Capital Structure and Financial Analysis of AMP Limited

This assignment covers a report on the capital structure of AMP limited through categorisation of capital structure into debt and equity portion. AMP Limited is established in 1849 and dealing in providing financial services. In the year 1998, it is listed in Australian Stock exchange. The company is operated in Australia and New Zealand and providing financial services including banking, wealth management, superannuation services and financial planning to the customers. Further this report also covers the computation of firm’s after tax weighted average cost of capital and on the basis of return on equity it is evaluated that the company is providing sound returns to the shareholders. In addition to this, the capital structure of the company is assessed for the previous three years such as 2017, 2016 and 2015 and also comparison is made with Australia and New Zealand Banking Group. This assignment further provides critical analysis of key financial ratios and this report ends with providing the conclusion mentioning that AMP limited is successful in managing risks and wealth generation of the shareholders is also maximised in the past three years.

RUNNING HEAD: ACCOUNT AND FINANCE
ACCOUNT AND FINANCE

CCOUNT AND FINANCE 1
Executive Summary
This assignment covers a report on the capital structure of AMP limited through
categorisation of capital structure into debt and equity portion. AMP Limited is established in
1849 and dealing in providing financial services. In the year 1998, it is listed in Australian
Stock exchange. The company is operated in Australia and New Zealand and providing
financial services including banking, wealth management, superannuation services and
financial planning to the customers. Further this report also covers the computation of firm’s
after tax weighted average cost of capital and on the basis of return on equity it is evaluated
that the company is providing sound returns to the shareholders. In addition to this, the
capital structure of the company is assessed for the previous three years such as 2017, 2016
and 2015 and also comparison is made with Australia and New Zealand Banking Group.
This assignment further provides critical analysis of key financial ratios and this report ends
with providing the conclusion mentioning that AMP limited is successful in managing risks
and wealth generation of the shareholders is also maximised in the past three years.

CCOUNT AND FINANCE 2
Contents
PART B...................................................................................................................................................3
Introduction.......................................................................................................................................3
Conclusion.......................................................................................................................................15
References.......................................................................................................................................16

CCOUNT AND FINANCE 3
PART B
Introduction
AMP limited is an Australian based company offering services and solutions across
financial advice, retirement service, lending, capital management, investing, retirement
income and life insurance. AMP was established in Australia in the year 1849 with an
objective that every people should govern their life. Currently the company offers services
globally covering 11 nations in Middle east, Asia, UK, Europe and North America (AMP,
2018).
Further AMP limited has 750000 investors and covering over 3.8 million clients in
New Zealand and Australia and 100000 AMP bank customers (AMP, 2018).
In this assignment, Debt and equity portion is computed for previous years that is
2017, 2016 and 2015. Capital structure is also compared with Australia and New Zealand
Banking Group. Further in this assignment weighted average cost of capital and key financial
ratios are computed (AMP, 2018).
Categorisation of Debt and Equity of AMP limited
Capital Structure of AMP Limited is categorised into Debt and Equity. The figures of
2017, 2016 and 2015 are as follows:
AMP Limited
For the year ended 31st December
Particulars 2017 ($m) 2016 ($m) 2015 ($m)
Debt
Payables 1,752.00 1,852.00 2,031.00
Current tax liabilities 71.00 55.00 271.00

CCOUNT AND FINANCE 4
Provisions 153.00 205.00 197.00
Employee benefits 325.00 271.00 290.00
Other financial liabilities 591.00 1,342.00 1,108.00
Interest-bearing liabilities 21,009.00 17,218.00 17,452.00
Deferred tax liabilities 2,190.00 1,946.00 2,076.00
External unitholder liabilities 14,468.00 13,252.00 13,571.00
Life insurance contract liabilities 23,683.00 24,225.00 23,871.00
Investment contract liabilities 75,235.00 71,579.00 69,848.00
Reinsurance liability – ceded life insurance
contracts 1,296.00 530.00 -
Defined benefit plan liabilities 29.00 44.00 98.00
Total Debt 1,40,802.00 1,32,519.00 1,30,813.00
Equity
Contributed Equity 9,376.00 9,619.00 9,566.00
Reserves -2,010.00 -1,972.00 -1,866.00
Retained Earnings -164.00 -185.00 819.00
Total Equity 7,202.00 7,462.00 8,519.00
(Annual report, 2017; 2016; 2015).
Critical Analysis
1. According to above table, it is observed that in FY 2017 payables are least in
comparison to both previous years. In other words, payables are decreased by 5%
from 2016 and 14% from 2015.
2. Considering employee benefits of AMP limited, it was highest in 2017 as compared to
2016 and 2015 figures which means company has focussed on more benefits on their

