Mr Brady Chambers Has Approached You for Advice as to Which

question 18

Essay

Mr Brady Chambers has approached you for advice as to which investment structure he should use to acquire some preference shares in Strikealite Ltd., a company that will list on the Australian Stock exchange on the 30^th June 2014. Brady is 32 years old and seeks to purchase 200,000 shares at the listing price of $1 per share. The company has forecast fully franked annual preference dividends of 10 cents per share and analysts have forecast a price for the shares in 2 years of $1.60.
a) Assuming the dividend and price forecasts are realised, what would be the net investment return to Brady on the share acquisition over 2 years, expressing your return in the form of the net after-tax dollar amount received from the investment at the end of 2 years, where the shares were acquired in each of the following entities:
1-1Brady's own name assuming a marginal tax rate of 45% (ignore the medicare levy in your calculations).
1-2 A company name.
1-3 The name of a superannuation fund.
Show all calculations for each investment entity.
b) Based on your calculations in part (a), rank the alternatives from the most preferred to the least preferred investment entity.
c) Briefly outline other financial and non-financial issues in relation to the various investment entities that would be relevant to discuss with Brady prior to providing any recommendations.

---

Definitions:

Negatively Sloped

Describes a line on a graph that moves downward from left to right, indicating an inverse relationship between two variables.

Total Surplus

The sum of consumer surplus and producer surplus, representing the total benefits to society from the trade of a good or service.

Consumer Surplus

The difference between the maximum price consumers are willing to pay for a good or service and the actual price they pay.

Producer Surplus

The disparity between the price that producers are ready to accept for a product or service and the price they actually obtain.