Analysis of AMP Limited's Capital Structure and Risk Management

Part B
Executive Summary
The report deals with the analysis of AMP Limited considering its capital structure and risk
management system. In the first part, the report provides an introduction of the company along
with the evaluation of its current capital structure. In the later part, the WACC of the company is
calculated along with its cost of equity and the capital structure is compared with AMP’s
competitor Commonwealth bank. Also, an analysis of financial ratios has been done which
determines the performance of AMP. In the last, the significant changes in company’s capital
structure are identified along with the management of its seven identified risks. In the end, a
conclusion is provided with all the findings of the report.

Introduction
AMP limited is an Australian financial service company which commenced its operations in
1849 as Australian Mutual Provident Society (AMP). The company is listed on ASX and is
involved in the business of providing wide range of financial services to its customers or clients
such as banking, financial planning, superannuation services and others.
Current capital structure
The table shows the capital structure of AMP Limited for the year 2017. The data has been
derived from the annual report of the company for the same year. It can be observed that the
equity component of the firm is 79% whereas debt equals to 21% only. This means that firm has
low financial risk and it depends more on equity.
current capital structure of
AMP
Amount Weight
Total equity
7,283.0
0 79%
Total Debt 1976 21%
9,259.0
0 1.00
Weighted average cost of capital

WACC is that rate at which company pay to its security holders to finance the assets. AMP’s
current WACC is 10% which is lower than its required rate of return calculated further. The
major reason for the fluctuation in WACC is the changes in the market and not in the
management (Fernandes, 2014).
Particular
s Amount
Weights
(A) Cost of capital (B) A*B
Equity $ 7,283.00 0.79 11.12% 9%
Debt $ 1,976.00 0.21 3.28% 1%
Total $ 9,259.00 1.00 10%
Cost of equity by CAPM model
The calculated required rate is 11.12% which is higher than firm’s WACC and market return of
8.54%. This means the company is providing sound return to its shareholders.
Calculation of cost of equity using CAPM
Risk free rate (Rf) 3.06%
Market return (Rm) 8.54%
Beta (b) 1.47
Cost of equity (Rf+B*(Rm-Rf)) 11.12%
Comparison of the capital structure
current capital structure of AMP
Amount Weight
Total equity 7,283.00 79%