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1

List different types of (a) financial markets, (
b) financial products, (c)
financial institutions
and (d) financial regulators that you know of

Financial markets
Equity (stock) market
Debt (credit) market
Real estate (property) market
Foreign exchange market
Derivatives market

(b) Financial products/instruments
Equities: common shares, preference shares
Debt: bills, notes, bonds (debentures) issued by government, banks and/or
corporations
Derivatives: Futures, Forward, Options and Swaps (FFOS)

(c) Financial institutions
Commercial banks (JP Morgan, CBA, ANZ, and etc.)
Investment banks (Morgan Stanley, Goldman Sachs, Macquarie Group and etc.)
Managed funds, including superannuation funds
Insurance companies (health, property and life)
Hedge funds
Private equity funds

(d) Financial regulators
Australian Securities Exchange (ASX)
Australian Securities and Investment Commission (ASIC)
Australian Prudential Regulation Authority (APRA)

2

What sorts of careers do you think are open to you with knowledge of finance?

Investment banking including:
Underwriting
Merger and acquisitions
Leveraged/Management buyout
Consulting
Project finance
Treasury including:
Risk management (foreign exchange, interest rate, commodity risk and etc.)
Cash management
Asset-liability Committee (ALCO)
Proprietary trader in equity, debt, foreign exchange and derivatives markets
Research department in accounting firms, banking and financial sector
Corporate/Personal lending
Wholesale/Retail finance
Financial planning (investment advisors)

3

Jeff joined AMG Bank in 2017. As per the contract, Jeff’s salary increases by 5%
per annum (p.a.) for the first five years. Suppose Jeff’s salary as of 2019 is
$63,000.
1) How much was his salary in 2018?

Solution: 1) Let X = Jeff’s wage in 2018
X × (1 + 5%) = $63,000
X = $63,000 ÷ (1 + 0.05) = $60,000

Notes: 5% is based on 2018 wage, not 2019 wage. Therefore it is incorrect to
attempt as $63,000 × (1 - 5%) = $59,850

4

Jeff joined AMG Bank in 2017. As per the contract, Jeff’s salary increases by 5%
per annum (p.a.) for the first five years. Suppose Jeff’s salary as of 2019 is
$63,000.
2) How much will his salary be in 2021?

2) Following the given information, 2021 salary will be 5% more than 2020
salary, which is 5% on the top of 2019 salary.
2021 salary = 2020 salary × (1 + 0.05)
2020 salary = 2019 salary × (1 + 0.05)
So, 2021 salary = 2019 salary × (1 + 0.05) × (1 + 0.05)
= 2019 salary × (1 + 0.05)2
= 63,000 × (1 + 0.05)2
= 63,000 × 1.1025
= $69,457.50
Or we can directly skip to 63,000 × (1 + 0.05)2 because 2020 – 2018 = 2

5

The three key decisions faced by financial managers are:

The capital budgeting (investment) decision:
- What real assets will be purchased to help generate future cash flows?
2. The capital structure (financing) decision:
- How will the purchase of these real assets be financed? How much and what types of
debt and equity should be used to fund the firm?
3. The dividend policy decision:
- How will residual cash flows be distributed to shareholders, i.e. pay out as dividends
or buyback, or retain for future growth?

6

What is the main objective of a company? How is the maximisation of shareholder wealth
different to profit maximisation?

The main objective of corporation is to maximise the value of the company and hence the wealth
its owners i.e. the shareholders.

The maximisation of shareholder wealth is maximising the present value of future cash flows (what
expected future cash flows are equivalent to in today’s dollars).

This is different to profit
maximisation because profit maximisation doesn’t consider the timing of cash flows (the sooner
cash is received the more value it has), the risk of the cash flows, and it includes non-cash items
such as depreciation

7

what is a financial intermediary

An institution that raises capital by issuing
liabilities against itself and then lends that
capital to corporate and individual borrowers.

8

tradtional business legal classifications

Sole proprietorships
• Partnerships
• Corporations

9

all forms of business organisations

• Sole proprietorships
• Partnerships
• Corporations
• Limited partnership (emerging)
• Proprietary limited company (emerging)

10

what is a sole proprietorship

Sole proprietorship is unincorporated business owned by one individual.
No distinction between business and person

11

advantages of sole proprietorship

Advantages
 Easy to set up and operate
 Subject to few government regulations
 Taxed like an individual

12

disadvantages of a sole proprietorship

 Proprietor has unlimited personal liability for business debts
 Life of proprietorship is limited to time the creator owns it
 Transferring ownership can be difficult
 Difficult for sole proprietorship to obtain large sums of capital (funds)

13

what is a pertnership

Partnership is unincorporated business owned by two or more persons.

