Assignment 2 is worth 20% of total assessment and is marked out of 100. 

Please show all workings including any formula used.

Question 1 (20 marks)

This question relates to material covered in the Topics 1 to 3. This question addresses the 5th and 6th subject learning outcomes.

For the following numerical problems, detailed answers must be shown. This involves providing a brief description of the problems, formulae used, progressive and final answers to the questions. For assignments you are expected to show your workings using the appropriate formula.

a. Jayne Saxby is considering buying a new house for $500,000 and needs to borrow money from a bank. Currently, ANZ bank offers a 30-year loan. She can choose to pay weekly at an interest rate of 4.55% pa, or fortnightly at 4.75% pa.

    (i)    Which payment option should Jayne choose? (3 marks)

    (ii)   If Jayne wants to pay $1,000 a week, how long will it take her to pay off the loan? (3 marks)

b.Jennifer Jean is 30 years old and has just had a baby son. She and her husband 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% pa. Jennifer and her husband want to pay a monthly fixed payment at the end of each month. 

     (i)   If Jennifer and her husband contribute 30% and 70% respectively to the savings, what is Jennifer's monthly payment? (4 marks).

     (ii)   When the son is 18 years old, Jennifer and her husband will withdraw $100,000 to pay for his higher education. The rest of the savings will be kept in the son’s account at a deposit rate of 4% for another 10 years. During this 10 years, the son will be allowed to withdraw $1,000 at the beginning of each month for three years right 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 the gift (7 marks). 

     (iii) If the son wants to buy a house for $800,000 and uses the gift as a deposit for the house, and the loan term is 30 years with monthly repayments at a nominal rate of 4.5% per annum, what will be his monthly repayment amount? (3 marks).

Question 2 (10 marks)

This question relates to material covered in Topics 4 and 5. This question addresses the 5th and 6th subject learning outcomes.

Kai Sayers is holding an investment portfolio including 10-years bonds, 1000 preference and 1000 ordinary shares. His bonds have a total face value of $5,000 and pay coupons on a semi-annual basis at an annual coupon rate of 8%. The market’s required yield to maturity on a comparable-risk bond is 7%. The preference shares recently paid a dividend of $0.55 and have a market rate of return of 11%.  The company issuing ordinary shares just announced a net profit of $120 million over its equity of $400 million, 60% of its earning is retained and the rest is to pay dividend at $1.20 per share. The current dividend growth rate is expected to be maintained in the next three years, but then will change to 6% per year indefinitely. The market’s required rate of return on the ordinary shares is 20%.

     (i)   Use an Excel spreadsheet to draw a timeline showing the cash flows of the ordinary shares (2 marks)

     (ii)   Calculate the market value of Kai’s investment portfolio (8 marks).

Question 3 (20 marks) The dividend imputation taxation system

This question relates to material covered in Topic 1 particularly the Australian taxation system and dividend imputation credits. This question addresses the 1st, 2nd, and 3rd subject learning outcomes. 

Students are expected to conduct their own research and develop their own opinions about the merits of this topic. There is no single correct answer and students will be marked on the depth of their research, the quality of their arguments (for and against), and their demonstrated understanding of the issues involved in this complex area of financial policy. 

Write an essay of between 600 and 1,000 words addressing the following issues:

–         Identify the major differences between the classical taxation system and the dividend imputation taxation system.

–         Use examples with calculations to demonstrate your understanding of how imputation (or franking) credits work.

–         Discuss the impacts of the dividend imputation taxation system on domestic and international investors.

Question 4 (45 marks)

This question relates to material covered in Topics 1-5. This question addresses the 1st, 2nd and 3rd subject learning outcomes.

Westpac Banking Corporation (WBC.AX) and Commonwealth Bank of Australia (CBA.AX) are amongst four big banks in Australia. These two companies are having the highest capitalisation within the Financial Sector. 

