This article discusses the current share prices of AMP and CBA, their financial summaries, and the impact of the Royal Commission on their images. It also explains Required Rate of Return, Internal Rate of Return, and Net Present Value. The article is relevant to finance and economics courses and is suitable for university students.
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AMP AND CBA SHARE PRICES1 AMP and CBA share price and Capital budget By (Studentβs Name) Course Tutor University [Date Submitted]
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AMP AND CBA SHARE PRICES2 Part A 1. AMP located in Australia and New Zealand and headquartered in Sydney is a corporation that provides superannuation and investment products, financial plans and counsel, insurances and banking service. The commonwealth bank of Australia located in the regions; New Zealand, Asia, US and UK are multinational banking service provider dealing with retail, business and institutional banking services, management of fundingβs, superannuation, insurance, brokering and investing. The current common share price of AMP is 3.140 Table 1. AMP financial summary Daily change0.010- 0.319% Daily volume10,892,214 Market capital9.13 billion Bid3.140 Offer3.150 No of Shares2.92 billion 52 weekLow- 3.080 High- 5.470 Dividends Most recent- 10c Dividend expiry date-22/08/2018 Dividend pay date- 28/09/2018 Validating- 50% Annual dividend worth- 7.83% The current common share price of CBA is $71.50
14.5 0 10 20 30 20162015201420132017 12.5 14 14 14.5 13.5 14 14 26 28 28 29 11.511.523 2015201742013201 6201 $884m m $972m $848m $672m 0 250 500 750 1,000 1,250 0 250 500 750 1,000 1,250 20152014201320162017 $1,045m $1,120m $486m $1,040m $849m AMP AND CBA SHARE PRICES3 Table 2. CBA financial summary Daily change0.32- 0.45% Daily volume2,833,016 Market capital125.27 billion Bid71.50 Offer71.64 No of Shares1.76 billion 52 weekLow- $67.22 High- $82.66 Dividends Dividend expiry date-15/08/2018 Dividend pay date- 28/09/2018 Franking- 100% Annual dividend worth- 7.51% The table below summarizes AMP share price evolution over the past five years. Table 3. AMP financial data 20172016201520142013 Basic earnings per ordinary share($)0.290.110.330.300.23 Diluted earnings per ordinary share($)0.290.110.330.300.23 Dividends per ordinary share($)0.290.280.280.260.23 Number of ordinary shares($)29582958295829582958 Assets under management($)257240226214197
( AMP AND CBA SHARE PRICES4 The dividend of 14.5 cents/share was due on 28/03/2018 and will have a franking of 90%. $837m returned to shareholders was in the form of dividends and there were dividend reinvestment plan shares in 2017. (Manager, 2018) The table below summarizes CBA share price evolution over the past five years. Table 4. CBA annual dividends 12/201412/201512/201612/201712/2018 Dividend amount($)4.014.204.204.294.31 20142015201620172018 3.85 3.9 3.95 4 4.05 4.1 4.15 4.2 4.25 4.3 4.35 dividend From the above graph there was a rise in the year 2015 from $4.01 to $4.20 which followed stagnation in the year 2016 at $4.20 then an increase in the dividends in the year 2017 to $4.29. There was also another increase in the dividend in the year 2018 to $ 4.31.(ASX 2018)
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AMP AND CBA SHARE PRICES5 2. Royal commission objective was to restore trust and confidence and maintain the already existing stability in the economic sector. Banks are vulnerable to economic fluctuations because of their reliance on higher financial leverage. Banks are opaque to most of their customers therefore the royal commission results in loss of confidence hence expected less deposits. This may be because the royal commission inquiries into the following matters. First is misconduct in financial service providers. Secondly is any conduct by a financial service provider that stoops below the populationβs expectations and also superannuation of an individual retirement savings that do not coordinate with the communityβs expectations among others. From the royal commission the following can be observed from both the systematic and unsystematic risk. First there is a challenge of misalignment in relation to the customer and their financial service provider. There is loss of trust in the financial system due to less effective powers in the tackling of illegal behaviors. Lastly there is a potential risk that of negative sentiment spilling in the larger finances system. The main aim of royal commission is tackling misconduct which includes fairness and fulfillment of a communityβs expectations. Complaints resulting from financial counsel will and insurance claims will result in compensations and this will also elevate ASIC Inquiring by the royal commission has led to attacks on the banks by political principles. . The impactful role by the royal commission is regarding the costs placed on consumers, competition and financial stability of the system is key in provision of financial counsel and insurance matters and it is most impactful when it comes to loans.
