This report analyses the capital structure and financial performance of ANZ bank. It includes computation of weighted average cost of capital, financial ratios and analysis of integrity and accountability. The report concludes that the company needs to improve its solvency position and efficiency position.
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Running head: ACCOUNTING AND FINANCE Accounting and finance Name of the student Name of the university Student ID Author note
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1ACCOUNTING AND FINANCE Table of Contents Part A.........................................................................................................................................2 Requirement (a)......................................................................................................................2 Requirement (b).....................................................................................................................3 Requirement (c)......................................................................................................................5 Part B..........................................................................................................................................6 Executive summary................................................................................................................6 Introduction............................................................................................................................6 Answer 1................................................................................................................................6 Answer 2................................................................................................................................8 Answer 3..............................................................................................................................10 Answer 4..............................................................................................................................10 Conclusion............................................................................................................................11 Reference..................................................................................................................................12
2ACCOUNTING AND FINANCE Part A Requirement (a) 1.After tax cash flows From the above table it can be identified that the after tax cash flows amounted to $ 34,213,332.19. 2.Net present value (NPV) NPV is value of all the future cash flows whether negative or positive, over the entire life of the investment that is discounted to present value. It is the form of intrinsic valuation and is extensively used across the accounting and finance to determine the value of a project, new venture or cost reduction programme. It is used for determining the worth of the investment project or series of cash flows. Apart from factoring of all the costs and revenues, NPV also takes into account timing of each cash flow that can have great impact on present value of the investment (Boyd, Epanchin-Niell & Siikamäki, 2015). Generally, if the NPV is positive the project is accepted and on the contrary, if the NPV is negative the project is not
3ACCOUNTING AND FINANCE accepted. Looking into the above table it can be recognised that NPV of the project is $ 11,590,351. Therefore, the project can be accepted as the NPV is positive. 3.Payback period Payback period determines the time taken by the project to recover the amount of initial investment. Payback period analysis assists the company to compare the alternative opportunities available for investment and deciding upon the project that recover the initial investment in shorter period of time, if the entity has preference for shorter period (Chandra, 2017). From the given scenario the calculated payback period is 0.86 years that is the initial investment will be recovered in 0.86 years. 4.Profitability index It is the index that attempts for identifying relationship among costs and benefits of the proposed project. This tool is useful for ranking the projects as it allows quantifying the value generated for per unit of the investment. Profitability index for the above project is 2.40. As the PI is more than 1, it shall be accepted (DeFusco et al., 2015). 5.Viability of the project Taking into consideration all the above mentioned measures it can be recognised that after tax cash flows and NPV of the project is positive, payback period is 0.86 years and PI is more than 1. Hence, from all the aspects it can be stated that the project is viable (Gaudard, 2015). Requirement (b) (i)After tax cash flows with 10% increase in sales
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4ACCOUNTING AND FINANCE (ii)After tax cash flows with 10% decrease in sales (iii)Comment on findings From the above it can be recognised that the after tax cash flow is $ 37,522,165.41 when the sales level is 10% more than the estimation. On the other hand, after tax cash flow
5ACCOUNTING AND FINANCE is $ 30,904,498.97 when the sales level is 10% less than the estimation. Hence, the cash flow is highest when sales level is 10% more than the estimation. (iv)Importance of after tax cash flows After tax cash flow is considered as an important measure as it considers the tax impact on the profits. It is used for determining cash flow of investment undertaken by the company.Hence, it can be used to measure the cash flows that will be available from the project after payment of tax. Requirement (c) If full payment is made at the time of purchase the payment will be $ 71,25,000 after discount of 5%. If payment is made on monthly basis the payment requirement is $ 71,06,724. If the payment is made on quarterly basis the payment requirement is $ 69,06,360. Hence, the entity shall choose quarterly payment option as the payment requirement under this method is lowest.