CCOUNT AND FINANCE 5
employee welfares. The figures are increased by 20% and 12% from 2016 and 2015
respectively.
3. Further we have observed that life insurance contract and investment contract
obligations are highest in 2017 means figures are increased by 3.25% and 5.55% from
2016 and 2015 respectively.
4. Total equity of AMP limited is lowest in financial year 2017 as compared to 2016 and
2015 figures. The total equity is decreased by 3% from 2016 and 15% from 2015.
Comparison from Australia and New Zealand Banking Group
Capital Structure of Australia and New Zealand Banking Group is categorised into
Debt and Equity. The figures of 2017, 2016 and 2015 are as follows:
ANZ
For the year ended 30th September
Particulars 2017 ($m) 2016 ($m) 2015 ($m)
Debt
Settlement balances owed by ANZ 9,914.00 10,625.00 11,250.00
Collateral received 5,919.00 6,386.00 7,829.00
Deposits and other borrowings 5,95,611.00 5,88,195.00 5,70,794.00
Derivative financial instruments 62,252.00 88,725.00 81,270.00
Current tax liabilities 241.00 188.00 267.00
Deferred tax liabilities

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257.00 227.00 249.00
Liabilities held for sale 4,693.00 -
Policy liabilities 37,448.00 36,145.00 35,401.00
External unit holder liabilities (life
insurance funds) 4,435.00 3,333.00 3,291.00
Payables and other liabilities 8,350.00 8,865.00 10,366.00
Employee entitlements 530.00 543.00 -
Other provisions 628.00 666.00 1,074.00
Debt issuances 1,07,973.00 1,13,044.00 1,10,756.00
Total Debt 8,38,251.00 8,56,942.00 8,32,547.00
Equity
Ordinary share capital 29,088.00 28,765.00 28,367.00
Reserves 37.00 1,078.00 1,571.00
Retained Earnings 29,834.00 27,975.00 27,309.00
Total Equity

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58,959.00 57,818.00 57,247.00
(Annual report, 2017; 2016; 2015).
1. Comparing total equity, it is seen that AMP limited has very less equity amount in
comparison to ANZ. The reason is due to negative reserves and retained earnings in
AMP limited of $ 2010 million and $164 million in all the three years.
2017 ($m) 2016 ($m) 2015 ($m)
0
100
200
300
400
500
600
325
271 290
530 543
0
Equity
AMP Limied ANZ
2. The AMP limited has reported current liabilities amounting $ 71 million whereas
ANZ has reported $ 241 million in 2017 whereas deferred tax liabilities was relatively
high in AMP limited as compare to ANZ limited.

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2017 ($m) 2016 ($m) 2015 ($m)
0
100
200
300
400
500
600
325
271 290
530 543
0
Current tax liabilities
AMP Limied ANZ
2017 ($m) 2016 ($m) 2015 ($m)
0
100
200
300
400
500
600
325
271 290
530 543
0
Deferred tax liabilities
AMP Limied ANZ
3. Benefits given to employees are also very low in AMP limited as compared to
entitlements given by ANZ to their employees.

