Financial Analysis

FINANCIAL ANALYSIS

 

Introduction

The assignment includes 3 parts. The 1st part will be about the 4 kinds of financial institutions such as commercial banking, investment banks, insurance companies, and investment funds of Australia. Each kind of financial institution will be explained with the help of different companies which belong to each kind of financial institution. The 2nd part will include information regarding the financial adviser register and the persons eligible to be registered in the financial adviser register, their educational qualification, and background. It will also contain different types of financial products that are available in the market. In the 3rd part, we will be provided with a scenario and check whether the project should be accepted by the company or not using sensitivity analysis and NPV calculation.

Part 1

1.1

National Australia Bank

National Australia Bank is a leading commercial bank that provides various services to its customers and various other businesses. NAB provides various financial products. It provides banking services to investors, medium businesses, and small businesses. The major products of the National Australia Bank are banking for business, business for consumers, wholesale banking, and other wealth management insurance.

It provides customers with services for consumer banking. It also provides services such as personal finance and home loans, personal loan facilities as well. It also caters to the demand of the consumers by managing their Wealth and advises on Wealth and Asset management.

The code of the listed National Australia bank stock on the Australian stock exchange is NAB. The total outstanding share is 3196.22 million. The stock was listed on 1 Jan 1974. As of 28th May 2020 market capitalization is $60.47 billion (nab.com.au, 2019). The chairman and director of the National Australia Bank are Philip Chronicon. The managing director, CEO (chief executive officer) of the company is Ross McEwan. Due to the sluggish growth of the business. The interim dividend payment is 3rd July 2019.

 

 

National Australia bank

 

 

 

year

dividends in cents

 

2015

198

 

2016

198

 

2017

198

 

2018

198

 

2019

166

 

 

 

 

 

Suncorp group ltd

Suncorp Group Ltd is one of the biggest insurance companies in Australia and provides various services. It provides services like general insurance and is one of Australia's mid-sized banks. It accepts deposits and provides loans to consumers. It is the largest general insurance group and was formed in the year 1996 after the merger with QIDC (Queensland Industry Development Corporation) and Metway bank. IT also provides various asset management services and products and has operations around the globe. Suncorp ranks among the top 5 in property-casualty insurance and it is also famous for its health and life insurance products and services.

The code of listed Suncorp group Ltd on the Australian stock exchange is SUN. The total outstanding share is 1260.95 million. The stock was listed on 7/7/1988. As of 28th May, 2020 market capitalization is $12.07 billion (suncorpgroup.com.au, 2019). The chairman and director of Suncorp Group ltd are Christine McLoughlin. The managing director (acting) and CEO (chief executive officer) of the company are Steve Johnston.

 

Suncorp Group Ltd

 

 

 

year

dividends in dollars

 

2015

0.8

 

2016

0.71

 

2017

0.73

 

2018

0.82

 

2019

0.7

 

 

 

Morningstar Inc.

Morningstar Inc. is a leading investment research company and has operations across the world. It provides various services to customers. It lies in the group of investment funds. The services that he provides are manager research (exchange-traded funds, mutual funds, other vehicles, and separate accounts), Equity Research, credit rating, and portfolio advice methodologies. As an advisor to individual investors, they help their customers to reach the financial goals of which they desired. It also provides asset management services. As fixed-income security arrangers and issuers, they provide a rating and work as a rating agency as well. They provide investment research services to corporates and advise them to manage their excess reserves.

The code of listed Morningstar on the Australian stock exchange is MCO. The total outstanding share is 42.9 million. As of 28th May 2020 market capitalization is 6.44 billion. The chairman and director of Westpac are Joe Minuet. The managing director and CEO (chief executive officer) of the company are Kunal Kapoor. The next dividend payment is on 3rd July 2020

 

MORNINGSTAR

 

 

year

dividends ($) per share

2015

0.76

2016

0.88

2017

0.92

2018

1

2019

1.12

 

 

 

 

 

Australia and New Zealand Banking Group Limited

 Australia and New Zealand Banking Group Limited are not only one of the leading investment banks in Australia but across the globe. It has a huge network and invests in various other countries as well. It is headquartered in Melbourne Australia and was founded in the year 1955. As an investment bank, it provides various services like advisory, trading, and provides research as well. It has $889.9 billion AUM (assets under management). The company does invest in various platforms and businesses. It is also known as a key private equity firm and do invest in startups. It also provides credit cards and mortgages. It also delivers global wealth management. It has got huge assets under management which also includes infrastructure in green businesses. It provides other businesses with financial advisory, equity, and debt arrangement.  As an investment banker, it does mergers and acquisitions of many businesses and also helps in valuation and listing procedures for new companies that want to have an IPO.