6ACCOUNTING AND FINANCE Part B Executive summary Aim of the report is to focus on the capital structure of ANZ bank and analysing whether the firm is able to maximise the generation of wealth for the shareholders. The report will compute the weighted average cost of capital and using the CAPM it will analyse whether the firm is providing appropriate return as compared to risk. The report will further analyse the financial performance of the firm through financial ratios. Further, it will consider whether the firm is complying with the requirement of integrity and accountability. Introduction ANZ is the publicly listed entity that was incorporated in Australia on 14thJuly 1977. Various segmentsof the bank includeswealth Australia,institutional,Australia,New Zealand, technology, operations, service, Asia Retail & Pacific and group centre. It offers numerous banking as well as financial products and services. Apart from that it offers mortgages, flexible facilities, personal loans, home loans, commercial and business loans, investmentservices,overdrafts,ruralfinances,house,boats,contents,car,firmand equipment, credit card payment and business (Anz.com, 2019). Answer 1 (a)Capital structure Capital structure of the company inclusive of debt and equity is as follows –
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7ACCOUNTING AND FINANCE (b)WACC As per the given information, Beta = 1.37 Risk free rate = Rf= 2.3%, Market risk premium = Rm= 8.2% Hence, required rate of return = R = Rf+β( Rm– Rf) R = 2.3% + 1.37 * (8.2% - 2.3%) = 10.38% WACC = E/V * Re+D/V * Rd* (1-Tc) Where, E/V = Equity percentage in capital structure = 5% D/V = Debt percentage in capital structure = 95% Re= Cost of the equity = 10.38% Rd= Rate of debt = 7.9% Tc= corporate tax rate = 33.3% (Barberis et al., 2015). With the above information WACC of the firm will be as follows – WACC = 5*10.38% + 95*7.9% (1- 0.333) = 5.52% (c)Return compared to risk
8ACCOUNTING AND FINANCE In accordance with the CAPM the expected return is 10.38% whereas the actual return computed from the stock is 1.50%. Therefore, it is recognised that the stock of the company is underperforming and not generating appropriate return as compared to the given risk (In.finance.yahoo.com, 2019). (d)Comparison of capital structure with competitor One of the main competitors of ANZ bank is the Westpac Bank that is one of the major banks in Australia. Westpac Bank’s capital structure – If the capital structure of ANZ bank is compared with the capital structure of Westpac bank it can be identified that both the firms are highly dependent on debt financing as compared to equity. However, ANZ bank is slightly more dependent on debt as compared to Westpac Bank as its debt percentage of ANZ bank is 95% and for Westpac bank it is 94% (Westpac.com.au, 2019). Answer 2 Ratio analysis
9ACCOUNTING AND FINANCE Analysis Profitability ratio –As profitability ratio, net profit margin and return on equity is considered. Return on equity has been considered as it measures the ability of the company to provide return on their investment. On the other hand net profit margin is considered as it states the ability of the company to generate profit from the sales revenue. Looking into the ratio computation table it can be identified that both return on equity as well as net profit ratio of the company has been improved in 2016 as compared to the year 2016. Hence, the profitability position of the company is improved. Asset utilization ratio – return on assets ratio has been considered for evaluating the asset utilization ability of the company as it indicates the efficiency level of the entity to generate earnings through using the assets. Return on assets of the company for both the years are significantly low as the return is only 0.1 (Brigham et al., 2016) Solvency ratio – debt to equity ratio is selected as solvency ratio as it indicates the leverage position of the company through comparing its liabilities against equity. For both the years the debt equity ratio of the company is significantly high and is considered as highly leveraged.
