Finance and Banking

The aim of the assignment is to conduct a financial analysis on the banking industry and particularly there movement in the five year of trend analysis taken into consideration for evaluating the project. The first part of the assignment deals with share research of the key banking stocks like the AMP, CBA and NAB Bank. The impact on the share prices of the company after the enquiry of Royal Commission of Australia conducted the same. The second part of the assignment deals with the analysis of the capital budgeting of project. The analysis was done for Prospects Ltd and the relevant analysis of the company by applying investment assessment tools such as NPV and IRR for assessing the financial viability of the project.

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

1BANKING AND FINANCE
Executive Summary
The aim of the assignment is to conduct a financial analysis on the banking industry and
particularly there movement in the five year of trend analysis taken into consideration for
evaluating the project. The first part of the assignment deals with share research of the key
banking stocks like the AMP, CBA and NAB Bank. The impact on the share prices of the
company after the enquiry of Royal Commission of Australia conducted the same. The
second part of the assignment deals with the analysis of the capital budgeting of project. The
analysis was done for Prospects Ltd and the relevant analysis of the company by applying
investment assessment tools such as NPV and IRR 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
Royal Commisssion Enquiry..................................................................................................5
Analysis......................................................................................................................................6
Capital Budgeting...................................................................................................................6
Required Rate of Return and Internal Rate of Return............................................................6
Net Present Value...................................................................................................................6
IRR of Landfill and Borehole................................................................................................7
Cost of Capital........................................................................................................................8
Recommendations......................................................................................................................8
Conclusion..................................................................................................................................9
Reference..................................................................................................................................10

3BANKING AND FINANCE
Introduction
The banking is a crucial industry in the economy and the performance of the banking
company is dependent on major company’s performance. The analysis of the banking stocks
like AMP Bank, Commonwealth Bank and National Australia Bank were evaluated in the
five year trend period and the performance of the companies were assessed for the trend
period (Arthur 2018). The effect of share prices on several crucial events were identified and
the same were assessed to identify whether the same was because of the systematic risk or
because of the unsystematic risk associated with the company (Travlos, Trigeorgis and
Vafeas 2015). The second part of the assignment dealing in the analysis of the two
investment project on behalf of Prospects Ltd was carried for assessing the Landfill and
Boreole project. The key investment assessment tool applied for the evaluation of the project
was the Net Present Value and the Internal Rate of Return. Required rate of return plays a
crucial role in an investment project and the variation in the same will influence the
profitability from the project.
Research
AMP, CBA and NAB Share Price
The share price of the banking stocks like AMP Bank, Commonwealth Bank and
National Australia Bank were evaluated in the five year trend period. The five year trend
period taken into consideration for the evaluation of the share price of the companies was the
period from 2013-2018. The movement of the share price in the trend period was assessed
and the same has been taken into consideration for the graphical analysis (Gay 2016). The
share price of the AMP Bank has grown well in the year 2014-15 but after that we can
observes that the trend for the share price has been falling. The share price of the company
saw an almost 30% decline in October 2018 when the Royal Commission of Australia

4BANKING AND FINANCE
conducted enquiry on the charges raised against the bank. On an overall basis the share have
given a negative return in the trend period of five year analysed for the company (Asker,
Farre-Mensa and Ljungqvist 2014).
41 67 0
41 75 9
41 85 1
41 94 3
42 03 5
42 12 4
42 21 6
42 30 8
42 40 0
42 49 0
42 58 2
42 67 4
42 76 6
42 85 5
42 94 7
43 03 9
43 13 1
43 22 0
43 31 2
43 40 4
0
1
2
3
4
5
6
7
8
AMP Share Price
Date
SHARE PRICE
Figure 1: AMP Share Price
The share price of the Commonwealth Bank (CBA) was also taken into consideration
for the five year trend period and the relevant analysis of the company share price was
analysed during the trend period. The company has shown a stable and a consistent rate of
movement in the trend period analysed for the company. There was no major changes and
deviation seen in the trend period analysed for the company. However it is crucial to note that
the share price of the company has not shown a growing trend which it should have depicted
thereby reflecting shareholder’s wealth creation (Bekaert and Hoerova 2014).

