Analysis of Banking Stocks and Project Assessment in Banking and Finance

The aim of the assignment is to conduct an analysis of the key banking stocks in the banking industry and evaluate the financial viability of a project. The analysis includes the evolution of share prices of companies in the last five years and the influence of recent events on the share prices. The project assessment is done using investment appraisal tools like Net Present Value and Internal Rate of Return.

Running head: BANKING AND FINANCE
Banking and Finance
Name of the Student:
Name of the University:
Author’s Note:

1BANKING AND FINANCE
Executive Summary
The aim of the assignment is to conduct an analysis of the key banking stocks in the banking
industry and the evolution of the share price of companies in the last five years. The influence
of share prices by the recent event held by the Royal Commission of Australia on banks like
AMP, CBA and NAB was taken into analysis. The second part of the assignment deals with
the assessment of an project and the same was evaluated with the help of investment
assessment tools like Net Present Value and Internal Rate of return for assessing the financial
viability of the project.

2BANKING AND FINANCE
Table of Contents
Introduction................................................................................................................................3
Research.....................................................................................................................................3
AMP, CBA and NAB Share Price.........................................................................................3
Share Price Evolution.............................................................................................................6
Analysis......................................................................................................................................7
Capital Budgeting...................................................................................................................7
Required Rate of Return and Internal Rate of Return............................................................7
Net Present Value...................................................................................................................8
Internal Rate of Return...........................................................................................................9
Variable Required Rate of Return........................................................................................10
Recommendations....................................................................................................................10
Conclusion................................................................................................................................11
Reference..................................................................................................................................12
Appendix..................................................................................................................................14

3BANKING AND FINANCE
Introduction
The analysis of the banking industry in contrast to the changes observed in the recent
five years is of great importance. The three major banks of the Australian Banking system
like AMP Bank, Commonwealth Bank and National Australia Bank has played a crucial; role
in the banking industry and the share price of the company has well grown. The share price of
the companies has shown sustainable growth in the last five year but still the banking
companies have seen a direct influence on the share price of the companies and the same
needs to be focused (Vijitha and Nimalathasan 2014). The movement of the share price in
contrast of the recent events where the Royal Commission of Australia investigated the bank
for several claims charged has directly influenced the share price of the banks in the year
2018 and the most affected bank was the AMP bank which almost saw a 30% decline in the
share price of the company (Vogel 2014). There are several risks associated with a company
and the same can be wither in the form of systematic risk that is risk of the company in
contrast to the economy and the other is unsystematic risk which is dependent on the internal
factors of a company. There are various aspects of Capital Budgeting also taken into
consideration for the analysis of the project and the same was evaluated for assessing the
financial viability of a project (Stephen and Okoro 2014).
Research
AMP, CBA and NAB Share Price
The share price analysis was done for all of the major banks in the Australian Banking
industry for evaluating the share price trend shown by each of the Bank during the last five
year of trend period (Ballings et al. 2015). The current share price of AMP Bank is at 2.58
AUD and the share price of the company saw a major movement in the month of October
when the bank was found to be alleged with some charges by the Royal Commission of

4BANKING AND FINANCE
Australia where the company shares saw an almost 30% decline. The share price of the
company has been volatile in the third quarter of 2018 as depicted in the below graphical
analysis.
Figure 1: AMP Share Price
(Source: Finance.yahoo.com 2019)
The current share price of the Commonwealth Bank is around 72.47 AUD the bank had
the most sustainable share price movement in the trend period analysed. The share price of
the company had a common trading price range of 70-80 price level where the company had
frequently traded in the analysed range and there was no major volatility in the price range
observed for the company. The share price of the bank has depicted a growth trend in the
trend period analysed reflecting wealth creation (Patel and Yalamalle 2014).
Figure 2: Commonwealth Bank Share Price
1/1/2014
4/1/2014
7/1/2014
10/1/2014
1/1/2015
4/1/2015
7/1/2015
10/1/2015
1/1/2016
4/1/2016
7/1/2016
10/1/2016
1/1/2017
4/1/2017
7/1/2017
10/1/2017
1/1/2018
4/1/2018
7/1/2018
10/1/2018
0
1
2
3
4
5
6
7
8
AMP Share Price
Date
SHARE PRICE

