HI5002-Research on Financial market and Capital Budgeting Analysis

Part 1

Introduction

This assignment will be containing 3 parts. In the 1st part, there will be 4 companies selected from key financial institutions and would write a brief about every company. In the 2nd part, there will be information regarding the listing procedures required for a company to list in ASX. There will be information regarding the financial adviser register, the persons who are eligible to register, and details about the financial products which can be offered. In part 3 there is a scenario provided about a company and the requirement is to check whether the investment will be viable or not with the help of NPV calculation and sensitivity analysis.

Part 1.1

Westpac

Westpac Group is a leading commercial bank that provides various services to its customers and various other businesses. From a consumer perspective, it is responsible for delivering various insurance services. It offers lenders mortgage, general, and life insurances. From the perspective of the corporate, it provides various wealth and business banking products for the customer across New Zealand and Australia. It provides various financial services and products for commercial and SME business customers. It also provides equities broking and margin lending (westpac.com.au, 2019). Westpac institutional bank delivers various financial products to corporate, commercial, government, and institutions such as life insurance products. Treasury is one of the most important branches of services that are offered by the group business of Westpac.

Providing services and sales of financial and banking services and products to customers is the main source of income for the company. It also provides insurance products such as general, life, and insurances for lenders mortgage. All this constitutes the most important source of revenue for Westpac as contributes almost 50% of the total revenue.

The code of listed Westpac bank stock on Australian stock exchange is WBC. The total outstanding share is 3.61 billion. The stock was listed on 18 July 1970. As of 28th May 2020 market capitalization is. The chairman and director of Westpac is Lindsay Maxsted. The managing director and CEO (chief executive officer) of the company is Brian Hartzer. Due to the sluggish growth of the business Westpac has decided to defer the interim dividend payment in June 2020. Right now there is no further information about dividends (westpac.com.au, 2019).

 

WESTPAC

year

dividends (cents) per share

 

 

2015

187

 

 

2016

188

 

 

2017

188

 

 

2018

188

 

 

2019

174

 

 

 

 

 

Insurance Australia group

Insurance Australia Group is one of the biggest insurance companies in Australia and provides various services. It provides services like health/life insurance, property-casualty insurance. IT also provides various asset management services and products and has operations around the globe. IAG 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 IAG on the Australian stock exchange is IAG. The total outstanding share is 3.89 billion. The stock was listed in the year 2000. As of 28th May 2020 market capitalization is $13.54 billion (iag.com.au, 2019). The chairman and director of IAG are Elizabeth B Bryan. The managing director and CEO (chief executive officer) of the company are Peter G Harmer.

 

IAG

year

dividends (CENTS) per share

 

 

2015

29

 

 

2016

36

 

 

2017

33

 

 

2018

34

 

 

2019

37.5

 

 

 

 

 

 

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 a fixed income security arrangers and issuers, they provide a rating and work as a rating agency as well. They provide investment research services to corporate and advise them to manage their excess reserves.

The code of listed Morningstar on Australian stock exchange is MCO. The total outstanding share is 42.9 million (newsroom.morningstar.com, 2019). 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

 

 

 

Macquarie

Macquarie is not only one of the leading investment bank in Australia but across the globe. It has a huge network and invests in various other countries as well. It is headquartered in Sydney Australia and was founded in the year 1969 by Stan Owens. As an investment bank, it provides various services like advisory, trading and provides research as well. It has $50000 Croce plus AUM (assets under management) (macquarie.com, 2019). The company does invest in various platforms, development projects and businesses. It also does equity and debt investment. It provides other services like asset financing, providing assets that are energy efficient. It has got huge assets under management which also includes infrastructure in green businesses. It provides other businesses financial advisory, equity and debt arrangement. Macquarie also acts as a rating agency and provides ratings and reporting to various other companies. As an investment banker, it does mergers and acquisition of many businesses and also helps in valuation and listing procedures for new companies who want to have IPO (macquarie.com, 2019).

The code of listed Macquarie stock on Australian stock exchange is MQG. The total outstanding share is 354.38 million. The stock was listed on 30th October 1996. . As of 28th May, 2020 market capitalization is 39.32 billion AUD (macquarie.com, 2019). the chairman and director of Macquarie is Peter Warne. The managing director and CEO (chief executive officer) of the company is Shemara Wikramanayake. The next dividend payment is on 3rd July 2020.

