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(solution) Humperdinck Inc, an organisation that investigates opportunities


Humperdinck Inc, an organisation that investigates opportunities for potential investment has recently promoted you out of the mailroom. You have some experience in valuation having spent a summer internship at an investment bank. Your boss, easing you into the role, expects you provide an analysis of Hillock & Hummock Ltd, an Australian owned company.

Hillock and Hummock produced 2,500 marmot pelts in the past financial year which had an average selling price of $2,000. Variable costs are estimated at 70% of revenue, with an additional warehouse rent, wages and licences fixed at $750,000 for the year.

Hillock and Hummock have only one depreciable asset, initially purchased at $1,500,000 which they depreciate in a straight line to $0 over 10 years. They are currently still depreciating this asset.


Hillock and Hummock have an interest expense from the debt they hold of $50,000, and the applicable corporate tax rate is 20%

(a) Provide an income statement for Hillock and Hummock for the past financial year.

(7 marks)


There are currently 1 million ordinary shares outstanding for Hillock and Hummock and they pay out 90% of their after tax earnings to investors.

(b) Identify Hillock and Hummock?s earnings per share, the dividend per share and the total amount, dollar amount, of dividends paid to shareholders.

(2 marks)


The founder of the company, Mr. Glass, who is now retired, has no other income other than the revenue from his 300,000 Hillock and Hummock shares and is a resident of Australia. The dividends are expected to be fully franked.

(c) Determine the taxable income for Mr. Glass.

(4 marks)


(d) Based on the tax rates provided below, determine the size of the refund or tax payable for Mr. Glass. Note: do not include the Medicare Levy or any other levies, offsets or rebates in your calculations.

(2 marks) 


Tax rates

Income

Rate

$0 - $18,200

0%

$18,201 - $37,000

19%

$37,001 - $80,000

32.5%

$80,001 - $180,000

37%

      Source: Australian Taxation Office, 2016

 


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