This document provides an analysis of accounting and finance concepts including after tax cash flows, net present value, payback period, profitability index, and project viability. It also includes a review of the capital structure and financial ratios of ANZ bank.
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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 Part B..........................................................................................................................................6 Executive summary................................................................................................................6 Introduction............................................................................................................................6 Answer 1................................................................................................................................6 Answer 2................................................................................................................................8 Answer 3..............................................................................................................................10 Answer 4..............................................................................................................................11 Reference..................................................................................................................................12
2ACCOUNTING AND FINANCE Part A Requirement (a) 1.After tax cash flows After tax cash flows is the measure used for measuring the entity’s ability to generate the positive cash flow after deducting the taxes. After tax cash flows of the company are calculated as follows – Total amount of after tax cash flows is $ 34,213,332.19. 2.Net present value Net present value is present value of the investment’s projected cash inflows reduced by initial cost expenses for acquiring the asset. The project is generally accepted if the net present value is positive and is rejected if the net present value is negative (DeFusco et al., 2015). From the above it can be identified that the net present value of the project is $ 11,590,351. Hence, based on the NPV the project shall be accepted. 3.Payback period
3ACCOUNTING AND FINANCE Payback period is the time required by the project to recover the initial investment cost. It is an important determinant while deciding regarding acceptance of any project. From the calculation it can be identified that the payback period of the project is 0.86 years that is the initial investment related to the project will be recovered in 0.86 years and hence the project is acceptable (Chandra, 2017). 4.Profitability index It measures the ratio among the present value of the future cash flows and initial investment. It is considered as an important tool to rank the projects and selecting one particular project based on the rank. From the calculation it can be identified that the profitability index of the project is 2.40. As the profitability index is more than 1 it is indicating that the project will be able to recover its initial outlay amount and therefore acceptable (Boyd, Epanchin-Niell & Siikamäki, 2015). 5.Viability of project From all the measures used above it is identified that the project is acceptable from all the aspects. Hence, the project will be considered as viable. Requirement (b) (i)After tax cash flows if sales units are 10% higher
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4ACCOUNTING AND FINANCE (ii)After tax cash flows if sales units are 10% lower (iii)Findings It can be identified from above that total cash flows generated when the sales level is 10% higher as compared to estimation for the 1styear is $ 37,522,165.41. On the other hand, total cash flows generated when the sales level is 10% lower as compared to estimation for
5ACCOUNTING AND FINANCE the 1styear is $ 30,904,498.97. Hence, cash flow is highest when the sales level is 10% higher as compared to estimation for the 1styear (Gaudard, 2015). (iv)Decision regarding payment option If the payment is paid in full at the time of purchase the payment required to be made is $ 71,25,000 after getting 5% discount. If the payment is monthly the total amount required to be paid is $ 71,06,724 and if the payment is made on quarterly basis in 3 years the amount required to be paid is $ 69,06,360. Hence, the payment is lowest if it is made on quarterly basis for 3 years. Hence, the company shall choose quarterly payment option.
6ACCOUNTING AND FINANCE Part B Executive summary The purpose of the report is to review the capital structure of ANZ bank and reporting on the ability of the company to generate return for its shareholders. The report will focus on the debt and equity component of the company’s capital structure for the year ended 2017. It will further compute the after tax weighted average cost of capital and will compare its capital structure with any other firm in the same industry. Further, the report will evaluate the performance of the company through computing the financial ratios. Any significant changes in the capital structure of the company will also be discussed in the report. Introduction Australia and New Zealand Banking Group Limited offers wide range of financial and banking services and products. The bank’s segments include New Zealand, Australia, institutional, Wealth Australia, Asia Retail & Pacific, technology, service, operations and the group centre. Operation span of the bank is in New Zealand, Australia and various countries in Asia Pacific region, United Kingdom, Germany, France, and United States. It offers savings, current, premium call, cal deposits, solicitors trust, trust management and other accounts for international payment, foreign currency and credit and debit cards. It further offers mortgages, personal loans, overdrafts, home loans, flexible facilities, commercial and business loans, investment services, rural finances, house, contents, boats, car, credit card payment, firm and equipment and business (Anz.com, 2019). Answer 1 (a)Capital structure