 

MACQUARIE

year

dividends ($) per share

 

 

2015

3.3

 

 

2016

4

 

 

2017

4.7

 

 

2018

5.25

 

 

2019

5.75

 

 

 

 

1.2 Analysis of financial management questions

 

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 the access to capital which is possible only by being listed on the stock exchange as it increases the shareholders base (Xiong, Nelson and Bodle, 2018).

b) External growth requires currency: the availability of currency facilitates acquisitions by providing more liquid and diversified share capital.

c) Company profile: elevates the profile of the company as analysts and media cover 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 the capital access as well as credibility.

e) Improved valuation: It produces independent valuation with the available market information.

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.

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 (De et al. 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, the 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 have almost 7 steps:

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

Step 2: From the 2nd week onwards to 10th week, drafting of the prospectus, required documents and listing application are done. The experience team does due diligence and make an informed decision. The liabilities and assets are assessed which are attached to the shares.

Step 3: The Company starts marketing to the institutional investors as marketing to the general public is restricted by the corporation act. Various meetings are held between the management of the company and its advisors.

Step 4: The prospectus is available to the public for comment and review and applications cannot be accepted by the company during this period. After the exposure period which is of 7 days, the application can be accepted from investors.

Step 5: It takes 7 days for the application to be listed with ASX. The application is reviewed within 6 weeks. All this process takes around 5 weeks.

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

Step 7: After all this tedious process the final step is of closing the offer and allocating the shares after which the 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 $100 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 - $ 100 million

Value per security - $ 1

Initial fees - $ 159177

Annual listing fee payable - $ 45901

Subsequent fee payable - $ 77395

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. The register contains the experience, qualification and employment history of the financial adviser to assess the ability of the individual (BIRD et al. 2016). With the help of 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 person who doesn’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 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) 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. Doctoral degree

2. Bachelor Hons 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

CASH FLOW

 

 

 

 

 

 

 

YEAR

 

0

1

2

3

4

NET INCOME

 

$2,135,000

$2,135,000

$2,135,000

$2,135,000

initial cash outflow

2000000

 

 

 

 

working capital

150000

150000

150000

150000

 

depreciation

 

450000

450000

450000

450000

working capital release

 

 

 

 

600000

the residual value of equipment

 

 

 

 

200000

net cash flows

-2150000

$2,435,000

$2,435,000

$2,435,000

$3,385,000

discount rate

10%

10%

10%

10%

10%

 

 

 

 

 

 

discounted cash flow

-2150000

2213636.364

2012396.694

1829451.54

2312000.546

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 assignment, we are aware of the various categories within the financial institutions and the companies that fall into individual categories. We gained knowledge of various products offered by various companies. In part 2 we got to know about the different rules and regulations regarding the listing of a company in ASX and the qualification and eligibility criteria of a financial adviser. In part 3 we acquired the knowledge of the usage of NPV and how it helps us to carry on sensitivity analysis which ultimately helps us in the decision making of a project whether it should be carried on or not.

 

 

References

BIRD, H., Gilligan, G., Godwin, A., Hedges, J. and Ramsay, I., 2016. An Empirical Analysis of Enforceable Undertakings by the Australian Securities and Investments Commission between 1 July 1988 and 31 December 2015

De, I., Chittock, E.C., Grötsch, H., Miller, T.C., McCarthy, A.A. and Müller, C.W., 2019. Structural basis for the activation of the deubiquitinase calypso by the polycomb protein ASX. Structure27(3), pp.528-536

iag.com.au, (2019) IAG Available at https://www.iag.com.au/results-and-reports Accessed on 28th May 2020

macquarie.com, (2019) MACQUAIRE Available at https://www.macquarie.com/au/en/investors/results.html Accessed on 28th May 2020

newsroom.morningstar.com,(2019) MORNIGSTAR Available at https://newsroom.morningstar.com/newsroom/news-archive/press-release-details/2020/Morningstar-Inc-Reports-Fourth-Quarter-Full-Year-2019-Financial-Results/default.aspx Accessed on 27th May 2020

westpac.com.au, (2019) WESTPAC GROUP Available at https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/2019_Westpac_Group_Annual_Report.pdf Accessed on 29th May 2020

Xiong, F., Nelson, J. and Bodle, K., 2018. The adoption of new technology by listed companies: the case of Twitter. Technology Analysis & Strategic Management30(7), pp.852-865

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