CCOUNT AND FINANCE 9
2017 ($m) 2016 ($m) 2015 ($m)
0
100
200
300
400
500
600
325
271 290
530 543
0
Employee benefits
AMP Limied ANZ
Weighted Average cost of capital
WACC is termed as overall cost of capital where each capital of the company is
weighted proportionately. If the WACC is increased, then the risk of the company is also
increased and value of the company is decreased. WACC is symbolized as Ko. WACC is
expressed in percentage form. In this assignment, WACC is calculated for FY 2017.
Mathematical Formula:
WACC = (Cost of debt * weight) + (Cost of equity * weight)
OR
Ko= (Kd* Wd) + (Ke * We)
where,
Ke (Cost of equity) = It is the portion of company’s capital structure. It means the earnings
required by the investors who abide the risk of rights. It is expressed in percentage form.
The formula for computing Ke as per CAPM model is as below:

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Ke = Rf + β (Rm – Rf)
where,
Rf = risk free rate = 2.68% (as per ASX website)
Rm = market return = 8.54%
β = Beta = 1.47 (Source: reuters)
Ke = 2.68% + 1.47 * (8.54% - 2.68%)
Ke = 11.29%
Kd (Cost of debt) = It is also part of capital structure. Debt includes total liabilities. It is
expressed in percentage form.
The formula for computing Kd is as below:
Kd (after tax) = Kd (before tax) * (1 – tax rate)
Kd (before tax) = (Interest *100) ÷ total debt
where,
Finance costs = $ 585 million (source: annual report, 2017)
Total debt = $ 140802 million
Kd (before tax) = (585 * 100) ÷ 140802
Kd (before tax) = 0.42%
Tax rate = 30% (source: annual report, 2017)
Kd (after tax) = 0.42% * (1 – 30%)
Kd (after tax) = 0.29%

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Weights of equity and debt is computed as follows:
Total capital structure = total debt + total equity
Total capital structure = $ 140802 million + $ 7202 million
Total capital structure = $ 148004 million
We (Weight of Equity) = Total equity/ total capital structure
We = $ 7202 million/ $ 148004 million
We = 0.05
Wd (Weight of Debt) = Total debt/ total capital structure
Wd = $ 140802 million/ $ 148004 million
Wd = 0.95
Accordingly,
WACC = [0.29% * 0.95] + (11.29% * 0.05]
WACC = 0.84%
According to the above calculation, it is observed that WACC of AMP limited is
0.84% which signifies that company is expected to recompense 0.84% to different investors
for the purpose of finance its assets. The above calculation is governed by external market. In
addition to this, AMP’s cost of equity is 11.29% in 2017 financial year which depicts that
company is notionally required to reimburse to their owners for the risks embark by them.
This also encourages existing as well as prospective investors to continue invest in the
company.
Key financial ratios for AMP limited

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In this assignment, some key financial ratios computed are current ratio, net profit ratio,
ROE and debt ratio considering FY 2017 figures.
1. Current ratio: Current ratio is computed to identify the ability of the company to meet
its short term obligations within time. In the computation, current assets and current
liabilities are considered. Formula is: Current assets/ Current liabilities.
Particulars Amount ($m)
Current Assets 5898
Current Liabilities 2301
Current ratio 2.56
(Annual report, 2017).
2. Net Profit ratio: Net profit ratio is computed to gauge the earnings earned by the
company from per dollar of sales revenue. This ratio is important from stakeholder’s
point of view because the profitability position is depicted. Formula is: Net profit
*100 / total income.
Particulars Amount ($m)
Net profit 873
Total income 18361
Net profit ratio 4.75%
(Annual report, 2017).
3. ROE: From the shareholder’s invested money, earnings of the company are gauged.
Higher ratio depicts better financial health of the company because it shows more
income earned from shareholders invested money. Formula is: Net profit/ total equity.

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Particulars Amount ($m)
Net profit 873
Total Equity 7202
ROE 12.12%
(Annual report, 2017).
4. Debt Ratio: It evaluates company’s capability in reimbursing its debts from utilisation
of assets. Low ratio is preferable because it means debts are lower than assets in a
company. Formula: Total liabilities/ total assets.
Particulars Amount ($m)
Total liabilities 140802
Total Assets 148085
Debt ratio 95%
(Annual report, 2017).
According to above four ratios, it is observed that company is able to meets its current
obligations within time which means short-term solvency position is sound. Further it is
observed that net profit earned by the company is 4.75% which is sound. Considering ROE, it
can be concluded that stability position and financial health of the company is sound because
returns earned by the company is 12.12% from the shareholder’s investment. However as per
Debt ratio it signifies that total liabilities are 95% of total assets which means long-term
solvency position is not effective (Annual report, 2017).
Material risks