5BANKING AND FINANCE
(Source: Finance.yahoo.com 2019)
The current share price of the National Australia Bank Ltd is around 24.44 AUD and
the share price of the company has also seen major changes in the five years of course time.
The share price of the bank has also been volatile reflecting that the economic outlook and
various macroeconomic factors are affecting the share price for the company. The trading
price level for the company has been around 35-25 price level (Lashgari and Ahmadi 2014).
The share price of the company has shown a downward trend or a falling share price trend in
the trend period.
1/1/2014
4/1/2014
7/1/2014
10/1/2014
1/1/2015
4/1/2015
7/1/2015
10/1/2015
1/1/2016
4/1/2016
7/1/2016
10/1/2016
1/1/2017
4/1/2017
7/1/2017
10/1/2017
1/1/2018
4/1/2018
7/1/2018
10/1/2018
0
5
10
15
20
25
30
35
40
NAB SHare Price
date
share price
1/1/2014
4/1/2014
7/1/2014
10/1/2014
1/1/2015
4/1/2015
7/1/2015
10/1/2015
1/1/2016
4/1/2016
7/1/2016
10/1/2016
1/1/2017
4/1/2017
7/1/2017
10/1/2017
1/1/2018
4/1/2018
7/1/2018
10/1/2018
0
10
20
30
40
50
60
70
80
90
100
CBA Share Price
date
share price

6BANKING AND FINANCE
Figure 3: National Australia Bank Share Price
Share Price Evolution
There are primarily two common types of risks associated with a company the
systematic risk shows the risk associated with the market while the unsystematic risk shows
the risk associated with a company through its particular industry or internal factors. The
enquiry from the Royal Commission about the various banking companies about the charges
raised against them has significantly affected the goodwill and credibility of the market
which in turn affected the share price of the banking companies (Milosevic 2016). The
inquiry affected the stocks because of the unsystematic risk as the risk was particularly
because of the particular banking industry and due to charges raise against the companies for
charging fees for services which the banks did not provided. The enquiry and charges raised
against the banking companies hampered the operations of the company and the faith for
transparent level of business activities which in turn affected the business activities and the
share price of the companies. The banking which was most affected under this investigation
matter and charges was the AMP Bank where the share price of the company showed a
downward trend of about 25-30% in the year 2018 after the report of the Royal Commission
of Australia. The Share Price of NAB Bank was also affected by the report presented by the
Royal Commission of Australia in the year 2018. However the volatility and the movement
of the share price observed was very limited as compared to AMP Bank. The Commonwealth
Bank share price was also affected by the report presented by the Royal Commission of
Australia. The share price of the company fell about by 7% in the month of October in the
year 2018. The systematic risk involved which incorporates various factors such as the
changes in business cycle structure, macroeconomic factors like level of interest rate,
inflation rate and various other factors also affects the level of share price of the company
(Idawati and Wahyudi 2015).

7BANKING AND FINANCE

8BANKING AND FINANCE
Figure 4: Share Price Evolution
(Source: Finance.yahoo.com 2019)
Analysis
Capital Budgeting
The Capital Budgeting is an investment appraisal or the planning process applied for
evaluating the financial viability and visibility of a project. The common capital budgeting
tools applied for the purpose of investment appraisal is the application of the Net Present
Value, Internal Rate of Return and the Payback Period. The common financial tools are
applied for the purpose of assessing the financial viability and visibility of the long-term
investment (Burns and Walker 2015).
Required Rate of Return and Internal Rate of Return
The required rate of return shows the minimum amount of return that is required by
the investors of the company while investing into a specific asset or a project (Chittenden and
Derregia 2015). The require rate of return is determined on a risk adjusted basis which shows
the minimum rate of return required from the shareholders or the key investor for the
purpose of investment and the same is used as a benchmark return and discounting actor for
1/1/2014
4/1/2014
7/1/2014
10/1/2014
1/1/2015
4/1/2015
7/1/2015
10/1/2015
1/1/2016
4/1/2016
7/1/2016
10/1/2016
1/1/2017
4/1/2017
7/1/2017
10/1/2017
1/1/2018
4/1/2018
7/1/2018
10/1/2018
0
20
40
60
80
100
Share Price Evoluti on
AMP CBA NAB
date
share price