1. Find the monthly holding period returns for the 2017/18 financial year for Westpac (WBC), Commonwealth (CBA), and the market (MKT) as proxied by the All Ordinaries index. The monthly holding period return is the return you would receive if you bought an asset on the first day of the month (opening price) and sold it on the last day of the month (closing price). Using Excel, conduct a line graph with all three monthly returns included. The line graph will allow easy comparison of the performance of WBC, CBA and the MKT over the year with percentage (%) return results plotted on the y (vertical) axis and time (month) on the x (horizontal) axis. (Use 'Close' rather than 'Adjusted Close' for the selling price.) Note: Opening price MUST equal previous month closing price (10 marks).
2. For each of the three investment options calculate the average monthly holding period return (3 marks).
3. For each of the three investment options calculate the annual holding period return (4.5 marks).
4. For each of the three investment options calculate the standard deviation of the monthly rates of return (6 marks).
5. Use the scatter plot Excel graph function to plot your results from (3) and (4) above with risk on the x axis and return on the y axis for each of three investments (3.5 marks).
6. If the 10 year government bond rate is 2.78% and the long term return on the market as proxied by the ASX is 5.85%, assuming the beta (β) for WBC is 1.26 and for CBA is 1.23, use the Capital Asset Pricing Model (CAPM) to find the expected returns for WBC and CBA (4 marks).
7. Construct and graph the Security Market Line (SML) (use a scatter plot and fit the SML line) showing where WBC, CBA and the MKT should lie (5 marks).
8. Based on your findings construct a portfolio made up of 40% WBC and 60% CBA. Calculate the estimated return and β for this portfolio (4 marks).
9. Based on your understanding of the CAPM and the SML, which of these asset(s) or portfolio(s) would you invest in and which would you not invest in. Explain your choice (5 marks).

Introduction to Accounting Assessment 2

Information:

· The total marks available for this assignment is 100. The assessment is 70% of your overall module grade.

· The total word count for this assignment (not including figures, appendices and calculations) is 1500 (+ or- 10%). A breakdown of the count for each part of the report is given below as guidance.

· The deadline for submitting your assignment is Friday 7thDecember 2018 at 1155pm.  Please upload to Study Direct

· Assignments received after that time will be subject to the rules for late submission

Submission Format Instructions 

· Please ensure that all submissions includes the assignment title – in this case:  Introduction to Accounting 2:  Zhetong General Retailers

· All work should be word processed and typed in Arial font, 11 point with one and a half line spacing with a minimum of 2.5cm margin down both sides of the page.

· You are expected to show evidence of reading by including both in text reference and a reference list after end of the report.

Following these instructions is important as marks are awarded for presentation

Please note:5 marks are available for presentation and 5 for English

Assignment Brief:

Information about ….

Zhetong General Retailers has been operating as a sole trader in Brighton selling food and other household items the past 5 years. A local rival retailer, Ahan is has been operating successfully but due the retirement of the owner, the business is being sold. 

Zhetong approaches you with the financial statements of Ahan. He wants you to advise him on whether he should buy the business based on its performance and financial position (Appendix 1). He also provides you with a set of information about Ahan forecasted cash flow for 2019 (Appendix 2).

In addition, there two other investment opportunities for Zhetong, that are given in appendix 3 that are available. 

You are required to write a report to Zhetong advising him on the three options available to him as follows:

1. Assess Zhetong’s financial performance for the year ended 31stOctober 2018. To what extent should Zhetong rely on other information other than accounting ratios to assess the performance of Ahan business?

(800words) 

2. Zhetong would like you to prepare Ahan’s cash flow forecast for 2019 using the information in appendix 2and explain to him the extent to which the ash flow forecast assist Zhetong to assess the decision to purchase Ahan’s business. 

(350 words)

3. Perform an investment appraisal, using the payback period, accounting rat of return and net present value, of the two other options available to Zhetong and advise him of the best option he could take. Justify your advice.

(350 words)

Remember

All workings must be submitted as appendices and referenced in the report.  

Additional information on the business provided in appendices below consists of:

1.  Financial statements for year ending 31stOctober 2018

2.  Planned cash movements for year ending 31stOctober 2019

3.  Two potential expansion projects (Options)  

 

Appendix 1: Financial statements for the end of the financial year (31stOctober 2018)  

Statement of Comprehensive Income of Ahan as at 31stOctober 2018

Sales

519,740

Less Returns Inwards

11248

508,492

Less Cost of Sales

Opening Stock

31,308

Purchases

271,360

Less Returns Outwards

26,814

Carriage inwards

23,660

Less Closing Stock

35,500

264,014

Gross Profit

244,478

Discounts Received

3,500

247,978

Less Expenses

Salaries and wages

77,042

Rent, rates and insurances 

38,836

Heating and lighting

24,740

Carriage out

9,124

Advertising

11,960

Postage, stationery and telephone

4,820

Bad debts

4,016

Allowance for doubtful debts

446

Discounts allowed

4,612

Depreciation

24,148

199,744

Net profit

48,234

Statement of Financial Position of Ahan at 31stOctober 2018

Non-current assets

Fixtures and fittings at cost

241,480

LessDepreciation to date

126,040

115,440

Current assets

Inventory

35,500

Accounts receivable

49,000

Less Allowance for doubtful debts

1470

47,530

Prepaid expenses

13,110

Bank

8,880

Cash

1068

106,088

221,528

Less Current Liabilities

Accounts payable

39,680

Expenses accrued

2,720

42,400

Net assets

179,128

Financed by:

Capital

167,774

Net Profit

48,234

Less Drawings

-36880

179,128

Appendix 2: Cash Flow Forecast information

·  There is an opening balance on 31, October 2018 of £2000.