5BANKING AND FINANCE
Figure 2: CBA Share Price
The share price of the National Australia Bank has also been volatile in the trend
period analysed for the company. The share price of the company has seen major volatility in
the year 2016 and in the year 2018 where the pricing movement range of the stock was
around 25-35 price level. The share price of the company was also affected when the banking
industry in Australia were said to be under scrutiny by the Royal Commission of Australia
(Adam, Marcet and Nicolini 2016).
Figure 3: National Australia Bank Share Price
4 1 6 7 0
4 1 7 5 9
4 1 8 5 1
4 1 9 4 3
4 2 0 3 5
4 2 1 2 4
4 2 2 1 6
4 2 3 0 8
4 2 4 0 0
4 2 4 9 0
4 2 5 8 2
4 2 6 7 4
4 2 7 6 6
4 2 8 5 5
4 2 9 4 7
4 3 0 3 9
4 3 1 3 1
4 3 2 2 0
4 3 3 1 2
4 3 4 0 4
0
20
40
60
80
100
CBA Share Price
date
share price
41670
41759
41851
41943
42035
42124
42216
42308
42400
42490
42582
42674
42766
42855
42947
43039
43131
43220
43312
43404
0
5
10
15
20
25
30
35
40
NAB SHare Price
date
share price

6BANKING AND FINANCE
Royal Commisssion Enquiry
The Royal Commission of Australia had conducted an enquiry on some of the major
banks of Australia for the charges raised against the banking companies. The banking
companies was charged with allegations like they were charging customers for the services
which were not provided by the banking institutions. The enquiry affected the stock of the
companies and it was due to the unsystematic risk or the risk which happened due to internal
factors of the companies. The share price of the companies are primarily affected by various
reasons and the same is also dependent on two common risk factors that is Systematic Risk
and Unsystematic risk (Waemustafa and Sukri 2016). The systematic risk is the risk
associated with the market or to the economy which is also called as external factors. The
unsystematic risk is an internal risk factor associated with the company which is primarily
within the industry in which the firm operates. The systematic risk of the banking companies
was found to be less in the stocks analysed above. The share price of AMP Bank saw an
almost 30% decline in October 2018 when the Royal Commission of Australia came out with
the report. The AMP bank was the most suffered in the banking industry whose shares saw a
drastic decline in the trend period. The Share price of the CBA Bank however did not see any
major changes like AMP and NAB the share price of the CBA though saw a decline of about
7% when the report came out. The National Australia Bank was also affected by the report of
the Royal Commission where the company report but the share price of the company has
been volatile throughout the trend period analysed for the company (Jordan 2014). The share
price of the company was affected by both external and internal factors that is both
systematic and unsystematic risk played a significant role in the share price movement of the
company. Thus, the investigation conducted by the Royal Commission affected all the major
banking stocks reflecting the company inability in maintain transparent business services
provided.

7BANKING AND FINANCE
Analysis
Capital Budgeting
The analysis of the Landfill and Borehole Project was evaluated by applying various
assessment tools like the Net Present Value and the Internal Rate of Return for the project.
The assessment tool was applied for the projects and the project with better financial viability
will be considered for the purpose of investment (Burns and Walker 2015).
Required Rate of Return and Internal Rate of Return
The required rate of return shows the opportunity cost of capital or the minimum set
of return desired by the investors from a project or from an investment. The required rate of
return is the minimum set of return required by the investor for the purpose of investment.
The required rate of return from a project is crucial input which is applied for assessing the
financial viability of the project. The return acts as a benchmark for assessing the investment
project. The higher the risk and the more uncertain the cash flows are from a project the
higher is the required rate of return from a project (Andor, Mohanty and Toth 2015).
The internal rate of return from project shows the return generated from a project after
incorporating all the cash inflows and cash outflows from a project. The Internal rate of
return shows the return generated by the project in terms of the percentage. The internal rate
of return is assessed by the investor for evaluating the financial viability of the project and the
accessibility of the same in the long-term. The financial viability of the project is assessed
with the help of the internal rate of return (Daunfeldt and Hartwig 2014).

