Banking and Finance: Share Price Analysis and Capital Budgeting

This article provides an analysis of the share price of AMP and CBA, and how the Royal Commission has affected systematic and unsystematic risk. It also includes a capital budgeting analysis of two projects, including net present value and internal rate of return calculations.

Running head: BANKING AND FINANCE
Banking and Finance
Name of the Student:
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Table of Contents
Part A: AMP and CBA Share Price...........................................................................................2
1. Indicating the current share price of AMP and CBA, while detecting the evolvement
conducted in the past five years:................................................................................................2
2. Indicating how the Royal Commission inquiring into the activities of financial institutions
in Australia affect systematic (market) risk and unsystematic (firm-specific) risk and
explaining how the news reported from the Royal Commission have moved the share price of
AMP and CBA:..........................................................................................................................4
Part B: Capital Budgeting..........................................................................................................6
1. Distinguishing between the required rate of return and internal rate of return (IRR):..........6
2. Determining the net present value of both the projects, which indicating whether they
should be accepted:....................................................................................................................7
3. Determining the IRR for each of the project and detecting whether it should be accepted:..8
4. Indicating whether change in conclusion will be conducted if the overall required rate of
return decreases to 10%:..........................................................................................................10
5. Indicating under what circumstance the IRR and NPV will offer different
recommendations:....................................................................................................................11
References and Bibliography:..................................................................................................13

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Part A: AMP and CBA Share Price
1. Indicating the current share price of AMP and CBA, while detecting the evolvement
conducted in the past five years:
Figure 1: Depicting the share price of AMP for last five years
(Source: Au.finance.yahoo.com 2018)
The current share price of AMP is mainly at the levels of 3.14, where the company’s
overall share price has changed over the period of five fiscal year. The decline in share price
has been witnessed due to the reduction in valuation of the company. The reduction in
financial performance of AMP has mainly initiated the decline in share price of the
organisation, where financial condition has reduced exponentially leading to the reduction in
their current share valuation. The overall share price of the company has mainly increased
from 2014 to 2015, while the decline has been initiated after 2015 March. The share value of
the organisation has been declining since 2015, where the values have declined from the
levels of 6.5 to 3.14 (Au.finance.yahoo.com 2018). The decline in the overall share value
directly indicated a down trend for the organisation, which is continuously motivating the
shareholders to sell it shares. The overall high made by the organisation during the financial

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year of 2015 has not been broken, while lower lows has been obtained by the stock. Tougher,
Hanson and Goodman (2017) indicated that investor use the stock charts for understanding
the current trend of the organisation and determine whether they can generate high level of
returns from investment.
Figure 1: Depicting the share price of CBA for last five years
(Source: Au.finance.yahoo.com 2018)
The share price movement of Commonwealth Bank of Australia is relevantly depicted
in the above figure, which indicates the overall shar price movement of the company. In
addition, the company’s share price has been witnessing volatility, where no specific trend is
been detected from the evaluation. The share price of the company is relevantly having a
support line within the price range of 71.50 to 70, as the pricing structure has bounced the
value back up since past 5 years. the fiscal year of 2014 mainly witnessed a sudden increment
in the overall share value, where the price increased from the level of 72 to 98, which was
initiated with the high financial performance of the organisation. However, after reaching the
high of 98 the share price declined rapidly towards 71 during the financial year of 2015. This
decline in the current share price valuation directly indicates the low financial performance of
the company. During the period of 2016 the share price valuation of the company mainly

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traded within a range of 71 to 88, which was due to the deteriorating financial performance of
the company. the current share price value of Commonwealth Bank is mainly at the levels of
71.50, where the current trend of the stock cannot be determined. However, after the break of
the five-year support line the downtrend will be initiated, where share price structure will
decay due to the reducing financial performance of Commonwealth Bank. In this context,
Sharma et al. (2016) mentioned that investors using the technical analysis are able to
understand the investment opportunities present within a stock, which helps them to
maximise the level of income from investment.
2. Indicating how the Royal Commission inquiring into the activities of financial
institutions in Australia affect systematic (market) risk and unsystematic (firm-specific)
risk and explaining how the news reported from the Royal Commission have moved the
share price of AMP and CBA:
The Royal Commission assigned by the Australian regulators have direct impact on
the current operations of the financial institutions present in Australia. The commission is
assigned to analyse the misconduct in banking sector, superannuation, and financial services
industry, which has been operating in Australia. This commission is mainly assigned to
identify the loopholes, which are present in the current operations of the financial
organisations. The responsibility of the Royal Commission is to detect the level of
problematic conditions, which is being faced by the financial organisations. This is directly
affecting both the systematic and unsystematic risk of the financial organisation, as investors
are concerned that the unethical measures conducted by the banking companies can surface.
This relevantly increases the level of systematic and unsystematic risk involved in
investment, which might negatively affect the return generation capability of the investor. In
addition, the systematic and unsystematic risk of the financial organisations relevantly