9BANKING AND FINANCE
evaluating and assessing the financial viability of the project. The required rate of return is
also referred as an opportunity cost of capital for the company. The higher the risk and the
more infrequent cash flows are from a project the higher is the required rate of return from a
project (Rossi 2014).
However the internal rate of return shows the return generated from a project and the
same is determined after incorporating the net cash outflows and net cash inflows for a
specified period of time. The difference between the required rate of return from a project and
the expected return from a project is solely based on the investment project classification.
The IRR as a discount rate equates the cash flow into present value by applying the relevant
discount rates on the cash inflows to its market prices. The IRR also shows the average return
earned by the investors in the investment horizon of the project. The key assumption made in
such a scenario is that the cash flows earned in the project will be invested back itself at the
IRR (Zhang, Huang and Zhang 2015).
Net Present Value
The Net present value from the project was determined by incorporating all the cash
outflows and cash inflows from the project. The key factor that was included for determining
the Net Present Value and for discounting the cash flow was the required rate of return which
was taken at 12% for discounting the cash flows of the project. The financial viability of the
project was done on behalf of Prospects Ltd where the Net Present Value of the Landfill
Project was assessed to be around 498058 AUD (Andor, Mohanty and Toth 2015). The cash
flows of the project was sustainable and the recovery of the initial investment of project was
also seen to be recovered at the first year itself. The Net Present Value (NPV) of the Boreole
Project was assessed to be around 420133 AUD. The cash flows of the project was
sustainable and the recovery of the initial investment of project was also seen to be recovered
at the first year itself. The NPV also shows the amount or the extent by which the wealth of

10BANKING AND FINANCE
the shareholders wealth will be created. The NPV from the Landfill project was considered to
be more stable and higher and the same should be selected rather than the Boreole Project and
the same will create wealth for the shareholders/investors of the company.
Internal Rate of Return
The internal rate of return shows the percentage return generated by the company by
the investment done by the company from the project. The investment done by the company
for the project was analysed based on the cash flows earned by the company in respect of the
cash inflows from the projects. The Internal rate of return from the Landfill Project was
around 159% and the internal rate of return from the Boreole Project was around 106%. The
return generated from the project is much higher than the required rate of return. However,
the investment assessment tools helps the investor is assessing the crucial data by
incorporating various factors and conditions into account. It is easier for the investor for
assessing the financial viability and visibility when the return or cash flows are reflected in
percentage terms it becomes easier for the purpose of comparison to the investors (Daunfeldt
and Hartwig 2014).
Capital Budgeting Analysis
Particulars Landfill Boreole
Initial Investment (Year 0) -1,00,000 -2,50,000
Inflow Year 1 1,60,000 3,00,000
Inflow Year 2 1,60,000 3,00,000
Inflow Year 3 1,60,000 3,00,000
Inflow Year 4 1,60,000
Inflow Year 5 1,60,000
Inflow Year 6 1,60,000
Required Rate of Return 12% 12%
Net Present Value 498058 420133
Internal Rate of Return 159% 106%

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Variable Required Rate of Return
The require return reflects the minimum set of return required by the shareholders of
the company from a project within given set of time period and after assessing the cash flows
of the project. The change in required rate of return from 12% to 14% will affect the
profitability from the project and the overall return generated from the project. The increase
in the required arte shows that the investors of the company views the project risk to be
greater than optimal stage in terms of the cash flows and the timing of cash flows. The
analysis of the investment project was evaluated after incorporating the 14% required return
and the relevant analysis for the company was done in respect to the same. The Net Present of
the Project declined as the required rate of return from the project changed (Rossi 2015).
Capital Budgeting Analysis
Particulars Landfill Boreole
Initial Investment (Year 0) -1,00,000 -2,50,000
Inflow Year 1 1,60,000 3,00,000
Inflow Year 2 1,60,000 3,00,000
Inflow Year 3 1,60,000 3,00,000
Inflow Year 4 1,60,000
Inflow Year 5 1,60,000
Inflow Year 6 1,60,000
Required Rate of Return 14% 14%
Net Present Value 458059 391658
Internal Rate of Return 159% 106%
Recommendations
The above analysis conducted for the project was based on various assessment tools
for analysing the financial viability of the project. It is essential for evaluating the correct
project and the same should be done after analysing and evaluating the investment project
from various investment assessment tools (Levi and Welch 2014). The Net Present Value