AMP AND CBA SHARE PRICES6 The royal commissionβs findings by Hayne could result in permanent damage of AMPβs franchise. There was a fall in stock by 4.4% which will lead to a price of $4.55. $600 billion as deleted from the companyβs asset worth 13 billion having recently traded 18 million shares. From the finding a cost less than $4 million was utilized in the companyβs customer remediating procedure. The company also faced a major challenge as 15000 of its clients were being charged not following the protocol while giving financial counsel. There were also charges of charging for services not rendered. There is a possibility of long-term scar on the AMPβ image resulting from Hayneβs findings. AMP require major changes which fall among the responsibilities of the new. The royal commission has produced evidence indicating that CBA has been charging already dead clientele for financial counsel which has been done for the past ten years. The executive general manager also recently admitted that the CBA financial planning still kept accepting commissions from clients registered after July 2013 although the Fofa laws had been enacted. Findings by the royal commission also revealed that there were ignored complaints by customers about services not rendered being charged for over six years. This followed by CBA admitting to charging for financial advice not given. From this revelation it is clear that both CBA and AMPβs images have been tarnished and there is unexpected reduction in their share prices in the near future. Part B Overview of Required Rate of Return (RRR) and the Internal Rate of Return (IRR) Both are metrics used to account for the performance of particular investment overtime (Robson, 2017). In as much as they sound similar, it is worth noting that they describe the investment performance in very different terms altogether. In simple terms, the RRR is the least return that a
AMP AND CBA SHARE PRICES7 particular company requires on its investments or projects that compensates them for a given level of risk before proceeding with such investments. It is also known as the hurdle rate. Essentially, the required rate of return is often an arbitrary figure that often differs from company to company. Nevertheless, the required rate of return is often unrelated to the cost of funds (Robson, 2017). On the other hand, the internal rate of return is the discount rate that when functional to a series of cash flows outcome in a net present value of zero. Decision Rule of RRR and IRR There are certain decision rules that are used hand in hand with the RRR and the IRR. In essence, the decision rule in the required rate of return is such that if the NPV of the required rate of return is greater than zero for a given project, then the project passes the test and hence qualifies to be evaluated further, if the RRR is a lesser amount than zero then the project fails the test and hence is discarded in as much as it could be a great project. On the other hand, the rule that is used as decision in the IRR is such that when the computed internal rate of return is greater than the cost of capital, then the project should be taken and if the IRR is the same to the cost of capital, then the managers should be indifferent, and if the IRR is a lesser amount of than the cost of capital, then the project should be cast off. Hence, while selecting two projects that are equally elite, the one with the highest internal rate of return ought to be chosen as long as the computed rate is more than the cost of capital. Overview of Net Present Value (NPV) The Net Present Value (NPV) is a metric used to indicate the expected impact of a particular project on the value of a firm or company (Zen Wealth, 2016). Essentially, projects with a positive NPV are viewed with the expectation that they shall increase the value of the firm while
