Reference no: EM133059860

Carly is 26 and has just received a promotion at work. She now earns $10,000 more than the threshold at which the 20% marginal tax rate cuts in. Carly is unhappy at losing 20% of her money in tax. She hopes that by investing in a share portfolio she will be able to reduce this tax liability. Carly has spoken to a margin lender who has suggested that she negatively gear her share portfolio by concentrating on stocks that place more emphasis on capital gains rather than income. The lender has recommended a portfolio with a weighted LVR of 70% and Carly is happy to contribute $60,000 of her own money and borrow the maximum amount that this equity contribution allows using an interest-only loan. Carly lives with her partner in rented accommodation - they like living in rented accommodation as this gives them the freedom to move around, take holidays and not worry about maintaining a house and meeting mortgage repayments. Since Carly is a conservative investor, she has requested your assistance to do some financial projections for her over a one-year investment horizon after which she plans to liquidate her investment. Carly provides you with the following information and assumptions:

• Grossed-up dividend income projected to be 5% p.a.
• Capital gains will be 10% p.a.
• Only 50% of capital gains is assessed for CGT purposes.
• Cost of debt is 9% p.a.
• Income tax and CGT rate are both 20% p.a.

Required:

1. Calculate Carly's net dollar return with: c. 100% equity in total investment.

d. Negative gearing plus her $60,000 equity in total investment.

2. Calculate Carly's net percentage returns on equity for: a. 100% equity in total investment.

b. Negative gearing plus her $60,000 equity in total investment.