12BANKING AND FINANCE
from a project is considered to be ore superior to the Internal rate as the project considers the
reinvestment rate of return which is close to the required rate of return. The NPV has a
superiority over the IRR method when the cash flows from a project is non-normal. The NPV
and IRR would offer different recommendation when the cash flows are not normal from a
project and when the timing of the cash flows of the project are not normal in the project. The
Net Present value is considered to be more superior than the IRR as the NPV method
considers the shareholders wealth creation approach and is solely based on the decision of
accepting or rejecting a project based on the accepting a rejecting a project. The same
concepts has been applied while evaluating the two project and relevant recommendation
were made.
Conclusion
The key banking stocks in the banking industry and the evolution of the share price of
companies in the last five years in these industries were evaluated. The evolution of the share
price of the banking stocks were evaluated and the material changes has been taken into
consideration for the purpose of analysis. The influence of share prices by the recent event
held by the Royal Commission of Australia on banks like AMP, CBA and NAB was taken
into analysis. The Capital Budgeting is an investment appraisal and the same was applied for
evaluating the financial viability and visibility of a project. The financial viability of the
project was done on behalf of Prospects Ltd for evaluating the best investment project for the
company. The NPV from the Landfill project was considered to be more stable and higher
and the same should be selected rather than the Boreole Project.

13BANKING AND FINANCE
Reference
Andor, G., Mohanty, S.K. and Toth, T., 2015. Capital budgeting practices: A survey of
Central and Eastern European firms. Emerging Markets Review, 23, pp.148-172.
Ballings, M., Van den Poel, D., Hespeels, N. and Gryp, R., 2015. Evaluating multiple
classifiers for stock price direction prediction. Expert Systems with Applications, 42(20),
pp.7046-7056.
Burns, R. and Walker, J., 2015. Capital budgeting surveys: the future is now.
Chittenden, F. and Derregia, M., 2015. Uncertainty, irreversibility and the use of ‘rules of
thumb’in capital budgeting. The British Accounting Review, 47(3), pp.225-236.
Daunfeldt, S.O. and Hartwig, F., 2014. What determines the use of capital budgeting
methods?: Evidence from Swedish listed companies. Journal of Finance and
Economics, 2(4), pp.101-112.
Idawati, W. and Wahyudi, A., 2015. Effect of earning per shares (EPS) and return on assets
(ROA) against share price on coal mining company listed in Indonesia stock
exchange. Journal of Resources Development and Management, 7, pp.79-91.
Lashgari, Z. and Ahmadi, M., 2014. The impact of dividend policy on stock price volatility in
the Tehran stock exchange. Kuwait Chapter of the Arabian Journal of Business and
Management Review, 3(10), p.273.
Levi, Y. and Welch, I., 2014. Long-term capital budgeting. Unpublished working paper,
Anderson Graduate School of Management, UCLA.
Milosevic, N., 2016. Equity forecast: Predicting long term stock price movement using
machine learning. arXiv preprint arXiv:1603.00751.

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Patel, M.B. and Yalamalle, S.R., 2014. Stock price prediction using artificial neural
network. International Journal of Innovative Research in Science, Engineering and
Technology, 3(6), pp.13755-13762.
Rossi, M., 2014. Capital budgeting in Europe: confronting theory with practice. International
Journal of Managerial and Financial Accounting, 6(4), pp.341-356.
Rossi, M., 2015. The use of capital budgeting techniques: an outlook from
Italy. International Journal of Management Practice, 8(1), pp.43-56.
Stephen, E.A. and Okoro, E.G., 2014. Determinants of Stock Price Movement in Nigeria:
(Evidence from the Nigerian Stock Exchange). Journal of Economics and Sustainable
Development, 5(3), pp.1-7.
Vijitha, P. and Nimalathasan, B., 2014. Value relevance of accounting information and share
price: A study of listed manufacturing companies in Sri Lanka. Merit Research Journal of
Business and Management, 2(1), pp.1-6.
Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis.
Cambridge University Press.
Finance.yahoo.com. (2019). Yahoo Finance. [online] Available at:
https://finance.yahoo.com/quote/AMP.AX/history?p=AMP.AX [Accessed 8 Jan. 2019].
Zhang, Q., Huang, X. and Zhang, C., 2015. A mean-risk index model for uncertain capital
budgeting. Journal of the Operational Research Society, 66(5), pp.761-770.