The code of listed Australia and New Zealand Banking Group Limited stock on the Australian stock exchange is ANZ. The total outstanding share is 2.84 billion. The stock was listed in 1951. As of 28th May 2020 market capitalization is 54.48 billion AUD (anz.com, 2019). The chairman and director of Australia and New Zealand Banking Group Limited

 Is David Gonski. The managing director and CEO (chief executive officer) of the company is Shayne Elliott. The next dividend payment is on 10th November 2020.

 

ANZ

 

 

 

year

dividends in cents

 

2015

181

 

2016

160

 

2017

160

 

2018

160

 

2019

160

 

 

 

1.2 Information from newspaper

Part 2. Fact-finding of Australian financial market regulation

2.1 Fact-finding of the listing on ASX

(1) The advantages of being a listed company on ASX are:

a) Access to capital for growth: for further growth of a company it requires access to capital which is possible only by being listed on the stock exchange as it increases the shareholders base

b) External growth: the availability of currency facilitates acquisitions by providing more liquid and diversified share capital and subsequently fuels the expansion rate of a company.

c) Company profile: elevates the profile of the company as analysts and media covers it and thus keeping the demand of the company’s shares intact.

d) Institutional investments: institutional investors get attracted as it increases liquidity and transparency, thus increasing capital access as well as credibility.

e) Improved valuation: It produces independent valuation with the available market information (Listing, 2017).

f) Greater efficiency: Reporting and disclosures increase the efficiency of the business.

g) Secondary market: It increases liquidity and further capital elevation is facilitated.

h) Management commitment: This facilitates employee share options thus increasing the motivation of the management and aligning them towards organizational goals.

i) Improved perception: due to continuous due diligence, it increases the assurance and improves the strength of the business as well its perception. It also ensures due diligence on compliance procedures and the process of listing.

(2) There are some disadvantages as well:

A) Vulnerable to market sentiments: the share price of a company can be susceptible due to the economic conditions and other companies that are in the same sector.

b) Reporting and disclosure requirements: an elevated level of corporate governance and disclosure is required if listed in ASX thus it can increase the management's precious time in fulfilling the requirements. It also pours in some additional investments as well (FCPA et al. 2020).

c) Exposure to media: the listing increases the exposure of the company thus keeping a media manager increases the cost. The management also requires some time to be given to the media conferences.

d) Fees and cost: IPO( initial public offer) of a company is the first step of listing but for that, it requires a lot of due diligence and valuation the additional cost of which the company has to bear. Thus not only issuing the IPO it also requires maintaining and raising capital.

e) Dilution of control: the listing of a company means to sell the shares of the company which directly dilutes the promoters holding percentage. Dilution of the company’s shares means a dilution of control thus if the dilution is to a great extent it might also lead to delayed decision making (Business, 2019).

f) Responsibilities of director: the disclosures and investor relations need time and need to manage by the management of the company which requires time.

(3) Requirements for listing on ASX

There are various criteria that need to be fulfilled before getting listed

a) There should a minimum of 300 shareholders who are nonaffiliated and holds a share value of $2000 each.

b) The free float should be of 20%

c) Company size is also taken into consideration. Therefore for testing the company size there are 2 tests that are needed to be done, profit test and asset tests. For the profit test, the aggregated profit for the past 3 years should be $1 million-plus the consolidated profit for the last 12 months should be $500000. The working capital is not taken into consideration when the profit test is considered for listing in ASX. But if the company is considering the option of assets test then the working capital should be at least $1.5 million. Along with the working capital, market capitalization should also be taken into account. The net tangible assets of the company should be $4 million or the market capitalization should be $15 million.

