Finance Answers

Scott is an accountant who purchased a vacant block of land in

Brisbane on 1 October 1980. On 1 September 1986, Scott built a

house on the land. At the time, the land was valued at $90,000 and

the cost of construction was $60,000. The property has been rented

out since construction was completed. On 1 March of the current tax

year, Scott sold the property at auction for $800,000.

Requirement:

a) Based on the information above, determine Scott’s net

capital gain or net capital loss for the year ended

30 June of the current tax year.

b) How would your answer to (a) differ if Scott sold the

property to his daughter for $200,000?

c) How would your answer to (a) differ if the owner of the

property was a company instead of an individual?

Hilary is a well-known mountain climber. The Daily Terror

newspaper offers her $10,000 for her life story, if she will write it.

Without the assistance of a ghost writer, she writes a story and

assigns all her right, title and interest in the copyright for $10,000

to the Daily Terror. The story is published and she is paid. She has

never written a story before. She also sells the manuscript to the

Mitchell Library for $5,000 and several photographs that she took

while mountain climbing for which she receives $2,000.

Requirement:

Discuss whether or not the three payments are income from

personal exertion. Would your answer differ if she wrote the

story for her own satisfaction and only decided to sell it later?

Your client is a parent who lent $40,000 to her son to provide a
short-term housing loan. The agreement is that the son will repay
$50,000 at the end of five years.
Reconsider this question in light of the following facts. The loan was
made to the son without any formal agreement and without any
security provided for the sum lent. In addition, the client (the
mother) has informed you that she told her son that he need not
pay interest. However, the son repaid the full amount after two
years and included in his payment an additional amount which was
equal to 5% pa on the amount borrowed. Only one cheque was
presented for the total amount.
Requirement:
Discuss the effect on the assessable income of the parent

Stock W has the following returns for various states of the economy:
State of the Economy Probability Stock W's Return
Recession 10% -30%
Below Average 20% -2%
Average 40% 10%
Above Average 20% 18%
Boom 10% 40%
Stock W's standard deviation of returns is
A) 10%.
B) 14%.
C) 17%.
D) 20%

An investor must choose between two bonds: Bond X pays $95 annual interest and has a market value of $900. It has 10 years to maturity. Bond Z pays $95 annual interest and has a market value of $920. It has two years to maturity. a. Compute the current yield on both bonds. b. Which bond should he select based on your answer to part a? c. A drawback of current yield is that it does not consider the total life of the bond. For example, the approximate yield to maturity on Bond X is 11.21 percent. What is the approximate yield to maturity on Bond Z? d. Has your answer changed between parts b and c of this question in terms of which bond to select?

Your grandfather has offered you a choice of one of the three following alternatives: $7,500 now; $2,200
a year for nine years; or $31,000 at the end of nine years. Assuming you could earn 10 percent annually,
which alternative should you choose? If you could earn 11 percent annually, would you still choose the
same alternative?

Did the tools that the Egyptian government uses to finance the deficit are efficient?

(a) Your company’s current ratio is 0.5x, while your competitor’s current ratio is 1.5x. Both
firms want to "window dress" the coming end-of-year financial statements. As part of
the window dressing strategy, each firm will double its current liabilities by adding
short-term debt and placing the funds obtained in the cash account. Describe the actual
results of these transactions?

(b) What would be the effect if a company increases its debt ratio, but leaves its operating
income (EBIT) and total assets unchanged?

(c) A fire has destroyed a large percentage of the financial records of the Sunlight Inc. You
have the task of piecing together information in order to release a financial report. You
have found the return on equity to be 18 percent. If sales were RM4 million, the debt
ratio was 0.40, and total liabilities were RM2 million, what was the return on assets
(ROA)?

You are considering an investment in a 40-year security. The security will pay $25 a year at
the end of each of the first three years. The security will then pay $30 a year at the end of
each of the next 20 years. The nominal interest rate is assumed to be 8 percent, and the
current price (present value) of the security is $360.39. Given this information, what is the
equal annual payment to be received from Year 24 through Year 40 (i.e., for 17 years)?

To expand its operation, Sunbeam Ltd. has applied to the Lion Bank for a 3-year, $3,500,000
loan. Prepare a loan amortization table assuming 10 percent rate of interest.