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AMP AND CBA SHARE PRICES8 those with a negative NPV are considered to be of a negative impact on the firmβs value (Zen Wealth, 2016). Thus, the NPV decision rule is such that all independent projects whose NPV is positive should be accepted. Nevertheless, when faced with the decision to choose among projects that are mutually exclusive, the project that generates the largest/highest (positive) should be chosen. Calculation of Net Present Value (NPV) The formula is such that: Where: CFt= the cash flow at time t and r = the cost of capital. Computing NPV for project X at a discounting rate of 12% NPV = -300,000 + 80,000 / (1 + 0.12)1+ 140,000 / (1 + 0.12)2+ 130,000 / (1 + 0.12)3+ 160,000 / (1 + 0.12)4 NPV = -300,000 + 71,428.6 + 111,607.1 + 92,531.4 + 101,682.9 NPV = $ 77,250 Computing NPV for project Y at a discounting rate of 12% NPV = -300,000 + 160,000 / (1 + 0.12)1+ 160,000 / (1 + 0.12)2+ 160,000 / (1 + 0.12)3+ 160,000 / (1 + 0.12)4+ 160,000 / (1 + 0.12)5160,000 / (1 + 0.12)6 NPV = -300,000 + 142,857.1 + 127,551 + 113,884.8 + 101,682.9 + 90,788.3 + 81,061
AMP AND CBA SHARE PRICES9 NPV = $357,825.1 β $357,825 Decision Rule of NPV: Both projects should be accepted because they yield a positive Net Present Value as calculated above. Calculation of IRR The IRR formula is such that: IRR = lower rate + [(NPV at the lower rate) / (Absolute sum of NPVs)] x Difference in the rates Here, we already have the NPV at 12% for both projects. Hence, we can calculate the NPV at a lower rate of 7% and also NPV at a higher rate of 16%. NPV at a lower rate of 7% PROJECT X: NPV @ 7% = -300,000 + 80,000 / (1 + 0.07)1+ 140,000 / (1 + 0.07)2+ 130,000 / (1 + 0.07)3+ 160,000 / (1 + 0.07)4 NPV = -300,000 + 74,766.4 + 122,281.4 + 106,118.7 + 122,063.2 NPV = $ 125,229.7 β $125,230 PROJECT Y
AMP AND CBA SHARE PRICES11 I.R.R = 7% + [(125,230) / (125,230 + 44,660)] x (16 β 7) I.R.R = 7% + 6.63% I.R.R = 13.63% Determination of IRR for PROJECT Y is as follows: IRR = lower rate + [(NPV at the lower rate) / (Absolute sum of NPVs)] x Difference in the rates I.R.R = 7% + [(462,646) / (462,646 + 289,558)] x (16 β 7) I.R.R = 7% + 5.54% I.R.R = 12.54% Decision Rule: Both projects should be accepted because their computed internal rates of return are greater than the cost of capital of 12%. However, the managers ought to be indifferent with regards to project Y because the IRR is more or less equal to 12% hence further analysis of project Y ought to be conducted to determine its feasibility. Fundamentally, a change in the required rate of return will affect the decision or the conclusion that will be arrived at, but it would not affect the IRR. Essentially, the IRR will be the same despite the changes that are made to the required rate of return. It is worth noting that changes in the required rate of return only affect how the decisions will be made but not the NPV or the IRR.
AMP AND CBA SHARE PRICES12 In this case, computing the NPV of the projects using the required rate of return of 10% would be as follows: PROJECT X NPV = -300,000 + 80,000 / (1 + 0.10)1+ 140,000 / (1 + 0.10)2+ 130,000 / (1 + 0.10)3+ 160,000 / (1 + 0.10)4 NPV = -300,000 + 72,727.3 + 115,702.5 + 97,670.9 + 109,282.2 NPV = $ 95,382.9 β $ 95,383 PROJECT Y NPV = -300,000 + 160,000 / (1 + 0.10)1+ 160,000 / (1 + 0.10)2+ 160,000 / (1 + 0.10)3+ 160,000 / (1 + 0.10)4+ 160,000 / (1 + 0.10)5160,000 / (1 + 0.10)6 NPV = -300,000 + 145,454.5 + 132,231.4 + 120,210.4 + 109,282.2 + 99,347.4 + 90,315.8 NPV = $ 396,841.7 β $ 396,842 It is worth noting that if the above projects were of an equal duration, then the change in required rate of return would influence the final decision based on the NPV criterion. If the same required rate of return @ 10% is used in the computation of IRR, then there IRR would not change but the decision to be made would be influenced. In this case, the IRR would be computed as follows: First compute the NPV at a lower rate of 6% and NPV at a higher rate of 13%