15BANKING AND FINANCE
Appendix Date AMP CBA NAB
31-01-2014 4.83 74.2577 33.0476
28-02-2014 4.98 77.0227 33.7325
31-03-2014 5.05 78.4748 33.5803
30-04-2014 5.29 81.1503 31.8584
31-05-2014 5.3 80.4442 31.183
30-06-2014 5.49 83.2987 33.5993
31-07-2014 5.88 80.8818 33.4851
31-08-2014 5.46 74.8843 30.9547
30-09-2014 5.85 80.0463 33.2854
31-10-2014 5.64 80.285 31.0118
30-11-2014 5.5 85.1885 31.9631
31-12-2014 5.77 88.8486 33.8942
31-01-2015 6.7 91.4247 36.0536
28-02-2015 6.44 92.8967 36.6719
31-03-2015 6.44 88.3911 34.9787
30-04-2015 6.66 84.6315 33.1149
31-05-2015 6.02 84.6712 32.1404
30-06-2015 6.61 87.0882 33.5491
31-07-2015 5.95 76.36 30.0755
31-08-2015 5.56 72.72 28.9273
30-09-2015 5.73 76.73 29.0913
31-10-2015 5.81 79.43 28.358
30-11-2015 5.83 85.53 29.1396
31-12-2015 5.37 78.67 26.6888
31-01-2016 5.32 70.14 24.19
29-02-2016 5.79 74.92 26.24
31-03-2016 5.88 73.89 27.19
30-04-2016 5.64 77.43 27.15
31-05-2016 5.16 74.37 25.43
30-06-2016 5.81 77.35 26.54
31-07-2016 5.26 71.81 27.34
31-08-2016 5.28 72.4 27.87
30-09-2016 4.57 73.39 28
31-10-2016 4.7 78.65 28.93
30-11-2016 5.04 82.41 30.67
31-12-2016 5 81.66 30.33
31-01-2017 4.88 82.32 31.99
28-02-2017 5.18 85.91 33.34
31-03-2017 5.36 87.4 34
30-04-2017 5.05 79.65 30.12
31-05-2017 5.19 82.81 29.59
30-06-2017 5.39 83.73 29.95
31-07-2017 5.1 75.8 30.2
31-08-2017 4.83 75.25 31.5
30-09-2017 4.97 77.63 32.66
31-10-2017 5.11 79.43 29.59
30-11-2017 5.19 80.34 29.57
31-12-2017 5.25 78.87 29.13
31-01-2018 5.29 76.39 30.18
28-02-2018 4.99 72.31 28.49
31-03-2018 4.04 71.82 28.95
30-04-2018 3.9 69.3 26.8
31-05-2018 3.56 72.87 27.41
30-06-2018 3.4 74.79 28.33
31-07-2018 3.34 71.24 28.37
31-08-2018 3.19 71.41 27.81
30-09-2018 2.47 69.23 25.21
31-10-2018 2.43 71.23 24.64
30-11-2018 2.45 72.39 24.07
31-12-2018 2.51 72.57 24.22
Share Price Evolution

