Banking and Finance: Share Price, Capital Budgeting and Risk Analysis

This article discusses the share price trend of AMP and CBA, implications of Royal Commission enquiry on systematic and unsystematic risk of financial institutions, and capital budgeting techniques such as IRR, RRR, and NPV. It also explains the differences between IRR and RRR, and depicts the calculation of NPV and IRR for Project X and Project Y. The article concludes with the calculation of changes in NPV with the decline in required rate of return by 10%, while determining any changes in the current decision.

Running head: BANKING AND FINANCE
Banking and Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Part A: AMP and CBA Share Price...........................................................................................2
1. Understanding the share price of CBA and AMP, whereas detecting their trend for past
five years:...................................................................................................................................2
2. Understanding the implications that Royal Commission enquiry has on systematic and
unsystematic risk of financial institutions, while detecting the share price movement of both
AMP and CBA with the reports of Royal Commission:............................................................4
Part B: Capital Budgeting..........................................................................................................6
1. Detecting the differences between the internal rate of return and required rate of return:....6
2. Understanding and calculating the current NPV value of Project X and Project Y:.............6
3. Calculating and detecting the internal rate of return of Project X and Project Y:.................7
4. Calculating the changes in NPV with the decline in required rate of return by 10%, while
determining any changes in the current decision:......................................................................8
5. Depicting the conditions under which Net Present Value and Internal Rate of Return offers
alternative recommendations:....................................................................................................9
References and Bibliography:..................................................................................................11

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Part A: AMP and CBA Share Price
1. Understanding the share price of CBA and AMP, whereas detecting their trend for
past five years:
Figure 1: Share price trend of AMP for last five years
(Source: Au.finance.yahoo.com 2018)
The share price movement of AMP Limited is relevant depicted in the above figure,
where the changes in values can be seen. In addition, the current share price of the
organisation is mainly at the levels of 3.17 as of 19-09-2018, which depicts their declining
trend. Therefore, from the evaluation it is also understood that the shar price of the company
was mainly rising during the financial year of 2014, while the decline started after the
augmentation of 2015 (Viney and Phillips 2015). This decline in the current operations of the
organisation was the main reasons behind the deterioration of the share price. The pricing
also indicate that the current share price movement of the company is mainly in down trend,
as now higher highs has been achieved since 2015, while lower lows has been attained. This
is an indication where the current shar price valuation of the organisation is declining due to
its overall performance. However, the decline since 2017 is steeper, which has incurred due

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to the augmentation of the Royal Commission that was assigned to view the current unethical
practices conducted in financial sectors. The new related to the current operations of AMP
has mainly declined its share values, as the company has been engulfed in unethical practices,
which was partially disclosed by the Royal Commission. On the contrary, Chandra (2017)
argued that investor using the technical analysis is not able to comprehend the investment
opportunity, which is detected from fundamental analysis.
Figure 1: Share price trend of CBA for last five years
(Source: Au.finance.yahoo.com 2018)
The current share price value of Commonwealth Bank is mainly at the levels of 72.09,
which has relevantly fallen from the highs of 96.08 achieved in 2015. However, increment in
valuation of the company was mainly at the levels of 73.08 during the start of 2014, while it
achieved the highs of 96.08 in 2015. This increment in share price was only witnessed once,
while rapid decline in the share price can be seen during the financial year of 2015. Since
2015 the share price of Commonwealth Bank has mainly declined exponentially, where the
support is seen within the levels of 70. The share price of the organisation has relevantly
increased during the financial year of 2017, while the disclosures conducted by the Royal
Commission directly have negative impact on valuation of the organisation. The share price

