BUACC3701 – Fisher’s separation theorem and The “Market Value Rule”

Hi guys, here are some notes just for you to read. I took them from the internet as I think they are quite important. You might find something in the YouTube if you want to avoid getting sleepy reading this. Hahaha

What is Fisher’s separation theorem?

By Richard Wilson

Fisher’s separation theorem stipulates that the goal of any firm is to increase its value to the fullest extent, regardless of the preferences of the firm’s owners. The theorem is named after American economist Irving Fisher, who first proposed this idea.

The theorem can be broken down into three key assertions. First, a firm’s investment decisions are separate from the preferences of the firm’s owners. Second, a firm’s investment decisions are separate from a firm’s financing decisions. And, third, the value of a firm’s investments is separate from the mix of methods used to finance the investments.

Thus, the attitudes of a firm’s owners are not taken into consideration during the process of selecting investments, and the goal of maximizing the firm’s value is the primary consideration for making investment decisions. Fisher’s separation theorem concludes that a firm’s value is not determined by the way it is financed or the dividends paid to the firm’s owners.

For related articles, check out Ten Books Every Investor Should Read and Profiting From Panic Selling.

This question was answered by Richard C. Wilson.

Read more: What is Fisher’s separation theorem? http://www.investopedia.com/ask/answers/09/fisher-separation-theory.asp#ixzz4pYu458bo
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The “Market Value Rule”

If you have ever lived in a property and then began to rent it out to produce income, then the application of the “market value rule” is something you need to be aware of.

If you first commenced to rent out your main residence after 20 August 1996, you have the option of obtaining a valuation of the value of the property as at that date which then becomes the “deemed purchase price” for any future capital gains tax calculations. This will ensure that any capital gain that as accrued up until the time the property was first used to produce income is effectively disregarded.

Although not clear from a literal reading of the Tax Act, based on the advice from the Tax Office, it appears that where the market value rule applies, the property’s entire purchase price including legal fees, etc, is replaced with the property’s market value.

This means that all expenditure incurred in relation to the property before it first became income producing, is replaced with the property’s market value at the first income time.

However, any cost base expenditure incurred after the first income time, will be included in the property’s cost base in addition to the property’s market value  at the first income time.

For example, let’s say a property was valued at $350,000 at the first income producing time. A number of improvements were made to the property after it commenced producing income. The cost of these improvements would be added to the $350,000 to form the cost base for any future capital gains tax calculations.

If you initially purchased your property, lived in it, then commenced renting it after 20 August 1996, the market value could be extremely valuable in your endeavours to reduce any capital gains tax payable.

 If you have any questions regarding the market value rule and how you might take advantage of it, please contact Ellingsen Partners.

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