(4) Listing procedures

The listing procedures has almost 7 steps:

Step 1: the first step is of selecting an experienced group of advisors such as stockbrokers, investment bankers, lawyer, accountant and an expert of IPO. The time taken for the first step is almost 7 days

Step 2:  Drafting of the prospectus, listing application and required documents are done. The experienced team is responsible for the due diligence and make an informed decision. The assets and liabilities are assessed which are attached to the shares.

Step 3: the Company approaches to the institutional investors as marketing to the general public is not allowed by the corporation act. Various meetings are held between the advisors and the management of the company.

Step 4: the prospectus is available to the public for review and comment.  Applications cannot be asserted by the company in this period. After 7 days or the completion of the exposure date, the application can be accepted from investors.

Step 5: listing in ASX takes 7 days. The application is reviewed within 6 weeks. All this process takes around 35 days.

Step 6: As soon as the exposure day of 7 days gets over the retail investor gets a proposal from the company.

Step 7: After all this tedious process the final step is of closing the offer and the shares are allocated to the retail investors and trading commences.

 

(5) Fees for listing

An initial listing fee is mandatory after the listing process gets over. The initial fees depend on the market capitalization of the company. Along with the initial fees and annual pro-rata fee is also charged.

In our example, we take a company that has a market capitalization of $150 million. Therefore with the ASX guidelines and rules and the help of the calculator we calculated an initial fee as well as annual pro-rata fee.

Market capitalization - $ 150 million

Value per security - $ 1.5

Initial fees - $ 182505

Annual listing fee payable - $ 48304

Subsequent fee payable - $ 101203

2.2 Fact-finding of requirements on financial advisory service registration in Australia.

(1) ASIC (Australian Securities and Investments Commission) maintains a register known as Financial Advisers Register. It is published on Money Smart. Financial Advisers Register is a register which contains a public record of the financial advisers. The persons who give financial advice to individual personnel on financial products that are complex in nature are known as financial advisers (Degeling and Hudson, 2018). The register contains the experience, qualification and employment history of the financial adviser to assess the ability of the individual. With the help of a register, the ASIC can monitor and identify the advisers (financial) who are present in Australia. The register also assures that the financial advisers are authorized or not. It gives information about the financial adviser which helps the individual to make an informed decision about whether he should be taking any financial advice from the adviser.

(2) The persons who are authorized to act as a financial adviser are listed in the financial adviser's register. An individual who has AFS (Australian financial services) licensee, employee, a representative who is authorized or director can be a financial adviser. The person who has the authority to give retail investors, personal advice of the financial products which are relevant is considered as a financial adviser and is included in the register. The person who is an AFS licensee is included in the AFS licensees register and financial advisers Register.

There are certain persons who don’t belong on the financial adviser register. The persons who give advice on financial products that are not relevant are not included in the register. Therefore the products like credit insurance, general insurance, and banking products which are basic in nature are non-relevant financial products.

Financial advisers register is managed by ASIC but the responsibility to update and add information is of AFS licensees.

(3) The register is very valuable as it contains various information. The register includes details of the financial advisers. The various details that should be included are:

a) Appointment date for the AFS license

b) Representative number

c) ABN (Australian Business Number)

d) Given name

e) Other given names

f) Family name

g) Date of birth

h) A country where the adviser was born

i) State or territory

j) City or suburb

k) Principle place of business ( level/floor , property name/ building , office/ unit , street type , suburb/city , postcode ,territory/ state , street name , country )

l) Email address

m) Role of the adviser (financial adviser (provisional in nature), timeshare, financial adviser)

(4) There are certain financial products which are considered to be relevant. But the definition given in the ASIC site is exclusive, which means that ASIC (Australian Securities and investments commission ) has mentioned the financial products which are not relevant so that we can deduce from the list that whether the financial products are relevant or not. If the financial product offered by the financial adviser is on the list then it is imperative that the financial product is not relevant. The list is given below:

a) Basic banking products (non-cash payment and non-basic deposit products)

b) Foreign exchange contracts

c) Bonds and stocks, government debentures

d) Products of life insurance: life insurance investment products, insurance for consumer credit.

e) Investment schemes that are managed: all investment schemes that are managed are considered except IDPS (an investor directed portfolio services)

f) Retirement savings accounts products

g) Superannuation

h) Margin lending

i) Carbon credits

j) Financial facilities which are miscellaneous

(5) For being a financial adviser one needs to have certain professional qualifications. There are certain information that are to be displayed on the register (financial adviser)

a) Course name

b) Institution

c) Year

d) Course type (AQF level)