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10ACCOUNTING AND FINANCE Market value ratio – earnings per share is selected as it provides the details regarding the earning earned by the shareholders on each of their share. Earning position of the company has been enhanced as the EPS has been increased from 197.40 cents to 220.10 cents from 2016 to 2016 (Weygandt, Kimmel & Kieso, 2015). Answer 3 Changes in the capital structure It can be identified from above that no change is there in the capital structure of the company as for all the previous 3 years debt percentage was consistent at 95% and equity percentage was 5%. Answer 4 Integrity and accountability Accountabilityandtransparencyareco-related.Whilecommunicatingany information to the stakeholders the directors shall communicate it through using appropriate tone so that the stakeholders are able to understand the process used by the board to make any decision, challenges faced by them and responsibilities. On the other hand, integrity requires the management to adhere to moral and ethical code. It deals with the fair and equitable dealing with the stakeholders (Gitman, Juchau & Flanagan, 2015). Some of the most senior banks from Australia were found to be charged with criminal offence for allegedly forming the cartel to fix price of the ANZ share. Due to the scandal the
11ACCOUNTING AND FINANCE share price of ANZ bank were dropped by 1.70% and were trading at $ 29.64 in the market. It took the bank one year time to regain its share value at A$ 32.58 (Minnis & Sutherland, 2017). Further, the bank was concerned that they may lose the financial license owing to the fact that the bank staffs were providing personal financial service illegally and were selling superannuation product ‘Smart Choice and Pension by ANZ’key finding of the Royal Commission regarding the scandal were – (i) while providing the financial services bank staffs ignored basic standards for complying with honesty (ii) lenders wanted to earn profit over all other facts (iii) transaction basis were formed to mainlyconfuse indigenous customers and (iv) were disinclined towards to basic changes applicable for small business laws with regard to lending (ABC News, 2018). Hence, considering the above facts it can be stated that the firm was not successful in managing operational risk as it violated the integrity and accountability concept. Conclusion From the above discussion it can be concluded that the except the profitability aspect the company did not make any improvement regarding its solvency position and efficiency position. Further, the share of the company was underperforming in the market. More over the management of the company was unable to maintain integrity and accountability concept while running the business.
12ACCOUNTING AND FINANCE Reference ABC News. (2018).Greed and dishonesty in the pursuit of profit: The banks according to Hayne.Retrieved17January2019,from https://www.abc.net.au/news/2018-09-28/bank-royal-commission-kenneth-hayne- key-findings/10317752 Anz.com. (2019).ANZ - About ANZ - ANZ Corporate Information - Company Profile. Retrieved17January2019,from http://www.anz.com/australia/aboutanz/corporateinformation/company.asp Barberis, N., Greenwood, R., Jin, L., & Shleifer, A. (2015). X-CAPM: An extrapolative capital asset pricing model.Journal of financial economics,115(1), 1-24. Boyd, J., Epanchin-Niell, R., & Siikamäki, J. (2015). Conservation planning: a review of return on investment analysis.Review of Environmental Economics and Policy,9(1), 23-42. Brigham, E. F., Ehrhardt, M. C., Nason, R. R., & Gessaroli, J. (2016).Financial Managment: Theory And Practice, Canadian Edition. Nelson Education. Chandra, P. (2017).Investment analysis and portfolio management. McGraw-Hill Education. DeFusco,R.A.,McLeavey,D.W.,Pinto,J.E.,Anson,M.J.,&Runkle,D.E. (2015).Quantitative investment analysis. John Wiley & Sons. Gaudard, L. (2015). Pumped-storage project: A short to long term investment analysis including climate change.Renewable and Sustainable Energy Reviews,49, 91-99. Gitman, L. J., Juchau, R., & Flanagan, J. (2015).Principles of managerial finance. Pearson Higher Education AU.
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13ACCOUNTING AND FINANCE In.finance.yahoo.com. (2019).Yahoo is now a part of Oath.Retrieved 14 January 2019, from https://in.finance.yahoo.com/ Minnis, M., & Sutherland, A. (2017). Financial statements as monitoring mechanisms: Evidence from small commercial loans.Journal of Accounting Research,55(1), 197- 233. Westpac.com.au. (2019).Westpac - Personal, Business and Corporate Banking. Retrieved 17 January 2019, from https://www.westpac.com.au/ Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015).Financial & managerial accounting. John Wiley & Sons.