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Her friend starts to save at age 30 and deposits \$200 per month until he retires at age 65. The investment also earns 8% per annum compounded monthly. His first deposit is on his 30th birthday, and his last deposit is on his 65th birthday.

(a) How much does each investor deposit?

(b) Calculate the future value (FV) of each investment using a financial calculator.

(c) Who has the larger amount of money at retirement? Why is it important to start investing at an early age (in no more than 300 words)?

(a) Obtain the most recent financial statements for the two companies and present the major data/information that will be used for steps (b)-(e) in a table

(b) Obtain the current share prices for the two companies and present these in a table

(c) Compute the following financial ratios and evaluate the ‘profitability’ performance of the two companies: Operating profit margin; Return on assets; Return on equity

(d) Compute each firm’s current price-earnings ratio and market-to-book ratio and suggest to investors how to value these two companies’ future prospects

(e) Provide your personal assessment of the two companies’ past performance based on your analysis

## Deposit computation

 Particulars Amount University expenses p.a. A \$40,000.00 Nos. of Years in University B 4 Total Fund Required C=AxB \$1,60,000.00 Annual Interest Rate D 4% Nos. of Annual Deposits E 17 Annual Deposit Amount F=(CxD)/[(1+D)^E-1] \$6,751.76

For the purpose of deposit of money by grandfather, three banks have been chosen that is Commonwealth bank, NAB, ANB and Westpac. Evaluation of banks for selection are done by considering several parameters such as interest rate, location, convenience and other amenities such as serving coffees. All the banks common wealth bank, Westpac, NAB and ANZ pays interest rate compounded quarterly at rate of 5%. For selecting the bank, future value of deposit has been computed. For the computation, the present value of amount to be deposited by grandfather is considered. In addition to this, time for which money will be deposited in the bank, interest rate and number of compounding periods have been considered (Uechi et al. 2015).  The future values are as follows:

Now, looking at the future value of deposits made in Common wealth bank, the present value of money held by grandfather is \$ 10000 and the time for which the deposit is to be made is five years. Future value of deposit made in this bank stood at \$ 12820.37. Now, looking at the figures of future value of deposit made by ANZ bank, it can be seen that the amount stood at \$ 12840.28. Future value of money deposited in NAB bank stood at \$ 12840.03. Lastly, if the deposit is made in Westpac, future value of present amount of deposit stood at \$ 12762.82. It can be inferred from the above figures that money deposited in ANZ bank would generate higher future value of deposit compared to other banks. Therefore, it would be viable to select ANZ bank by grandfather.

The larger amount of money that the depositor would have is ascertained from the computation of future value of present amount of money held by investors. From the computation of figures, it can be seen that future value of deposit of amount of money held by investor 1 stood at \$ 394279.71 and future value of money held by investor 2 stood at \$ 461835.01 respectively. Therefore, investor 2 would have larger amount of money at retirement.

Making investment, at an early age, benefits investors in terms of time value of money. If investors have longer period for saving money, then it will help in increasing the value and is key to earning as much as possible. Investing at an early age comes with several benefits. Making investment at an early age will induce investors to save more and the sooner will be the interest received and dividend amount that will be added to the principal amount of investment. A habit of saving is developed and enables investors to reap the benefits of the magical concepts of compound interest (Hanna et al. 2016). Investors will be capable of making smart investment decision at an early age. They would be capable of taking higher risks and higher risks are associated with higher rate of return. For covering regular household, expenses and other medical expenses, there should be enough retirement corpus. Investors are able to inculcate financial decisions if they have the habit of making investment at an earlier age and keeping their expenses in check by prioritizing investment over purchase. All the lessons that investors learn from making earlier investment will reward them in the long-run. Imposing restraint and having financial discipline articulated in earlier age will lead to a better financial position (Atkinson et al. 2015).

## Importance of Starting Early

The profitability performance of Telstra and TPG is evaluated by the computation of operating profit margin, return on assets and return on equity. Operating profit margin of Telstra stood at 22.12% and that of TPG stood at 25.45% respectively indicating that profit generation from operations of later company is more than former company.  Return on assets of TPG stood at 10.63% as against 9.19% for Telstra. This depicts that assets of TPG are more efficient in generating revenue as against Telstra. Return on equity for TPG stood at 17.33% and that of Telstra stood at 26.61% indicating that Telstra is more efficient in generating profit from its shareholder money.