AMP AND CBA SHARE PRICES13 NPV at a lower rate of 6% for PROJECT X is: NPV = -300,000 + 80,000 / (1 + 0.06)1+ 140,000 / (1 + 0.06)2+ 130,000 / (1 + 0.06)3+ 160,000 / (1 + 0.06)4 NPV = -300,000 + 75,471.7 + 124,599.6 + 109,150.5 + 126,735 NPV = $ 135,956.8 β $ 135,957 NPV of PROJECT Y at a lower rate of 6% is: NPV = -300,000 + 160,000 / (1 + 0.06)1+ 160,000 / (1 + 0.06)2+ 160,000 / (1 + 0.06)3+ 160,000 / (1 + 0.06)4+ 160,000 / (1 + 0.06)5160,000 / (1 + 0.06)6 NPV = -300,000 + 150,943.4 + 142,399.4 + 134,339 + 126,735 + 119,561.3 + 112,793.7 NPV = $ 486,771.8 β $ 486,772 NPV of PROJECT X at a higher rate of 13% NPV = -300,000 + 80,000 / (1 + 0.13)1+ 140,000 / (1 + 0.13)2+ 130,000 / (1 + 0.13)3+ 160,000 / (1 + 0.13)4 NPV = -300,000 + 70,796.5 + 109,640.5 + 90,096.5 + 98,131 NPV = $ 68,664.5 β $ 68,665 NPV of PROJECT Y at a higher rate of 13%
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AMP AND CBA SHARE PRICES14 NPV = -300,000 + 160,000 / (1 + 0.13)1+ 160,000 / (1 + 0.13)2+ 160,000 / (1 + 0.13)3+ 160,000 / (1 + 0.13)4+ 160,000 / (1 + 0.13)5160,000 / (1 + 0.13)6 NPV = -300,000 + 141,593 + 125,303.5 + 110,880 + 98, 131 + 86,841.6 + 76,851 NPV = $ 339,600.1 β $ 339,600 Determination of IRR for PROJECT X is as follows: IRR = lower rate + [(NPV at the lower rate) / (Absolute sum of NPVs)] x Difference in the rates I.R.R = 6% + [(135,957) / (135,957 + 68,665)] x (13 β 6) I.R.R = 6% + 4.65% I.R.R = 10.65% Determination of IRR for PROJECT Y is as follows: IRR = lower rate + [(NPV at the lower rate) / (Absolute sum of NPVs)] x Difference in the rates I.R.R = 6% + [(486,772) / (486,772 + 339,600)] x (13 β 6) I.R.R = 6% + 4.1.2% I.R.R = 10.12% Conclusion:
AMP AND CBA SHARE PRICES15 It can be seen that the decision making criteria for IRR has been changed as a result of using a discounting rate that is equal to the required rate of return, that is, 10%. In this case, both scenarios yield IRR that are indifferent meaning that the management ought to conduct further analysis of the two projects in order to determine the extent of their feasibility. The conflict between NPV and IRR often occurs where NPV may rank a certain project A as number 1 and project B as number 2 whereas IRR ranks project B as number 1 and project A as number 2. This conflict often occurs under the following circumstances: (i)Difference in the size of projects under review When two projects have different sizes, IRR is likely to give the same kinds of results with regards to acceptance or rejection (ii)Presence of non-conventional cash flows Oftentimes these are cash flows whose signs are changing from positive to negative during the economic life of the project. (iii)Different timing of cash flows Where two mutually exclusive projects that have different timing of cash flows e.g. one projectβs cash flows are increasing while the other is decreasing, the NPV and IRR will be in conflict. (iv)Different economic lives of a project When two mutually exclusive projects have different economic lives e.g. project A has 2 years and B has 5 years, then NPV and IRR methods will conflict in the ranking of such projects.
AMP AND CBA SHARE PRICES16 Preferred Recommendation: Whenever there is a conflict between NPV and IRR, NPV shall prevail because it better reflects the ultimate goal of a particular firm β growth of the financial wealth of the company (Viney and Phillips, 2015). Reference Abbott, M., 2018.Markets and the State: Microeconomic Policy in Australia. Routledge. ASX 2018, September 14, Commonwealth bank of Australia,https://www.asx.com.au
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AMP AND CBA SHARE PRICES17 Chanticleer R, 2018, April 17. Financial review: Banking royal commission, Christian G, 2018. May 16. What does royal commission tell us?. Decker, F. and McCracken, S., 2018. Central banking in Australia and New Zealand: historical foundations and modern legislative frameworks.Research Handbook on Central Banking. Harris, T.R., 2017. Incorporating risk in analysis of tax policies for solar power investments. Souza, B.D.M., Dutra, K.L., Kuntze, M.M., Bortoluzzi, E.A., Flores-Mir, C., Reyes-Carmona, J., Felippe, W.T., Porporatti, A.L. and Canto, G.D.L., 2018. Incidence of Root Resorption after the Replantation of Avulsed Teeth: A Meta-analysis.Journal of endodontics