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Date Close Date Close Date Close
31-12-2013 null 31-12-2013 null 31-12-2013 null
31-01-2014 4.83 31-01-2014 74.2577 31-01-2014 33.0476
28-02-2014 4.98 28-02-2014 77.0227 28-02-2014 33.7325
31-03-2014 5.05 31-03-2014 78.4748 31-03-2014 33.5803
30-04-2014 5.29 30-04-2014 81.1503 30-04-2014 31.8584
31-05-2014 5.3 31-05-2014 80.4442 31-05-2014 31.183
30-06-2014 5.49 30-06-2014 83.2987 30-06-2014 33.5993
31-07-2014 5.88 31-07-2014 80.8818 31-07-2014 33.4851
31-08-2014 5.46 31-08-2014 74.8843 31-08-2014 30.9547
30-09-2014 5.85 30-09-2014 80.0463 30-09-2014 33.2854
31-10-2014 5.64 31-10-2014 80.285 31-10-2014 31.0118
30-11-2014 5.5 30-11-2014 85.1885 30-11-2014 31.9631
31-12-2014 5.77 31-12-2014 88.8486 31-12-2014 33.8942
31-01-2015 6.7 31-01-2015 91.4247 31-01-2015 36.0536
28-02-2015 6.44 28-02-2015 92.8967 28-02-2015 36.6719
31-03-2015 6.44 31-03-2015 88.3911 31-03-2015 34.9787
30-04-2015 6.66 30-04-2015 84.6315 30-04-2015 33.1149
31-05-2015 6.02 31-05-2015 84.6712 31-05-2015 32.1404
30-06-2015 6.61 30-06-2015 87.0882 30-06-2015 33.5491
31-07-2015 5.95 31-07-2015 76.36 31-07-2015 30.0755
31-08-2015 5.56 31-08-2015 72.72 31-08-2015 28.9273
30-09-2015 5.73 30-09-2015 76.73 30-09-2015 29.0913
31-10-2015 5.81 31-10-2015 79.43 31-10-2015 28.358
30-11-2015 5.83 30-11-2015 85.53 30-11-2015 29.1396
31-12-2015 5.37 31-12-2015 78.67 31-12-2015 26.6888
31-01-2016 5.32 31-01-2016 70.14 31-01-2016 24.19
29-02-2016 5.79 29-02-2016 74.92 29-02-2016 26.24
31-03-2016 5.88 31-03-2016 73.89 31-03-2016 27.19
30-04-2016 5.64 30-04-2016 77.43 30-04-2016 27.15
31-05-2016 5.16 31-05-2016 74.37 31-05-2016 25.43
30-06-2016 5.81 30-06-2016 77.35 30-06-2016 26.54
31-07-2016 5.26 31-07-2016 71.81 31-07-2016 27.34
31-08-2016 5.28 31-08-2016 72.4 31-08-2016 27.87
30-09-2016 4.57 30-09-2016 73.39 30-09-2016 28
31-10-2016 4.7 31-10-2016 78.65 31-10-2016 28.93
30-11-2016 5.04 30-11-2016 82.41 30-11-2016 30.67
31-12-2016 5 31-12-2016 81.66 31-12-2016 30.33
31-01-2017 4.88 31-01-2017 82.32 31-01-2017 31.99
28-02-2017 5.18 28-02-2017 85.91 28-02-2017 33.34
31-03-2017 5.36 31-03-2017 87.4 31-03-2017 34
30-04-2017 5.05 30-04-2017 79.65 30-04-2017 30.12
31-05-2017 5.19 31-05-2017 82.81 31-05-2017 29.59
30-06-2017 5.39 30-06-2017 83.73 30-06-2017 29.95
31-07-2017 5.1 31-07-2017 75.8 31-07-2017 30.2
31-08-2017 4.83 31-08-2017 75.25 31-08-2017 31.5
30-09-2017 4.97 30-09-2017 77.63 30-09-2017 32.66
31-10-2017 5.11 31-10-2017 79.43 31-10-2017 29.59
30-11-2017 5.19 30-11-2017 80.34 30-11-2017 29.57
31-12-2017 5.25 31-12-2017 78.87 31-12-2017 29.13
31-01-2018 5.29 31-01-2018 76.39 31-01-2018 30.18
28-02-2018 4.99 28-02-2018 72.31 28-02-2018 28.49
31-03-2018 4.04 31-03-2018 71.82 31-03-2018 28.95
30-04-2018 3.9 30-04-2018 69.3 30-04-2018 26.8
31-05-2018 3.56 31-05-2018 72.87 31-05-2018 27.41
30-06-2018 3.4 30-06-2018 74.79 30-06-2018 28.33
31-07-2018 3.34 31-07-2018 71.24 31-07-2018 28.37
31-08-2018 3.19 31-08-2018 71.41 31-08-2018 27.81
30-09-2018 2.47 30-09-2018 69.23 30-09-2018 25.21
31-10-2018 2.43 31-10-2018 71.23 31-10-2018 24.64
AMP CBA NAB