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increases due to the possibility of wrong doings conducted by the management
(Theguardian.com 2018).
The market (systematic) risk is relevantly on the rise, as the uncertainty within the
investors is on the rise. The banking companies involved in the evaluation process of the
Royal Commission are among the four largest banks operating within Australia, which
increases the concern for investors and portrays the question of an unethical measures, which
have been conducted by the management. The unsystematic (firm specific) risk is also
considered to be high and us negative affecting the lively hoods of citizens. The Royal
Commission was mainly established by the governor-general of Commonwealth for revealing
the malpractices, which has been conducted by the financial services that ruined lives of
citizens. The detection of malpractices within the operations of the banking companies will
directly increase both systematic and unsystematic risk (Theguardian.com 2018).
The share price of AMP and CBA has mainly declined after the Royal Commission
has been assigned, as relevant news regarding the manipulation conducted by both the
financial organisations are declared by the commission. The scandal was unfolded by the
Royal Commission regarding the operations of AMP, where the financial institution was
charging high fees for their super account. This disclosure directly indicated the loopholes in
the management, where AMP disclosed about the paying a compensation of $5 million to
almost 50,000 superannuation fund members. Therefore, the disclosers conducted by the
Royal Commission is directly affecting the share price valuation of the company, as the
fraudulent activities are being highlighted. Hence, the decline in share price of the
organisation can be witnessed in figure 1, which was initiated from the state of 2018
February, where the relevant news was disclosed by the Royal Commission
(Theguardian.com 2018).

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The Royal Commission also disclosed about the criminal offences which was being
conducted by CBA. These allegations were conducted by CBA where the relevant
information regarding the current unethical practices conducted by the management was
disclosed. The future reports of the Royal Commission will hold the relevant information,
which is needed for the disclosure of unethical activities conducted by CBA
(Theguardian.com 2018).
Part B: Capital Budgeting
1. Distinguishing between the required rate of return and internal rate of return (IRR):
There are major differences between the required rate of return and internal rate of
return, as they have different level of usage, which are conducted by company is deriving the
financial significance of the proposed project. Baum and Crosby (2014) mentioned that
internal rate of return is conducted to be one the major component of the investment appraisal
techniques, which are used by company to analyse the current financial performance of the
project. Th major differences between the internal rate of return and required rate of return
are depicted as follows.
 The first and foremost difference between the internal rate of return and required rate of
return is its usage, which needs to be conducted by the company in deriving the accurate
result. The organisation uses the internal rate of return calculation to determine the level
of minimum returns, which the project can provide during its life time. On the other hand,
the required rate of return is used as the minimum level of return that the project needs to
provide over the period of time (Li and Trutnevyte 2017).
 The second major difference between eh required return and internal rate of return is the
usage for determining the financial viability of the project. The required rate of return is

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mainly used in the calculation of net present value, which depicts the financial
performance of the project. In addition, the required rate of return is mainly calculated for
addressing the time value of money and is used for determining the present value of the
future cash inflows. However, the internal rate of return needs to be higher than the
required rate of return of the project, which is a minimum criteria for each project
(Lokman et al. 2017).
2. Determining the net present value of both the projects, which indicating whether they
should be accepted:
Year Project X Discounting rate Dis-cash flow
0 $ (300,000) 1.00 $ (300,000.00)
1 $ 80,000 0.89 $ 71,428.57
2 $ 140,000 0.80 $ 111,607.14
3 $ 130,000 0.71 $ 92,531.43
4 $ 160,000 0.64 $ 101,682.89
Discounted rate 12%
NPV $ 77,250.04
The above table represents the overall net present value calculation of Project X,
which directly indicates the level of income, which can be generated by the project over the
period of four years. The calculation directly indicates that the current net present value is
mainly at the levels of $77,250.04, which is depicted in the above table. The discount rate of
12% is taken into consideration in the above table for determining the level of returns, which
can be generated from an investment.
Year Project Y Discounting rate Dis-cash flow
0 $ (300,000) 1.00 $ (300,000.00)

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1 $ 160,000 0.89 $ 142,857.14
2 $ 160,000 0.80 $ 127,551.02
3 $ 160,000 0.71 $ 113,884.84
4 $ 160,000 0.64 $ 101,682.89
5 $ 160,000 0.57 $ 90,788.30
6 $ 160,000 0.51 $ 81,060.98
Discounted rate 12%
NPV $ 357,825.17
The calculation depicted in the above table directly indicates the level of net present
value for Project Y, which is mainly at the levels of $357,825.17. The calculation has been
conducted for 6 years, where the overall cash inflows has been stable, which might help in
generating high level of income. From the evaluation of both Project X and Project Y the
financial viability of Project Y is considered to be high, which would eventually raise the
level of income for the company. Warren and Seal (2018) mentioned that with the help of net
present valuation calculation companies are able to segregate predicts and select the suitable
investment opportunity, which can improve their firm value in future.
3. Determining the IRR for each of the project and detecting whether it should be
accepted:
Year Project X
0 $ (300,000)
1 $ 80,000
2 $ 140,000
3 $ 130,000
4 $ 160,000
Internal Rate of Return 23%