·  Sales:  Half of the sales are for cash, the other half are on one month’s credit. 

October 2018: £14,000; 

Sales in 2018/2019 are expected to be as follows November£14,500; December £15,000; January £16,000; February £17000; March £20,500; April £21,500; May £23,500; June £22,500; July £23,870; August £23,500; September £24,000; October £24,000. 

·  Returns were credited back to Ahan in December 2018 totalling £5624.

·  In November 2018, Ahan will take a loan £5,000 from the bank to buy a new computer system. They intent to repay the loan over 5 months, starting in February 2019.

·  Purchase are paid for in the month they are bought and are as follows: November £8,000; December £9,000; January £9,500; February £10,000; March £11,000; April £11,500; May £12,500; June £13,000; July £11,000; August £12,000; September £13,000; October £15,180

·  Rent, rates and insurances £19,418 split evenly between 12 months.

·  Delivery costs:  November £750; December £800; January £950; February £950; March £1100; April £1200; May £1350; June £1450; July £1362; August £1500; September £2080; October £2900.

·  Heating and Lighting:  £12,370 split and payable during January, April, July and October.

·  Advertising:  November £220, December £300; January £420; February £350; March £350; April £400; May £450; June £500; July £600; August £700; September £800; October £890

·  Postage, Stationery and telephone:  November £100; December £120; January £150; February £160; March £180; April £200, May £220, June £220; July £220; August £280, September £280; October £280

·  Ahan employs 2 part-time staff for 20 hours each per week; they are both will be paid the new living wage of £9 per hour.

·  The owner of Ahan draws £1,000 per month for himself.

·  Depreciation:  £12,074 split equally between 12 months.

Appendix 3: Expansion Options

Zhetong has two possible investment opportunities that may help him expand his business other than buying Ahan:  

Project A:Zhetong can open another shop in Croydon which is in South London, to establish its own brand name as a retailer.  Start-up costs are likely to be around £500,000.  

Project B:Develop a website and start to trade online.  This would cost Zhetong an initial outlay of £120,000.  If this becomes popular, further investment would be required to manage inventory, packing and delivery.  This will result in no job losses and possible new jobs in the future. 

The projects (investments) will have a projected life of 5 years (after initial set up).  

Year

A

B

£

£

Investment

-500,000

-120,000

Return 1  

150,000

120,000

 2

270,000

90,000

 3

350,000

80,000

 4

450,000

60,000

 5

500,000

50,000

Year

1

2

3

4

5

10% Discount Rate

0.9091

0.8264

0.7513

0.6830

0.6209

Total 100 marks

 Discussion..

 Assignment Details

This DB has three parts. 

You have been selected to give a presentation to the sales department outlining the new product that will be introduced at the end of your team’s project.  You will be detailing the timeline to production and integration into the current product line offering.  Discuss the following:

1. How will you prepare for this presentation?  What are the specifics you will need to include?
2. What type of specific information do you think will be helpful to the sales team to be better able to market the new product to the customers?
3. Discuss how you would gain the sales team’s buy-in for this new product.

Read and Reply by agreeing or disagreeing and why!!

Reply 1

You have been selected to give a presentation to the sales department outlining the new product that will be introduced at the end of your team’s project.  You will be detailing the timeline to production and integration into the current product line offering.  Discuss the following:

1.  How will you prepare for this presentation?  What are the specifics you will need to include?

You need to make the presentation relevant. Organize the presentation and materials ahead of time. Make a list of what is needed in the way of information leaving nothing to chance. Know what you are trying to sell, your competition, the customer, and the market. Fact finding and organizing the information into logical order is critical. The discussion of the product must be adapted to the sales department members. Modify it to include specifics. Create a connection between the product and the sales department. Prepare a sample of the product that will eventually be used so that it is visual and hands on. Have knowledge of the product so you can respond to any objections or reservations that they may have about the product and be prepared to use their feedback.

2.  What type of specific information do you think will be helpful to the sales team to be better able to market the new product to the customers?

A starting date or delivery date is helpful. The benefits of the product, the cost, and the upside that the product can provide, how it can generate revenue for the company.

3.  Discuss how you would gain the sales team’s buy-in for this new product.

One of the most effective strategies for gaining buy-in on any project is to identify and engage the right stakeholders early if possible. Promote the benefits of using the product and believe in the product show enthusiasm and a positive attitude for what you are promoting.

