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ACCTG 151G
Financial Literacy
SEMESTER ONE, 2020
Question 1 (25 marks)
In March 2019 you invested in 1000 shares that costs $8.00 each. At the end of February 2020 you receive a dividend from the company of $1.00 per share and by the end of March 2020 the shares were worth $11.00 each.
a. Calculate the total amount your investment was worth and the rate of return you would have received on your investment if you had sold the shares at the end of March 2020. (4 marks)
b. Unfortunately you waited and the Covid-19 pandemic had a drastic effect on the company you invested in. By the end of April 2020 the value of the shares had fallen to $6.00. Calculate the total return you will receive on your investment if you sold the shares at the end of April 2020. (2 marks)
You are considering purchasing a residential property as an investment. You have saved a considerable amount of money that you will use as a deposit and intend to borrow the rest from your bank. However, three of your friends have been talking with you about the possibility of buying the house together with you. The purchase price of the house is $800,000.
If you all buy the house together you will each contribute $200,000 towards the purchase price and will live in it as flat-mates (there are four separate bedrooms).
If you decide to buy it by yourself you have $200,000 cash saved and the bank will lend you $600,000 at a rate of 4% p.a. The loan will be “interest only”. You will rent rooms to each of your three friends for $200 per week each.
You expect the Auckland property market to improve after COVID-19 and for prices to rise by 7% over the next year.
c. If you and your three friends invested in the house together, and property prices rose as expected, what would be the rate of return on your investment for that year? (1 mark)
d. If you and your friends sold the house at the end of one year what would your share of the profit be? (2 mark)
e. If you invested in the house by yourself, how much profit would you make in that year if you sold the house? (4 marks)
f. If you invested in the house by yourself, what would be the rate of return on your investment for that year? (3 mark)
g. If you invested in the house by yourself but instead of rising, property prices fell by 4% over the next year, what would be the rate of return on your investment for that year? (5 marks)
h. Explain two similarities and two difference between investing in Real Estate and investing in Shares. (4 marks)
Question 2 (25 Marks)
You have been planning to start saving for your future and have been investigating an “International Growth” managed fund that has returned an average of 8% p.a. to its investors over the past five years. You expect this level of return to be achievable, on average, in the future.
A friend has told you that it would be better to invest your money in a registered “Conservative” KiwiSaver managed fund. The average return is lower at 5% p.a. but that is because the fund invests in safer investments plus it benefits from the additional Employer and Government contributions that the other fund doesn’t qualify for.
You earn $75,000 p.a. and plan to invest 5% of your salary annually into one of these two funds for the next 30 years. Your first investment will occur at the end of this year and the final one at the end of the 30th year (i.e. there will be 30 deposits). In addition to your deposits, the KiwiSaver fund will receive contributions from your employer of 3% of your salary each year plus the Government contribution of $521.43 p.a. These payments will occur at the same time as your contributions.
Assume your salary will remain constant for the next 30 years and that the returns on both funds are after tax and after deduction of management fees.
a. Determine which of these funds will make you wealthiest in 30 years-time and by how much. You must show all your workings. (9 marks)
b. Compare and contrast a “Conservative” fund with a “Growth” fund. What is the main difference you should be concerned about as an investor? (4 marks)
Another friend has told you about regularly purchasing shares in a company listed on the NZX. You notice that this is one of the companies that the KiwiSaver Conservative fund also invests in. This company has consistently generated investor returns in excess of 10% p.a. which, if this continued, would provide you with over $600,000 in 30 years-time if you regularly invested 5% of your income.
c. Explain the risk of you investing all your money in the shares of a single company compared with that of investing it in a managed fund. (8 marks)
d. Describe four advantages of investing in a KiwiSaver (managed) fund. (4 marks)
Question 3 (25 marks)
A good friend of yours started a business recently selling t-shirts. The first month of business has passed and your friend wants to see how the business has been going. She knows you have been studying financial literacy at university and has asked you to help her “do her accounts”.
So far she has recoded the following transactions in a manual accounting system (see below).
There have been a number of transactions that have occurred since this accounting record was compiled and your friend has asked you to:
a. Complete the accounting records with these remaining transactions:
xii. Your friend took $100 worth of t-shirts for her own personal use.
xiii. The business purchased a delivery vehicle for $5,000 cash.
xiv. The bank took $100 out of the bank account as payment of interest on the loan.
xv. The business made a sale of $1,000 on one month credit terms.
xvi. The t-shirts had originally cost the business $300. (10 marks)
b. Prepare a detailed balance sheet for the company (9 marks)
c. Prepare a detailed income statement for the company (ignore tax). (6 marks)
Question 4 (25 marks)
Appendices I to III contain a Balance Sheet and Statement of Income for the New Zealand Company Kathmandu Holdings Limited and a screen-shot of the company’s listing page on the NZX. From these statements you are required to:
a. Calculate the Gross Profit Margin for the 2019 and 2018 financial years and comment on the year-on-year change. (3 marks)
b. Calculate the Net Profit Margin for the 2019 and 2018 financial years. What does this tell us about the company when compared to the Gross profit margin? (3 marks)
c. Calculate the Return on Assets for the 2019 and 2018 financial years and comment on the change. (3 marks)
d. Calculate the Return on Equity for the 2019 and 2018 financial years and comment on the change. (3 marks)
e. Calculate the Current Ratio for the 2019 and 2018 financial years and comment on the current ratio and on the change. (3 marks)
f. Calculate the Interest cover ratio for the 2019 and 2018 financial years and comment on the change. (3 marks)
g. On the Balance sheet of Kathmandu Holdings, total equity (shareholders funds) is recorded as: $442,062,000. From the NZX listing for Kathmandu Holdings calculate the market value of total equity. Explain why this is different from the book-value of total equity. (4 marks)
h. In the NZX listing for Kathmandu Holdings, the company’s P/E is recorded as 6.600. Explain what the P/E is and what this number means about Kathmandu Holdings shares. (3 marks)