the
period 2006-2011. Round your answers to four decimal places.
(iv)  The sample data standard deviation of the annual holding period returns
for the period 2006-2011. Round your answers to four decimal places.

3     Calculate the covariance of the annual holding period returns for Jantex PLC.
and the BASPDI for the period 2006-2011

4     (i)  Calculate the correlation coefficient of the annual holding period returns for
Jantex PLC and the BASPDI.

(ii) Briefly outline (max 50 words) what your correlation coefficient measure
tells you about the annual holding period returns of Jantex PLC relative to
the BASPDI over the period 2006-2011.

5     Assuming the BASPDI is an appropriate proxy for the market portfolio, from
the data provided for the period 2005-2011 estimate the Beta of Jantex PLC.

6.    Briefly explain (max 50 words) what the Beta of Jantex PLC indicates about the
risk and the return that should be required from investing in Jantex PLC.

SOLUTION

Solution1:

For the financial decision making objective for a company  to maximize the after-tax  wealth of its shareholders, Australian company and its shareholders can utilize the dividend imputation system by fully integrating with it. By doing so the dividend imputation system will help in the elimination of double taxation upon company profits. By attach franking credits to dividends paid australian companies can reduce the income tax payable

Thus the shareholders are required to pay only the difference between the corporate rate and their marginal rate

The franking credit formula is given by

Div * tcompany / (1 – tc) * fp

Where fp is the franking proportion.

For the companies that are paying the tax in Australia have the franking proportion as 1.0 however there may be companies that are unfranked dividends.

Solution2:

Below are the calculations to determine the present value of the alternative in which cash is paid in four installments over a four year period.

Nominal Interest Rate as given above has been taken to be 7.25%

Present Value

Option 1 (Cash Alternative)

Year 0 =   $200,000* (1 + 0.0725)0 = $200,000

Year 1 =    Nil

Year 2 =     $150,000* (1 + 0.0725)2 = $130,406

Year 3 =     $100,000* (1 + 0.0725)3 = $81,060

Year 4 =     Nil

Year 5 =     $100,000* (1 + 0.0725)5 = $ 70,471

PV = $481,938

The results of the above calculations have been tabulated below:

Solution3:

Below is the historical data as provided to analyze the ordinary shares of the  Bopangoan stock exchange listed company –Jantex PLC relative to the market as represented by the Bopango All Shares Price and Dividend Index (BASPDI)

1.      For Jantex PLC calculate:

The annual holding period return (% expressed as decimal) for each year ended 31 December 2006, 2007, 2008, 2009, 2010, 2011 has been calculated as shown below:

Annual Holding Period return = ((Income + End Period Value – Initial Value) +1) / Initial Value^1/years-1

Based on the above formula the annual holding period return has been calculated as shown in the below table

The arithmetic average holding period return for the period 2006-2011 has been calculated below:

(0.1148+0.1111+0.0585-0.0105-0.0188+0.0016)/6=0.0531

The sample data variance of the annual holding period returns for the period 2006-2011:

The variance for each year has been calculated as shown below:

(Return for the year-Average Return for 2006-11)2

The variance for each year is shown below:

The Variance of the annual holding period returns for the period 2006-2011 is the mean of the variance for each year

Thus the variance of the annual holding period returns for the period 2006-2011 will be

(0.0038+0.0234+0.0001+0.0322+0.0049+0.0021)/6=0.0111

The sample data standard deviation of the annual holding period returns for the period 2006-2011 will be the square root of the variance for that period which has been calculated above thus the standard deviation will √0.0111=0.1053

2 .    For the Bopango All Shares Price and Dividend Index (BASPDI):

The annual holding period return (% expressed as decimal) for each year ended 31 December 2006, 2007, 2008, 2009, 2010, 2011 has been calculated as shown below:

Annual Holding Period return = ((Income + End Period Value – Initial Value) +1) / Initial Value^1/years-1

Based on the above formula the annual holding period return has been calculated as shown in the below table

The arithmetic average holding period return for the period 2006-2011 has been calculated below:

(0.1018+00.1253+0.1088-0.0304-0.0002+0.0028)/6=0.0211

The sample data variance of the annual holding period returns for the period 2006-2011:

The variance for each year has been calculated as shown below:

(Return for the year-Average Holding Period Return for 2006-11)2

The variance for each year is shown below:

The Variance of the annual holding period returns for the period 2006-2011 is the mean of the variance for each year

Thus the variance of the annual holding period returns for the period 2006-2011 will be

(0.0065+0.0164+0.0035+0.1405+0.0120+0.0000)/6=0.0298

The sample data standard deviation of the annual holding period returns for the period 2006-2011 will be the square root of the variance for that period which has been calculated above thus the standard deviation will √0.0298=0.1727

3     Covariance of the annual holding period returns for Jantex PLC. and the BASPDI for the period 2006-2011

4     (i) Correlation coefficient of the annual holding period returns for  Jantex PLC and the BASPDI.

Correlation Coefficient is given by

Covariance (Jantex, BASPDI)/(standard deviation of Jantex X  standard deviation of BASPDI)

The value of covariance and standard deviation calculated above has been used. Thus the correlation coefficient will be

0.0139/(0.1053 X 0.1727)=0.7653

(ii) The correlation coefficient measure of 0.7653 of the annual holding period returns for  Jantex PLC and the BASPDI over the period 2006-2011 tells that both  Jantex PLC and the BASPDI  move together and are 76.53% of perfect correlation is there between Jantex PLC and the BASPDI.

5    Beta of Jantex PLC.

In this case the Beta is calculated as

Covariance (Jantex PLC and the BASPDI)/ Variance (BASPDI)

These have been calculated above. Thus the beta value will be

0.0139/0.0298=0.4664

6.    As shown above the beta value is positive for Jantex PLC this means that it is directly related to the BASPDI. The Return of Jantex can be given as

E Rjantex = E(Rf ) +[E(RBASPDI ) −E(Rf )]β

Thus jantex will give more return when the return from BASPDI will be more to an extent of factor of 0.4664.

JF75

But you can order it from our service and receive complete high-quality custom paper.  Our service offers Accounting  essay sample that was written by professional writer. If you like one, you have an opportunity to buy a similar paper. Any of the academic papers will be written from scratch, according to all customers’ specifications, expectations and highest standards.”