14

advantages of partnership

Easy and inexpensive to form
 Subject to few government regulations
 Taxed like an individual

15

disadvantages of partnership

Partners have unlimited personal liability for business debts
 Life of partnership is limited to time the same group of partners owns it
 Transferring ownership can be difficult
 Difficult for partnership to obtain large sums of capital (funds); but better than for a sole
proprietorship

16

what is a comany (corporation)

Legal entity with all the economic rights and responsibilities of a person created by a statute (Corporation Act 2001)

17

advantages of a corporation

Limited liability – shareholders’ loss will be limited at their capital contribution
 Separate and distinct from its owners
 Unlimited life – ‘going-concern’
 Easy transferability of ownership if listed in the stock market
 Able to raise capital by issuing debt and equity instruments in the financial markets

18

disadvantages of a corporation

Setting up and filing regulatory reports is complex

19

If Robert own 1,000 shares in ABC Co., ABC Co. has 1,800,000 shares on issue and their
market capitalisation is $225,000,000, what is the total wealth Robert has invested in ABC
Co.?

Market Capitalization = share price × # of outstanding shares
So share price = Market Capitalization ÷ # of outstanding shares
Share price = $225,000,000/1,800,000 = $125
Robert’s wealth = 1,000 x $125 = $125,000

20

calculate tax payable if:
Taxable income of $59,000

37,000 < 59,000 < 90,000, marginal tax rate (MTR) = 32.5% = 0.325
Tax Payable = $3,572 + 0.3

21

Calculate tax payable if Assessable income $182,500 and allowable deductions of $34,000

Taxable income = Assessable income – Allowable deduction
= 182,500 - 34,000 = 148,500
90,000 < 148,500 < 180,000, MTR = 37% = 0.37
Tax payable = $20,797 + 0.37 × ($148,500 - $90,000) = $42,442

22

what is finance

Finance is concerned with decisions about money.
• It is integral to
 Economy and business
 Households
 Individuals
 Politics

• Finance is the ‘art and science to manage money’

23

A company’s share price reflects the

timing, magnitude and risk of the cash flows that investors expect a
company to generate over time.
Market capitalization = share price × # of outstanding shares

24

The capital budgeting process breaks down into three steps:

identifying potential investments
 analysing the set of investment opportunities and selecting those improving shareholders’ value
 Evaluating by estimating net present value (NPV) of these projects
 implementing and monitoring the selected investments

25

what is capital structure

raising capital by selling financial assets to support the company’s operations and investment programs (capital budgeting).

26

what is the agency problem

The conflict between the goals of a company's
owners (shareholders) and its managers.

27

how to overcome agency problems:

Rely on market forces to exert managerial discipline.
 ‘Proxy fight’ – shareholders use their voting rights in AGM to replace incompetent managers
 ‘Hostile takeover’
• Incur monitoring and bonding costs to supervise managers.
 Auditing, using debt and etc.
• Structure executive compensation packages to align managers’ interests with
shareholders’ interests.
 Short-term incentive: bonus
 Long-term incentive: performance shares, executive stock options

28

Simon Piper has been working as an apprentice plumber for J & S Plumbing
Partnership. For the financial year just ended he received gross wages of $40,000.
During the year he purchased protective clothing and boots costing $500. He also
spent $500 on replacing some of his plumbing tools which had been damaged.
Calculate Simon’s income tax payables as of FY2019/20.

Compute: 3,572 + 0.325 × (39,000 – 37,000) = $4,222

29

Net profit of the partnership is shared among the partners.
A partnership doesn't pay income tax on the profit it earns – each partner pays tax on
the share of profit they receive.
Example:
J & S Plumbing Ltd, a partnership business formed by Jessie and Simon, earned
$600,000 gross income during the financial year just ended, from the plumbing
services. The cost of materials amounted to $230,000 and other operating expenses
were $100,000. The business has $20,000 interest expense for the year.
Calculate the taxable income for J & S Plumbing.
Assuming
1. Jessie and Simon has 90% and 10% share in the partnership, respectively
2. Jessie and Simon does not have other income and other deductions

Calculation process:
 Jessie pays individual income tax on her 90% x $250,000 = 225,000 income.
54,097 + 0.45 × (225,000 – 180,000) = $74,347
 Simon pays individual income tax on his 10% x $250,000 = 25,000 income.
0.19 × (25,000 – 18,200) = $1,292
 Total tax payables: $74,347 + $1,292 = $75,639

30

A company is recognized as a Base Rate Entity (‘BRE’) if
 Aggregated Turnover < $50 million
 ‘Aggregated turnover’ is broader than ‘revenue’.
 No more than 80% passive income, i.e. dividends, interest, royalties and etc

Taxation of The J&S Plumbing Ltd., assuming its aggregated turnover as of
2019/20 is $700,000.00
BRE tax rate: 27.5% (FY18/19 & FY19/20)
Taxable income: $250,000
Tax payable:= 0.275 x $250,000 = $68,750