1. Bachelor Hons degree

2. Doctoral degree

3. Certificate of graduate

4. Diploma graduate

5. Advanced diploma

6. Master’s degree

7. Bridging course – finance and behavioural, legal and regulation obligation, ethics.

8. Professional designation

9. Others

 

 

 

Part 3 Risk analysis and project evaluation

 

 

 

 

 

 

 

selling price per unit

 

$22

 

 

 

 

no of units

 

350000

 

 

 

 

no of years

 

4

 

 

 

 

purchase price of the equipment

 

$2,000,000

(depreciation is straight line method)

 

residual value

 

$200,000

 

 

 

 

working capital

 

$600,000

(fully retrieved at the end of the project )

 

variable cost

 

$11

 

 

 

 

cash fixed cost per year

 

$350,000

 

 

 

 

discount rate

 

10%

 

 

 

 

tax rate

 

30%

 

 

 

 

 

 

INCOME STATEMENT

 

 

YEAR

 

0

1

2

3

4

Revenue

 

$7,700,000

$7,700,000

$7,700,000

$7,700,000

cost of sales

 

$3,850,000

$3,850,000

$3,850,000

$3,850,000

depreciation

 

450000

450000

450000

450000

GROSS PROFIT

 

$3,400,000

$3,400,000

$3,400,000

$3,400,000

EXPENSES

 

 

 

 

 

fixed cost

 

$350,000

$350,000

$350,000

$350,000

EBIT

 

$3,050,000

$3,050,000

$3,050,000

$3,050,000

tax

 

$915,000

$915,000

$915,000

$915,000

NET INCOME

 

$2,135,000

$2,135,000

$2,135,000

$2,135,000

initial cash outflow

 $            2,000,000

 

 

 

 

working capital

 $               150,000

 $          150,000

 $     150,000

 $    150,000

 

depreciation

 

 $          450,000

 $     450,000

 $    450,000

 $    450,000

working capital release

 

 

 

 

 $    600,000

residual value of equipment

 

 

 

 

 $    200,000

net cash flows

 $           (2,150,000)

 $       2,435,000

 $  2,435,000

 $ 2,435,000

 $ 3,385,000

discount rate

10%

10%

10%

10%

10%

 

 

 

 

 

 

discounted cash flow

 $           (2,150,000)

 $       2,213,636

 $  2,012,397

 $ 1,829,452

 $ 2,312,001

NPV

 $      6,217,485.14

 

 

 

 

IRR

110%

 

 

 

 

 

sensitivity analysis OF NPV

 

UNITS

NPV

 

6217485

350000

6217485

315000

5363206.407

 

 

 

 

sensitivity analysis of price per unit

 

price per unit

NPV

 

6217485.14

$22

6217485.144

19.8

4508927.669

 

 

sensitivity analysis  of variable cost per unit

variable cost per unit

NPV

 

6217485.14

$11

6217485.144

$12.10

5363206.407

 

 

sensitivity analysis of cash fixed cost

cash fixed cost

NPV

 

6217485.14

$350,000

6217485.144

$385,000.0

6217485.144

 

Analysis

Therefore from the above analysis, we can conclude that the project has a great prospect and do have high chances of high profitability. We can see that the NPV of the project is $ 6217485 and the IRR is 110%.

From the sensitivity analysis, we can see that the NPV of the project does affect but still, it is profitable to go on with the business even if we take a 10% variation in the sales, fixed cost, variable cost, and sales price per unit.

Conclusion

After completion of the project, we are cognizant of the difference between the 4 kinds of financial institutions and the various companies that operate in each kind of financial institution. We also gained the various financial products offered by each company and the different types of products that are considered financial products and the products which are not considered financial products. Part 2 aware us of the various rules and regulations and the hardships that are required for a company to get listed in ASX. Listing in ASX also contains some fees which depend on the market capitalization of the company. The 2nd part also gives us knowledge about the educational qualification required for becoming a financial adviser and the requirements required for getting registered in the financial adviser register. In part 3 we gained knowledge about the sensitivity analysis and NPV calculation and its usage and importance which helps us in determining whether to select the project or not.

 

 

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