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All
Me again........Looks like there may be all indians and no chiefs
(grin). As a contribution there's a formula for return on investment
posted on the webpage of of a local (Downunder) financial magazine. I
hve attached the author's rationale, and for anyone interested in
downloading the programme and/or reading the rationale the website is
http://www.shares.aust.com/
(you'll find it at the bottom right of the page at FORUM).
For thise interested in futures, the Sydney Futures Exchange page has a
couple of calculators that are quite handy at
http://www.sfe.com.au/Presentation/channel5/index.html
If they won't let you in go the main page and register.
Regards
Michael
michael wrote:
>
> All
> I have Win 95, P-166, and have recently bought Office 97 to do basic
> study in "Computer Business Applications", to sharpen my computer
> skills, and indirectly, my trading.
> Does anyone on the list have any relevant (to Metastock 6.5) Excel or
> Access templates, macros, techniques or other material they are willing
> to share with me, that I can get into as the course develops? I'm
> excited by its potential in the first three weeks. Ain't relational
> databases wonderful (G).
> Reply off-list if appropriate.
>
> With anticipatory gratitude,
> MichaelContent-Type: text/plain; charset=iso-8859-1; name="Excel_ROI_rationale.txt"
Content-Disposition: inline; filename="Excel_ROI_rationale.txt"
X-MIME-Autoconverted: from 8bit to quoted-printable by freeze.metastock.com id TAB19436
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SAVINGS PLANS Formulae
Just how good is that share investment? [Back] [Contents] [Forward]
By Hugh O'Reilly
DOWNLOAD The performance calculation spreadsheet
Investments usually fall into one of three categories:
fixed interest, property or shares. Fixed interest is the
simplest to understand: your investment grows at a
predetermined interest rate. The returns from property
are more complicated. Banks have developed computer
models to simulate property investment and can show
investors alternative scenarios.
Share investment requires greater skill again. Many
individuals might be comfortable with fixed interest or
property investments, but do not take the next step to
shares. For these potential investors there is often a
lack of knowledge and understanding of the returns that
are provided from an investment in shares.
Australia has more individual shareholders than ever
before. Recent floats have been directed at, and were
very popular with, private investors. The ASX Journal
noted last August: "One third of Australians aged over 18
now own shares, compared with 19.9 per cent in 1994 and
14.7 per cent in 1991." Even more will enter the
sharemarket when the next slice of Telstra stock goes to
the market. Do these new shareholders have the knowledge
and understanding necessary for rational investment in
shares?
Potential and new shareholders need a simple way of
calculating the returns from a share investment. I meet
this need here by modelling the returns from a share
investment. First, determine the variables. Imagine you
are considering buying shares in ZYX Inc. Newspapers have
published the fact that ZYX is providing a yield (y) of 5
per cent; so y = 0.05. Since ZYX is fully franked (no tax
is payable by the receiver of the dividend), the franking
credit rate (c) is 36 per cent (the company tax rate) so
c = 0.36.
If you were to consider borrowing, the interest rate
charged (r) is 8 per cent so r = 0.08. Your (marginal)
personal tax rate including the Medicare levy (t) is 48.5
per cent so t = 0.485. The capital growth rate of the
company (g) has been estimated at 3 per cent so g = 0.03.
Two further decisions are needed. First, decide on the
original amount, or value of the investment (x). For this
demonstration we will set the value at $10,000; so x =
10,000.
Second, decide on the proportion of this investment to be
borrowed (p). If you do not wish to borrow, the
proportion would be 0 per cent: p=0. For this
demonstration we will set the proportion at 30 per cent;
p=0.30.
The calculations require some advanced maths. Without
going more deeply into this arcane subject than
necessary, we must calculate three "left-overs" as part
of the formulae.
The left-over portion of c (the 36 per cent company tax
rate) is 64 per cent, which we will call 0.64 and
represent as c'. Similarly, t (your 48.5 per cent tax
rate) has a left-over of 51.5 per cent; so t' equals
0.515. And p (borrowings) of 30 per cent have a left-over
of 70 per cent, so p' is 0.70.
Now we can proceed to calculate the earnings rate after
interest and tax.
The Earnings Rate
Let E = (y/c' - rp)t'
then E = (0.05/0.64 - 0.08 x 0.30) x 0.515
or E = 0.0278743
So the earnings rate is 2.79 per cent.
With a $10,000 investment we can generate the net
cashflow.
The Net Cashflow
Let NCF = Ex
then NCF = 0.00278743 x 10,000
or NCF = 278.74
So the net cashflow is $278.74
With 30 per cent borrowed and 3 per cent estimated
capital growth, we can generate the Return on Equity.
The Return on Equity
Let ROE = (E + g)/p1
then ROE = (0.0278743 + 0.03)/0.70
or ROE = 0.0826776
So the return on equity is 8.27 per cent.
The model
Combining these lets investors view various scenarios.
The model may be summarised by three formulas.
Earnings Rate E = (y/c1 - rp)t1
Net Cashflow NCF = Ex
Return on Equity ROE = (E + g)/p1
The Earnings Rate (E) determines the investor's net
annual income rate (after interest and tax) from the
total investment. This is not a real return as it is
based on the total investment rather then the investor's
own funds. The main function of E is to generate the NCF
and ROE figures.
The Net Cashflow (NCF) illustrates the annual fund flow.
This is a real return to the investor. If the NCF is
positive, the investor will receive distributions. If
negative the investor must pay to maintain the
investment. The NCF indicates how efficiently an
investment is working.
The Return on Equity (ROE) tells the investor how well
their investment is working. It is used to compare annual
rates of return for different investments.
The values substituted can be varied to illustrate any
situation. Putting the formulas in a spreadsheet
multiplies the scenarios that can be viewed
simultaneously. The sample spreadsheet above shows how
the NCF and the ROE vary for different companies with
differing estimated capital growths and offering
differing yields.
This sample does not deliver all the information provided
by the spreadsheet. On the spreadsheet, five variables
listed at the start can be adjusted to perform further
analyses. Although the franking credit rate is not likely
to change, the borrowing interest rate may vary from 8
per cent and the investor's (marginal) personal tax rate
may not remain at 48.5 per cent. The two variables that
are most likely to change are the total investment amount
and the proportion borrowed. These can easily be altered
to analyse any situation.
Hugh O'Reilly is assistant lecturer at the Faculty of
Business and Economics, Monash University, Melbourne.
E-mail: hugh.o'reilly@xxxxxxxxxxxxxx edu.au
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This article is from Australia's Personal Investment magazine, June 1998.
© 1998 BRW Media - Your use of this site is governed by our Legal Notice
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