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The calculation of internal rate of return is mainly calculated at the above table, which
depicts that the project will provide an internal rate of return value of 23%. The internal rate
of return value is higher than the required rate of return, which indicates the positive
valuation of the project in proving high returns from investment.
Year Project Y
0 $ (300,000)
1 $ 160,000
2 $ 160,000
3 $ 160,000
4 $ 160,000
5 $ 160,000
6 $ 160,000
Internal Rate of Return 48%
The calculation presented in the above table also depicts the internal rate of return
value, which can help in depicting the performance that can generate high income from
investment. The internal rate of return for Project Y is mainly at the levels of 48%, which is
way higher than the current required rate of return of 12%. The evaluation of the relevant
calculation directly indicates that from the two proposals Project Y need to be selected, as its
overall internal rate of return is higher for the organisation. Hence, selecting Project Y will
eventually allow the company to improve their return generation capability. Shortall et al.
(2016) mentioned that internal rate of return calculation directly allows the managers of the
organisation to detect the project with the highest internal rate of return generation capability.

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4. Indicating whether change in conclusion will be conducted if the overall required rate
of return decreases to 10%:
Year Project X Discounting rate Dis-cash flow
0 $ (300,000) 1.00 $ (300,000.00)
1 $ 80,000 0.91 $ 72,727.27
2 $ 140,000 0.83 $ 115,702.48
3 $ 130,000 0.75 $ 97,670.92
4 $ 160,000 0.68 $ 109,282.15
Discounted rate 10%
NPV $ 95,382.83
The changes in the overall discounting rate or required rate of return of the project has
mainly helped in raising the level of NPV values. The discounted rate is used for detecting
present value of the future cash flows that has been generated by the project. This decline in
required rate of return from 12% to 10% has mainly increased the NPV from $77,250.04 to
$95,382.83.
Year Project Y Discounting rate Dis-cash flow
0 $ (300,000) 1.00 $ (300,000.00)
1 $ 160,000 0.91 $ 145,454.55
2 $ 160,000 0.83 $ 132,231.40
3 $ 160,000 0.75 $ 120,210.37
4 $ 160,000 0.68 $ 109,282.15
5 $ 160,000 0.62 $ 99,347.41
6 $ 160,000 0.56 $ 90,315.83
Discounted rate 10%

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NPV $ 396,841.71
The calculations that has been conducted in the above table represents the overall net
present value of Project Y, which might help in improving the level of income from
investment. The overall reduction in the current discount rate of Project Y has mainly
increased its net present value from $357,825.17 to $396,841.71. This increment in the
overall net present value directly portrays the level of income, which can be generated from
investment (Almarri and Blackwell 2014). Therefore, from the evaluation it can be detected
that the decline in overall required rate of return from 12% to 10% will have no impact on the
decisions for selecting the level project for the organisation. The overall net present value of
Project Y is relevantly high than Project X.
5. Indicating under what circumstance the IRR and NPV will offer different
recommendations:
The alteration in the IRR and NPV recommendation can be conducted under different
circumstances, where the overall financial viability project cannot be detected. The
alternations in the expected rate of return of the project will directly have negative impact on
the overall valuation of NPV value, while the IRR of the project will remain same. This
directly indicates that the recommendations of the project will change for NPV, while the
IRR valuation will remain same. The second measure which will alternate the
recommendation of IRR and NPV is the variation of the cash outflow timing, where the
recommendations of the NPV will not alter, while IRR will depict multiple or negative
values. Hence, under the circumstance of variation in timing of the cash flow the IRR
valuation will have alternative output. The third factor, where the recommendations of IRR
and NPV differ is the tenure of the project (Oesterreich and Teuteberg 2018). The values

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depicted for IRR will relevant change with the alternation of the project life, while it depicts
the accurate internal rate of returns, which is being provided by the project. Therefore, IRR
recommendation can be different from the NPV, as NPV aims in discounting the cash inflows
of the project, while IRR represents the internal rate of return depicted by the project. Thus,
under the above-mentioned situations the overall recommendation depicted by the NPV can
differ from the IRR results.

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Li, F.G. and Trutnevyte, E., 2017. Investment appraisal of cost-optimal and near-optimal
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Lokman, S., Volker, D., Zijlstra-Vlasveld, M.C., Brouwers, E.P., Boon, B., Beekman, A.T.,
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care for sick-listed employees: health-economic investment appraisal alongside a cluster
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Oesterreich, T.D. and Teuteberg, F., 2018. Looking at the big picture of IS investment
appraisal through the lens of systems theory: A System Dynamics approach for understanding
the economic impact of BIM. Computers in Industry, 99, pp.262-281.
Sharma, A., Fix, B.V., Delnevo, C., Cummings, K.M. and O'Connor, R.J., 2016. Trends in
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Warren, L. and Seal, W., 2018. Using investment appraisal models in strategic negotiation:
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