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valuation of the organisation has declined abruptly during the period of 2017, which indicates
the low valuation that has been conducted by the organisation. In this context, Edwards,
Magee and Bassetti (2018) mentioned that investors with the use of charts able to understand
the current trend of a share, which can be help in improving the level of income from
investment. Therefore, furthered decline in values of CBA below the price level of 70 will
indicate an initiation of a new downtrend.
2. Understanding the implications that Royal Commission enquiry has on systematic
and unsystematic risk of financial institutions, while detecting the share price
movement of both AMP and CBA with the reports of Royal Commission:
The Royal Commission was assigned during the fiscal year of 2017 for analysing the
current unethical practices, which are being conducted by the financial sector companies. The
results that is intended by the Royal Commission will directly have negative impact on the
performance of financial sector companies. This relevantly raises the level of concern for the
financial sector companies, as both the systematic and unsystematic risk has relevantly
increased for the financial institutions (Theguardian.com 2018). The rising concern for the
unethical measures, which were conducted by the financial sector companies was highlighted
by the Royal Commission. This relevantly raises the level of systematic (market) and
unsystematic (firm-specific) risk, present with the capital market. The rising concern for the
financial sector companies will directly affect the overall capital market and raises the
concern for price fluctuations. On the other hand, the rising concern for the financial sector
and the detection of unethical practises, which are being conducted raises the level of firm
specific risk and negatively affects the share price value of the companies.
AMP limited:

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The shar price movement of AMP Limited is directly influenced by the results and
disclosures, which are being conducted by the Royal Commission. In addition, the AMP
Limited share price has mainly declined during the financial year of 2018 due to the
disclosures of the scandal, which is being conducted by the Royal Commission. This directly
altered share price of AMP limited during the disclosures, where the share price declined
from the level of 5.43 to the current share price. This decline is directly reflecting the level of
unethical measures, which was being conceited by the company over the period. This
discloser contained the extra charges, which was imposed by AMP on their superannuation
fund investors. the compensation of $5 million was mainly distributed to 50,000
superannuation fund investors to comply with the unethical measures made previously by the
management. This disclosure directly reflected the problematic management decisions, which
were conducted in the organisation (Theguardian.com 2018).
Commonwealth Bank:
The disclosures that is being conducted by the Royal Commission against the current
operations of Commonwealth Bank are also raising concern for the investors and reducing tis
share valuation. In addition, the disclosures conducted during the fiscal year of 2017 and
2018 directly reflects the level of share price decline, which was conducted for
Commonwealth Bank. The Royal Commission has conducted allegations regarding the
current manipulations, which was being conducted by Commonwealth Bank. The Royal
Commission has adequately depicted that CBA has conducted malpractices in their
operations, which was going to be disclosed in future (Theguardian.com 2018).

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Part B: Capital Budgeting
1. Detecting the differences between the internal rate of return and required rate of
return:
The concept of IRR (Internal Rate of Return) and RRR (Required Rate of Return) has
some dissimilarities, which can be detected as follows.
 The major difference between the IRR and RRR is its measure, which is used for
selecting the accurate project for investment. The use of IRR directly allows the
management to understand the level of returns, which can be provided by a single project.
On the contrary, the RRR is a percentage returns, which is used for calculating the NPV
of the project.
 The second major difference is the usage and output between the IRR and RRR, which
relevantly allows the company to select a financially secure investment scope. The output
of IRR is different for all the projects, as it is determined from the level of cash outflows
and inflows conducted by the project. However, the RRR for each project is same, as the
organisation needs to evaluate different NPV value of the projects (Li and Trutnevyte
2017).
 The last difference between eh IRR and RRR is its significance, which allows the
company to detect the accurate project for improving their current financial progress. The
RRR is mainly assumed by the company to evaluate the projects survival conditions,
while IRR is absolute, where the cash inflows and outflows remaining constant.
2. Understanding and calculating the current NPV value of Project X and Project Y:
Project X
Year Cash Flow Discounting rate Dis-cash flow
Year 0 $ (300,000.0) 1.0 $ (300,000.0)