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7ACCOUNTING AND FINANCE Beta of the company is 1.37 Risk free rate = Rf= 2.3%, Market risk premium = Rm= 8.2% Therefore, required rate of return of the company’s share = R = Rf+β( Rm– Rf) R = 2.3% + 1.37 * (8.2% - 2.3%) = 10.38% (b)Computation of WACC WACC = E/V * Re+D/V * Rd* (1-Tc) (Barberis et al., 2015). Where, E/V = Equity percentage in the capital structure = 5% D/V = Debt percentage in the capital structure = 95% Re= Cost of equity = 10.38% Rd= Rate of debt = 7.9% Tc= corporate tax rate = 33.3% The given information for computation of WACC is as follows – Thus, WACC = 5*10.38% + 95*7.9% (1- 0.333) = 5.52%
8ACCOUNTING AND FINANCE (c)Return as compared to risk The actual return from the stock of the company is 1.50% whereas the expected return asperCAPMis10.38%.Hence,itcanbedeterminedthatthecompany’sstockis underperforming and is not generating given its risk (In.finance.yahoo.com, 2019). (d)Comparison of capital structure Capital structure of Westpac bank Comparing the capital structure of ANZ bank with Westpac bank it can be identified that both the banks are aggressively depended on debt as compared to equity. However, it can be stated that Westpac bank is slightly less depended on debt as compared to ANZ as the debt component of ANZ is 95% whereas the same for Westpac bank is 94%. Answer 2 Ratio analysis
9ACCOUNTING AND FINANCE Ratio interpretation – Debt equity ratio – debt to equity ratio is the solvency ratio used for measuring the percentages of fund raised through debt and percentage raised through equity. It determines that leverage position of the company as higher debt equity ratio determines that the company is using aggressive funding from outside for its business operation. Looking into the debt equity ratio of the company it can be identified that though the debt dependency of the company has been reduced over the years from 2016 to 2017, significantly high debt equity ratioofthecompanyisindicatingthatthecompanyishighlyleveraged(Minnis& Sutherland, 2017). Return on assets – return on asset is used to indicate the profitability of the entity as compared to the assets. It provides the analyst, investors and manager an idea regarding how efficient the management of the company can be in using the assets for generating earnings. Return on assets for the company is significantly low and has not been improved in 2017 as compared to 2016. For both the years the return on asset is 0.1 (Brigham et al., 2016) Return on equity – it is an important ratio as it measures the return rate received by the owners of company’s common stock received for their shareholdings. It signifies how efficient the company is with regard to generation of returns on investment received from the
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10ACCOUNTING AND FINANCE shareholders. Looking into the return on equity ratio of the company it can be identified that though the ratio of the company has been increased slightly over the years from 2016 to 2017, significantly low return ratio is indicating that the company is not able to provide sufficient return to its shareholders (Weygandt, Kimmel & Kieso, 2015). Net profit ratio – it establishes the relationship among net profit after taxes and revenues. It is considered as a major profitability ratio as it assists in determining overall efficiency of business operation. Further, it indicates how well the trading activities of the company are performing. Looking into the net profit ratio of the company it can be identified that the net profit of the company has been increased from 27.84% to 31.67%. Hence, it can be stated that the profitability position of the company has been improved over the years from 2016 to 2017. Earnings per share – it represents proportion of the entity’s earnings left with the entity after paying the taxes, preferred stock dividend and it is allocated to each common stock. Looking into the EPS of the company it can be identified that it has been increased from 197.40 to 220.10. Hence, it can be stated that the earning position of the company has been improved over the years from 2016 to 2017 (Gitman, Juchau & Flanagan, 2015). Answer 3 Changes in capital structure
11ACCOUNTING AND FINANCE It can be seen from the above table that for all previous 3 years the debt component of the capital structure was 95% and the equity component was 5%. Hence, there were no changes in the capital structure of the company. Answer 4 Conclusion regarding the integrity and accountability Principle of integrity states that the management are adhered to strict ethical or moral code notwithstanding from any pressure regarding acting otherwise. It is important concept of corporate governance as integrity deals with the principle of equitable and fair dealings with the shareholders. On the other hand accountability and transparency are inter-connected. Though all the decisions can be shared outside of the business the management are obliged to use right tone while communicating the shareholders. The shareholders must be able to understand the decision making process of the board, its challenges, responsibility and its plan to address the shareholders. Some of the key findings of Royal Commission were – (i) lenders were preferring pursuit of the profit over everything else (ii) financial advice ignored the basis standards for honesty (iii) reluctant upon the changes to the small business laws for lending (iv) basis transactions made for confusing the indigenous customers (ABC News, 2018). Owing to the scandal the bank face significant fell in its share value that took a year to recover the pre- raising value fir A$ 32.58. Looking into the management’s style of operating the business it can be concluded that the entity is not following the integrity and accountability concept of corporate governance and they are not successful in managing the operational risks.
12ACCOUNTING AND FINANCE Reference ABC News. (2018).Greed and dishonesty in the pursuit of profit: The banks according to Hayne.Retrieved14January2019,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. Retrieved14January2019,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. Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015).Financial & managerial accounting. John Wiley & Sons.