question 1

Amelia wants to start a share portfolio using the $50 000 in equity that he has already saved and possibly combine this with some borrowed funds. Assume the following:

interest rates at 6%

grossed-up dividend income of 4%

annual capital gain of 2%

MTR 37%.

Calculate the net return in both dollar and percentage terms for the following levels of gearing if he sells the investment asset a year and 1 day after he buys it? (5 marks each)

(a) 100% equity ($50 000 in equity)

(b) 50% equity ($50 000 in equity and $50 000 in debt)