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Australian finance services industry is currently responding to Royal Commission for
the purpose of misconduct in banking, superannuation and finance services. There are seven
types of material risks that should be completely monitored and assessed by the company in
order to gain the community’s trust and confidence in the industry (Annual report, 2017). The
seven material risks are insurance risk, credit risk, strategic risk, market risk, liquidity risk,
operational risk and concentration risk. These seven types of risks should be reported to BOD
in order to ensure that these risks are managed suitably.
a. Market risk of AMP: Market risk covers currency risk, equity price risk and interest
rate risk. AMP manages market risk by maintaining policies and regulatory
requirements.
b. Liquidity risk of AMP: This risk is not able to manage by the AMP limited because
the company is not able to liquidate assets or funding are not attained as and when
required (Annual report, 2017).
c. Credit risk of AMP: This risk is completely managed by the company because
contractual commitments are fully meet on time and reported to the fund managers
within credit criteria.
d. Operational risk of AMP: This risk is also completely managed by AMP limited
because there are no failed processes internally and externally reported by the
company in FY 2017.
e. Strategic risk and concentration risk of AMP: In this category, all the planned
decisions related to any changes in customer, governing or competitive site are taken
timely by the company.

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f. Liquidity risk of AMP: This risk is also managed properly by the company because as
per the above calculations of some key ratios it is observed that debt obligations are
properly met by the company and in full time.
Thus all the above risks are properly represented and reported by AMP to Royal
Commission. In addition to this for wealth maximisation of shareholders it can be observed
from past dividend payments that in FY 2015 and 2016 the dividend paid by the company
was 14 cents whereas in FY 2017 it was 14.5 cents which means that dividends paid are
increased by 0.5 cents in current financial year (2017). In other words, company has paid 0.5
cents more to their shareholders in 2017 as compared from past years Also taken into
consideration ROE where it is given that in FY 2017 ROE was 11.7% whereas in FY 2016
and 2015 it was reported -4% and 11.5% which depicts that the company has efficiently
earned returns from the available shareholders’ funds (Annual report, 2017). Hence, it is
summarised that shareholders’ wealth are maximised in current financial year.
Conclusion
It is concluded that AMP’s limited is effectively and efficiently maximised its wealth
for the shareholders. Further cost of equity is 11.29% which encourages existing as well as
prospective investors to continue invest in the company.

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References
ASX. 2018. Market Statistics. retrieved on 25 September 2018 from
https://www.asx.com.au/about/market-statistics.htm.
Bloomberg. 2018. AMP Ltd. retrieved on 25 September 2018 from
https://www.bloomberg.com/quote/AMP:AU.
AMP. 2018. About us. retrieved on 25 September 2018 from
https://corporate.amp.com.au/about-amp/what-we-do/what-we-do-key-facts-our-
history.
AMP. 2018. Dividend payments. retrieved on 25 September 2018 from
https://corporate.amp.com.au/shareholder-centre/shareholder-info/dividend-payments.
AMP. 2018. Five-year summary. retrieved on 25 September 2018 from
https://corporate.amp.com.au/content/dam/corporate/shareholdercentre/files/five-year-
financial-history/five_year_summary_fy_2017.pdf.
ANZ. 2017. 2017 Annual report. retrieved on 25 September 2018 from
http://shareholder.anz.com/sites/default/files/2017_anz_annual_report.pdf.
ANZ. 2016. 2016 Annual report. retrieved on 25 September 2018 from
http://shareholder.anz.com/sites/default/files/anz_-_annual_report_2016.pdf.
AMP. 2017. 2017 Annual report. retrieved on 25 September 2018 from
https://corporate.amp.com.au/content/dam/corporate/shareholdercentre/files/reports/
2018/Investor_and_annual_reports/2017_annual_report_20_march_2018.pdf.
AMP. 2016. 2016 Annual report. retrieved on 25 September 2018 from
https://corporate.amp.com.au/content/dam/corporate/shareholdercentre/files/
reports/2017/annual-reports/20170320_2016_annual_report.pdf.