The past performance of companies can be assessed by looking at the previous months share price and it can be seen that share piece of TPG is considerably higher than that of Telstra. The share price of TPG in the current period stood at 6.11 compared to 3.35 for Telstra. Furthermore, it can be seen that price earnings ratio of TPG that is 11.691 is more than Telstra at 9.877. On other hand, the market to book value of TPG is significantly less at 3.338 than Telstra at 8.635. When looking at sales figures, net sales of TPG are 2539.5 compared to 28202 for Telstra. Operating profit on other hand for Telstra is considerably higher than TPG by amount 5591.6. Total value of equity of Telstra is also more than TPG. However, the market price per share for Telstra is considerably higher than TPG. Therefore, from investor’s point of view, it can be inferred that Telstra has outperformed TPG in generating return to its shareholders. Moreover, value of total assets, total equity and sales generated by Telstra is higher than TPG. It is indicative of the fact that performance of Telstra is better compared to TPG.

Compounding and discounting are the financial factors that are considered integral to the concept of time value of money and they help in evaluation of investments. Discounting is used for expressing the value of future sums of money in terms of value of dollar today.  Compounding on other hand, is used for ascertaining the value of current amount of money in future value of dollars. Compounding uses compound interest rate for ascertaining future value of present value. Discounting uses discounting rate for ascertaining future value of present value (Petty et al. 2015).

Retirement planning is one of the most crucial areas of financial planning for allocating good proportion of resources and time. Need of retirement should be anticipated by considering pre retirement income and the income that will be provided from funding sources by creating difference between need of annual income and income that is generated from other sources. The ability of investors to draw a lifetime income depends upon the sequence of market return on in retirement. Allocation of assets of investors should be done by considering all the factors such as time horizon, tolerance of risks and future expectations. Formulation of overall investment plan investors should be done in conjunction with top priorities of retirement. Moreover, the period of portfolio of investment should be extended if planned retirement date intends to be shifted. The probability of earning return can be increased by staying in equities in greater proportion and for greater period. Saving needs for accumulating more return during retirement is determined by the factor interest rate. The payment from contribution plan to investors or employees during retirement is influenced by the interest rate factor (Ormrod 2015).

## Profitability Analysis

The report is prepared for studying the effects of cash rate on tourism sector of Australia. For the purpose of analysis, reasons associated with the change in cash rates have been ascertained and yearly data on cash rates for time period of ten years ranging from 2007 to 2017 have been collected. The target cash rate is set by Reserve Bank of Australia that is used as instrument of monetary policy (Andor et al. 2015). In order to keep cash rate at target, the approach employed by bank to supply enough funds.

Australian tourism industry has witnessed difficult conditions pertaining to demand because of several factors such as Australian dollar depreciation, subdued economic conditions and higher exchange rate accompanies by downturn in business travel and slow growth in spending by household. A stable cash rate might encourage people to money and increase the willingness of consumers to extend them in spending. This would have favorable impact on business of tourism industry, as increased spending would increase the income of industry as a whole.

The reason attributable to increase in cash rate is increase in yield of bank bills. The Reserve bank of Australia has left the cash rate unchanged at low record low of 1.5% for year ending March, 2018. It is expected that keeping the cash rate unchanged at such low level would lead to growth of economy faster in year 2018 compared to growth in year 2017. One of the continuous sources of uncertainty is the spending by household. From 1990 until 2018, interest rate of Australia is averaged at 4.60% by reaching record low of 1.5% in year 2016 and all time high of 17.5% in January 1990. The focus of central bank is to forecast higher growth rate of Australian economy in the current year. Although the level of inflation at global level is low, it is forecasted to increase over the next couple of years due to tighter labor market and higher commodity prices. Due to improvement in conditions of global economy, monetary stimulus has been withdrawn by central bank. Keeping the cash rate stable is also attributable to favorable conditions of business and increase in non-mining business investment. Moreover, economy is also being supported by higher level of investm.

ent in public infrastructure. Increase in rate of employment in the country is accompanies by considerable rise in participation of labor force (Xu et al. 2017).