Reply 2

 

Part 1

When attempting to present information in any area of a project the information should be precise and forthcoming. I would need to make sure that I had a full grasp of the project timeline, and effective communication skills to portray the timeline. It would be imperative for me to understand the product that is being presented. In order for me to adequately inform the involved parties I would need knowledge of the project, the risks that are involved, possible delays, and current progress on the project. It would also be necessary for me to know the integration process for the product. The exact items that will need to be known would include speculated timeline, actual timeline, budgetary concerns, staffing issues, if there is a lack of materials, basically any knowledge of the project issues, benefits, or concerns. This will help me adequately present the timeline, any possible delays in production or integration that could arise.

Part 2

The most helpful information, the sales team needs to know, is the target market. Who is the product intended for? Is there a chance another audience will find the product useful? Knowing what the unit cost is versus what the unit price will be is another important area for the sales team to focus on. It should not be the goal to merely break even the company should be able to generate a profit from the sale of the new product. Knowing how and who to promote the product to is also a very important tidbit of information for the sales team. The sales team should research their audience, the current price of like items on the market, and promote the product accordingly, (Barker, n.d.).

Part 3

I would explain the usefulness of the product to the sales team in order to gain their eagerness for the product. It is important that the sales team believe in the product otherwise it will be more difficult for them to convince customers to purchase the product. I would also feel it necessary to explain the monetary value of the product and promote the fact that it would add equity to the company. It could also be beneficial to explain that the product will open up a whole new market segment for the company as well.

References:

Barker, Shane, (n.d.). Inc. Magazine. 4 Things You Need to do Before You Launch a New Product. Retrieved from: https://www.inc.com/shane-barker/4-things-you-need-to-do-before-you-launch-a-new-product.html

 

(f)I very strongly prefer excel, but other formats are permissible if accompanied by a pdf printout of your solutions (or a hard copy at the RE department by the same deadline). Note that I am not currently set up to open any spreadsheet but excel. Also: the more you explain what you do, the likelier you’ll get more partial credit. I’m unlikely to spend too much time trying to figure out where you went wrong. You do not need to annotate cells (since I will be looking at them), but pay attention to the logical structure and presentation of the worksheets. SEND ONLY ONE FILE (e.g. excel) that includes your answers to the questions (use textbox, for example; do not send say an additional file (e.g., Word) with the written answers).

(g) Work with members of your own group only.You may use any source you find useful, except the help of another person outside your group. The latter constitutes “cheating,” and will very likely result, at a minimum, in an F for the class. In particular, do not try to abuse my typing finger by requesting answers to “non-clarifying questions” by email. I will be arranging extra office hours for the exams week.

Final Project [30 points total]

A. [20 points total] Consider the second last (12.7+ million) and last (76.7+ million) “mortgage loans” in loan group 1 in the Countrywide Alternative Trust 2005-J7 (p S-69).

1. Amortize both loans with a 100% PPC assumption as given on p. S-70, and a 100% SDA (this is now the base PP/D assumption; leave the factors open to change).[1] To simplify, assume that any default is realized instantaneously and that there is no recovery.[2] Also make the standard assumption that default happens before mortgage payment, prepayment after.

2. Create a WAC IO and PO tranche to give a 5.75% deal coupon. Assume that these two classes are paid first (before subs and seniors – see below). The WAC PO gets the aggregate (initial PO%) × (total principal cash flow), the WAC IO the aggregate excess interest on outstanding, current premium loan balance.[3]

3. With the remaining assets, create a senior/sub structure with 5% subordination, and a shifting interest structure as given on p S-61, under “shift percentage.” Take a percentage of, for example, 60% to mean that the sub receives only 60% of its prorated prepay principal (provided the sub still exists). The sub will be a single class (called “B”) that absorbs all realized losses first. Once the sub is exhausted, all seniors (see below) are allocated losses on a prorated basis. Assume interest is paid to the aggregate senior classes at 5.75% and any remaining interest is distributed to the sub.

4.Use the senior class to create a sequential pay structure of two classes, with principal A1:A2 :: 3:1. Prorate potential senior losses to A1 and A2 based on pre-default principal; assign each class its interest payment prorated on post-default beginning balance. 

5. Assume all classes sold under the base PP/D assumption at: A-1: 102:01; A-2: 99:20; B: 75:04; IO: 0:20 (notional); PO: 81:31.The notation “:nn” means “nn/32nds.”

6. Assume a Treasury term structure given by

z(T) = 0.03 × ln[0.038 × (T+40)]

where T is measured in months.

7.Make reasonable assumptions for any missing information, and justify them. Take care that you may only think the information to be missing.