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Year 1 $ 80,000.0 0.9 $ 71,428.6
Year 2 $ 140,000.0 0.8 $ 111,607.1
Year 3 $ 130,000.0 0.7 $ 92,531.4
Year 4 $ 160,000.0 0.6 $ 101,682.9
Discounted rate 12.0%
NPV $ 77,250.0
Project Y
Year Cash Flow Discounting rate Dis-cash flow
Year 0 $ (300,000.0) 1.00 $ (300,000.0)
Year 1 $ 160,000.0 0.89 $ 142,857.1
Year 2 $ 160,000.0 0.80 $ 127,551.0
Year 3 $ 160,000.0 0.71 $ 113,884.8
Year 4 $ 160,000.0 0.64 $ 101,682.9
Year 5 $ 160,000.0 0.57 $ 90,788.3
Year 6 $ 160,000.0 0.51 $ 81,061.0
Discounted
rate 12%
NPV $ 357,825.2
The above table directly represents the level of Net Present Value of both Project X
and Project Y, which depicts the financial position of the investment. After evaluating the
calculation, it can be detected that the overall NPV value of Project Y should be selected as
the values is higher and allows the investor to generate high returns from investment (Warren
and Seal 2018). Therefore, project Y needs to be selected by the organisation for improving
their firm value in future.
3. Calculating and detecting the internal rate of return of Project X and Project Y:
Project X
Year Cash Flow
Year 0 $ (300,000.0)
Year 1 $ 80,000.0
Year 2 $ 140,000.0
Year 3 $ 130,000.0
Year 4 $ 160,000.0

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Internal Rate of
Return 22.56%
Project Y
Year Cash Flow
Year 0 $ (300,000.0)
Year 1 $ 160,000.0
Year 2 $ 160,000.0
Year 3 $ 160,000.0
Year 4 $ 160,000.0
Year 5 $ 160,000.0
Year 6 $ 160,000.0
Internal Rate of
Return 48.32%
The IRR calculation for both Project X and Project Y is depicted, which can help the
management in making accurate investment decisions. The calculations directly indicate that
the IRR of project Y is higher and can generate high level of income from investment. This
was mainly possible due to the high level of cash inflows, which is being conducted by
Project Y in comparison to Project X. Therefore, Project Y needs to be selected by the
company for obtaining high growth and returns in future.
4. Calculating the changes in NPV with the decline in required rate of return by 10%,
while determining any changes in the current decision:
Project X
Year Cash Flow Discounting rate Dis-cash flow
Year 0
$
(300,000.0) 1.00 $ (300,000.0)
Year 1 $ 80,000.0 0.91 $ 72,727.3
Year 2 $ 140,000.0 0.83 $ 115,702.5
Year 3 $ 130,000.0 0.75 $ 97,670.9
Year 4 $ 160,000.0 0.68 $ 109,282.2
Discounted rate 10%
NPV $ 95,382.8

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Project Y
Year Cash Flow Discounting rate Dis-cash flow
Year 0
$
(300,000.0) 1.00 $ (300,000.0)
Year 1 $ 160,000.0 0.91 $ 145,454.5
Year 2 $ 160,000.0 0.83 $ 132,231.4
Year 3 $ 160,000.0 0.75 $ 120,210.4
Year 4 $ 160,000.0 0.68 $ 109,282.2
Year 5 $ 160,000.0 0.62 $ 99,347.4
Year 6 $ 160,000.0 0.56 $ 90,315.8
Discounted rate 10%
NPV $ 396,841.7
The calculation conducted in the above table represent the alternative value of
required rate of return for both Project X and Project Y. This alternation in the discounting
rate does not have any impact on the current decision of selecting Project Y, as the overall
performance of the project is high in-comparison to Project X. The values depicted in the
above table represents that NPV value of Project is higher even with the alteration in the
current required rate of return, which directly indicates that choosing Project Y is beneficial
for the organisation. Bader et al. (2018) mentioned that with the use of investment appraisal
techniques, organisation are able to understand the current valuation of the projects.
5. Depicting the conditions under which Net Present Value and Internal Rate of Return
offers alternative recommendations:
The difference in recommendation of NPV and IRR is conducted under the following
circumstances.
 The recommendation will eventually change for NPV and IRR, when the organisation
uses a high required rate of return for their calculations. This alternation will not change
IRR values, while the values of the NPV will differ under such circumstances.

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 The cash flow timing will also have negative impact on the performance IRR, where the
alternations in the cash flow will alter the values of IRR and even lead it to negative
(Lindvall and Larsson 2017).
 The third alternations that can affect the recommendation of IRR and NPV the is tenure
of the project. The time taken by the company in completing the project will directly alter
the output of IRR and NPV, which will differ the recommendations for each project.

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