## Valuation of Future Prospects

Change in cash rate of Austarlia:

(Source: Manalo etva. 2015)

The above graph depicts the movement in cash rates. A lower cash rates reduces borrowing costs, thereby encouraging people to buy more, and thereby stimulating the economy of country. On other hand, spending in economy is encouraged by higher interest rate. Level of supply and demand in economy and ultimately inflation level is effected by rise or fall in rate of interest. It is perceived that cash rate set of RBA will remain on hold until there is probable hike in rate and the risk is associated with the fact that rate will not rise until 2019 nonetheless. In the current scenario, there is unusual low wage and inflation trends and improvement in trading and local partner economies. The unchanged rate of cash since the last sixteen months from the perspective of monetary policy seems to persist in another year as well. Moreover, there have no change in forecast of inflation and rate of growth. There was no mentioning of consumer price index and it is viewed that over the year, the underline rate of inflation will now be about 0.25%. It is expected that RBA will leave the cash rate unchanged at level of 1.5% for the remainder of 2018. There was compassionate development of wages and rates of inflation. The first rate in rise is witnessed in current market pricing around March, 2019. Australian dollar will probably be the country’s buffer against the rising overseas rate of interest. There is no urgency for central bank to raise the cash rate until there is improvement in growth of wage rates. In fact, any change in cast rate would misguide business and sector such as tourism given the level of spending by household (Karadag 2015). In this regard, the key questions faced by officials of bank are the reconciliation of balance between household spending and employment growth.

Conclusion:

From the analysis of above discussed factors, it can be seen that cash rate would be stable at the rate of 1.5% in the remainder of current year. The reason is attributable to several economic factors such as wage rate and inflation rate in the economy. However, it is expected that bank will have tighter policy in light of weakness in inflation and retail sales. Increased focus on bank on the financial stability is indicative of the fact that the rates will be moved off the prevailing low historic levels as long as it is felt that level of inflation in the economy is headed in the right direction (Manalo et al. 2015).

References list:

Andor, G., Mohanty, S.K. and Toth, T., 2015. Capital budgeting practices: A survey of Central and Eastern European firms. Emerging Markets Review, 23, pp.148-172.

Atkinson, A., Messy, F.A., Rabinovich, L. and Yoong, J., 2015. Financial education for long-term savings and investments: review of research and literature. OECD Working Papers on Finance, Insurance and Private Pensions, (39), p.0_1.

Burns, R. and Walker, J., 2015. Capital budgeting surveys: the future is now.

De Nardi, M., French, E. and Jones, J.B., 2016. Savings after retirement: A survey. Annual Review of Economics, 8, pp.177-204.

Goda, G.S., Levy, M.R., Manchester, C.F., Sojourner, A. and Tasoff, J., 2015. The role of time preferences and exponential-growth bias in retirement savings (No. w21482). National Bureau of Economic Research.

Hanna, S.D., Kim, K.T. and Chen, S.C.C., 2016. Retirement savings. In Handbook of consumer finance research (pp. 33-43). Springer, Cham.

Hong, H.A., KIM, J.B. and Welker, M., 2017. Divergence of cash flow and voting rights, opacity, and stock price crash risk: international evidence. Journal of Accounting Research, 55(5), pp.1167-1212.

Karadag, H., 2015. Financial management challenges in small and medium-sized enterprises: A strategic management approach. Emerging Markets Journal, 5(1), p.26.

Manalo, J., Perera, D. and Rees, D.M., 2015. Exchange rate movements and the Australian economy. Economic Modelling, 47, pp.53-62.

Moutinho, L. and Vargas-Sanchez, A. eds., 2018. Strategic Management in Tourism, CABI Tourism Texts. Cabi.

Ormrod, N.G., 2015. Business Models: A Unit of Analysis for Company Performance.

Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin, J.D. and Burrow, M., 2015. Financial management: Principles and applications. Pearson Higher Education AU.

Titman, S., Keown, A.J. and Martin, J.D., 2017. Financial management: Principles and applications. Pearson.

Uechi, L., Akutsu, T., Stanley, H.E., Marcus, A.J. and Kenett, D.Y., 2015. Sector dominance ratio analysis of financial markets. Physica A: Statistical Mechanics and its Applications, 421, pp.488-509.

Xu, R., Chen, H. and Zhao, L.J., 2017. Predicting Corporate Venture Capital Investment.

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