B. [10 points total] Answer the following questions (on a separate worksheet within your workbook)

1. [2]      What is the initial principal and cash flow yield for each class? Compare      the total price of the tranches to the principal value. Generally, why      does the total market value of the deal exceed the initial pool balance?
2. [2]      Compute the WAL, modified duration, and convexity for each tranche at base      PPC/default. For simplicity, assume that a small Δy does not affect the effective prepayment speed.
3. [2]      Compute the nominal- and Z-spread for each tranche. Does a positive spread      automatically mean that the tranche is a better investment than a      Treasury?
4. [2]      Keeping the SDA fixed at its baseline value, plot the WAL of each      principal-paying tranche vs the PPC (in the range 0 to 300%). 
5. [2]      Plot the cash flow yield of each tranche vs the SDA percentage, in the      range 0 to 800%, for a PPC of 100%.

[1]Note that these loans are Alt-A, and their default behavior is different from prime mortgages. Nonetheless, we use SDA to simplify the discussion.

[2] A gross simplification.

[3]This means that the IO and PO trance are effectively sharing in losses with trance B (see next), which is uncommon. More typically they are senior tranches. 

58. Daniel B. Butler and Freida C. Butler, husband and wife, file a joint return. The Butlers live at 625 Oak Street in Corbin, KY 40701. Dan’s SSN is 111-11-1112, and Fredia’s is 123-45-6789. Dan was born on 1/15/67.

   During 2018 Dan and Freida furnished over half of the total support of each of the following individuals, all of whome still live at home:

Gina, their daughter 22 a full time student who married on 12/21/18 has no income of her own and for 2018 did not file a joint return with her husband Casey, who earned $10,600.00 during 2018. Gina’s SSN is 123-45-6788

Sam their son is 20 who had a gross income of 6300 in 2018 dropped out of college in October 2018. HE had graduated high school in May 2018. Sam’s SSN is 123-45-6787.

Ben their oldest son age 26 is a full time graduate student with gross income of 5200. Ben’s SSN is 123-45-6786

Dan was employed as a manager by WJJJ, inc. EIN # 11-11111111, 604 Franklin Street Corbin KY 40702, and Freida was employed as a salesperson for Corbin Realty KY 40701. Selected information from the W-2 forms provided by the employers is presented below. Dan and Freida use the cash method.

Line                        Description                                             Dan                 Freida

1                             Wages,tips, other compensation        74,000            86,000

2                             Federal income tax withheld                11,000            12,400

17                           State income tax withheld                       2,960              3,440

Freida sold a house on 12/30/18 and will be paid a commission of $3100(not included in the 86k reported on W-2) on the January 10, 2019 closing date.

     Other income (as reported on 1099 forms) for 2018 consisted of the following:

    Dividends on CSX stock (qualified)  700.00

     Interest on savings at Second bank 1600.00

     Interest on City of Corbin bonds           900.00

     Interest on First Bank CD                         382. 00

The $382 from First Bank was original issue discount. Dan and Freida collected 16k on the First Bank CD that matured on 09/30/18. The CD was purchased on 10/1/16 for $14,995.00 and the yield to maturity was 3.3%

Dan received a Schedule K-1 from Falcon Partnership which showed his distribution share of income as $7,000.00. In addition to the above information, Dan and Freida’s itemized deductions included the following:

    Paid on 2018 Kentucky income tax          700.00

    Personal property tax paid                         600.00

     Real estate taxes paid                               1,800.00

     Interest on home mortage (Corbin S&L) 4,900.00

     Cash contributions to the Boy Scouts        800.00

Sales tax from the sales tax table is $1,860. Dan and Freida made estimated tax payments of $8000.00. The Kentucky income tax rate is 4%.

Part 1- Tax Computation

Compute Dan and Freida’s 2018 icome tax payable (or refund due) If you use tax forms for the computations you will need Form 1040 and Schedules A, B and E

Part 2 Tax Planning

Dan plans to reduce his work schedule andonly work half time for WJJJ in 2019. He has been writing songs for several years and wants to devote his time to developing a career as a songwriter. Because of the uncertainty in the music business, however, he would like you to make all computations assuming that he will have no income from song writing in 2019. To make up for the loss of income Freida plans to increase the amount of time she spends selling real estate. She estimates that she will be able to earn $90k in 2019. Assume that all other income and expense items will be approximately the same as they were for 2019. Assume that Sam will be in enrolled in college as a full time student for the summer and fall semesters. Will the Butlers have more or less disposable income (after Federal income tax) in 2019? Write a letter to the Butlers that contains your advice and prepare a memo for the tax files.