Requirement ii:

The formula, used for calculating the value of cash flows, is as follows: 

Where, CF_n = Cash flow of n period

r= Interest Rate

n = Period

Value of Cash Flow on Time₁ :

ΣDCF₁ =  

=   = $0

Value of Cash Flow on Time₅ :

ΣDCF₅ = =  +  + + +

=   +  + + +

=   +  + + +

=  

Answer to question 3:

The Australian government on 1^st September introduced the treasury laws amendment bill that proposed the reduction of corporate tax rate for all the reporting entities from 30% to 25% (www.ato.gov.au 2018). For larger companies, government would bring into tax cut and witnessing overtime reduction in rates. Reduction rate in corporate tax rate is done for proposing and encouraging investment mainly highly mobile foreign direct investment. This reduction in taxation rate would help in lowering would help in increasing income for Australians in the long-run. Such acceleration in investment is done by building more productive and larger capital stock and generating knowledge spillovers and technology. Not only higher growth would be encouraged by building a more productive and larger capital stock, but it will also help in generating higher wages. It was indicated by some views on taxation of company that the corporate taxation rate should be reduced to 25% with the timing that is subjected to fiscal and economic circumstances. At the same time, there should be introduction of making arrangements for charging for the use of non-renewable sources of energy. It is indicated by the theoretical concepts that lowering the taxation rate would help in stimulating wages and investments. A large chunk of reduction in taxation rate of company would be met immediately by increasing the burden through personal income taxation. The reason is attributable to the fact that lowering Australian corporate taxation rate would immediately result in lowering franking credits for domestic shareholders that helps in offsetting their liabilities of personal income taxation (Stewart, 2017).

Nevertheless, the benefits attributable from any reduction in corporate taxation rate of Australia would largely go to owner of capital and foreign investors resulting from unique system of dividend imputation of Australia.  Australia is one of the few countries having the unique system of dividend imputation that effectively helps in lowering the taxation rate and in this regard, local companies operating in country are delivered with franking credits indicating that if the company is paying higher taxation rate or more amount of tax less amount then investors would be paying less (Faff, 2015). Dividend imputation is basically a mechanism that helps in providing some tax payers credits to residents for company tax that deemed to have been paid on behalf of company. Dividends are attached to the franking credits are the actual mechanisms for making delivery of tax credits to residents (Davis, 2016). For the tax residents of Australia, from the perspective of investment, the company taxation rate is irrelevant. Therefore, the impact of corporate tax rate is quite different because of system of tax imputation of Australia. For the Australian tax holders, the company tax rate is effectively a withholding tax as the amount is returned when the dividend payment is done. Reduction in corporate tax rate would have a direct benefits attributable to foreign investors and lower rate would attract new foreign investors to Australia. Moreover, arrangement by other foreign investors to make little payment or no taxation in Australia and reducing that the statutory rate does not impact them. A lower taxation rate would encourage investment and investment as potential returns generated would be higher (Loughran & McDonald, 2016). It is so because in the competitive global market, higher taxation rate would discourage investment in Australia and thereby dislocating economic activity.

If the corporation tax is highly disproportional, it is indicative of the fact that there will be lower business creation and fewer jobs. Amount of lower investment in capital would mean lower productivity and income for workers. For consumers, lower taxation rate would mean lower price and higher amount of product and services. Over the subsequent years, lower corporate taxation rate is correlated with skyrocketing revenue and revenue of government will also increase due to reduction in corporate tax rate of company (Adler & Stringer, 2016).

Answer to Question 4:

Requirement i:

The monthly holding period returns are calculated by using the formula, stated below:

R_i =

Where,  = Current Month’s Closing Stock Price

 = Previous Month’s Closing Stock Price

Requirement ii:

The average monthly holding period returns are calculated by using the formula, stated below:

Average Monthly Returns =

By using the above formula, the Average monthly holding period returns of NAB, BHP and All Ordinary Index are calculated in the following table:

Requirement iii:

The formula of annual holding period return, used in the following table is as follows:

Annual Holding Period Returns =  – 1

Where,  = Monthly Return of Last month

 = Monthly Return of First month

Requirement iv:

The formula for Standard Deviation, used below, is as follows:

Requirement iv:

The formula for Standard Deviation, used below, is as follows:

S =

Where, = Monthly Returns

 = Average Monthly returns

n= Nos. of Monthly Returns

Requirement vi:

The CAPM Formula for Expected Return is as follows:

E_r  = r_f  + (β x r_mp)

Where, r_f  = Risk Free Rate

β= Beta

r_mp = Market Risk Premium 

Requirement viii:

The formula of Portfolio Return & Portfolio Beta are given below:

P_r  = (w₁ x r₁) + (w₂ x r₂)

β_p = (w₁ x β₁) + (w₂ x β₂)

Where, w₁ = Weightage of NAB

w₂ = Weightage of BHP

r₁ = Average Monthly Return of NAB

r₂ = Average Monthly Return of BHP

β₁ = Beta of NAB

β₂ = Beta of BHP

Requirement ix:

Based on analysis of CAPM and SML, the portfolio of assets in which the investor would be making investment is in the shares of BHP Billiton and shares of NAB (Beaumont, 2015) It can be seen from the computation that return generated by the portfolio would be 4.312% with value of portfolio beta is 1. However, the average return generated by shares of BHP is more than that of BHP Billiton Limited. On other hand, the deviation of return generated from the shares of BHP Billiton is more than that of NAB. Therefore, returns generated by individual stocks has its own risks and returns and making a portfolio of both the assets would lead to generation of average monthly return of 1.29% and with annual holding period of 1.15% and variation of 2.29%.

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