8BANKING AND FINANCE
Net Present Value
The net present value shows the amount of profitability or the wealth the project will
create for the company given a minimum set of required rate of return for the project. The net
present value was evaluated for the Landfill and Borehole project after incorporating all the
Cash Inflows and the Cash outflows from the project and the relevant recommendation were
made for the project (Rossi 2015). The net present value for the Landfill project was
evaluated to be around 498058 AUD and the NPV for the Borehole project was evaluated for
420133 AUD. The key factor that was evaluated for determining the net present value was
the required rate of return that was applied while calculating the NPV. The return was taken
at 12% for determining the profitability of the project. The NPV from the Landfill project
was considerably higher than Borehole project and the same should be selected by the
Prospects Ltd for the purpose of the investment. The cash flows from the Landfill project was
also assessed to be at a steady and substantial.
IRR of Landfill and Borehole
The internal rate of return is assessed by the investor for evaluating the financial
viability of the project and the accessibility of the same in the long-term. The IRR of the
Landfill Project was evaluated to be around 159% and the IRR of the Borehole Project was
around 106%. The reason for having such a higher IRR than the cost of capital is that the
initial investment of the project is said to be acquired and met in the initial years (Malenko
2018).
Prospects Ltd
Particulars Landfill Boreole
(Year 0) -1,00,000 -2,50,000
Year 1 1,60,000 3,00,000
Year 2 1,60,000 3,00,000
Year 3 1,60,000 3,00,000
Year 4 1,60,000
Year 5 1,60,000

9BANKING AND FINANCE
Year 6 1,60,000
Required Rate of Return (Re) 12% 12%
Net Present Value (N.P.V) 498058 420133
Internal Rate of Return (IRR) 159% 106%
Cost of Capital
The cost of capital for the project is an important aspect and the same is dependent
after assessing the risk and the cash flows from the project. If the required rate of return from
the project changes from the current rate of 12% to around 14% then the final output that is
the profitability of the project will be affected from the same. The reassessment of the
profitability and the NPV, IRR from the project was reassessed from the project. The
changing required rate of return from a project may be seemed that the risk from the project
may have increased and the pattern of cash flows and the certainty regarding the cash flows
from a project might have hurt from a project (Kengatharan 2016).
Prospects Ltd
Particulars Landfill Boreole
(Year 0) -1,00,000 -2,50,000
Year 1 1,60,000 3,00,000
Year 2 1,60,000 3,00,000
Year 3 1,60,000 3,00,000
Year 4 1,60,000
Year 5 1,60,000
Year 6 1,60,000
Required Rate of Return (Re) 14% 14%
NPV 458059 391658
IRR 159% 106%

10BANKING AND FINANCE
Recommendations
The analysis of the Landfill project and Borehole project was evaluated with the help
of the investment assessment tools but the tools applied can give different set of opinion and
review. The investment assessment tool can give a varied opinion when the timing of the cash
flows and the pattern of the cash flows are not the same. The NPV is considered to be a better
assessment tool as the same considers all kind of cash flows and patterns and gives the
opinion in best interest of the shareholders of the company thereby accepting or rejecting a
project (Nurullah and Kengatharan 2015).
Conclusion
The analysis of the key banking stocks like AMP Bank, Commonwealth Bank and
National Australia Bank were evaluated in the five year trend period and the performance of
the companies were assessed for the trend period. The impact of share price due to external
factors were also analysed for the company and the same has been taken into consideration
for the analysis of the share price of the company. The analysis of the two investment project
on behalf of Prospects Ltd was carried for assessing the Landfill and Boreole project. The
landfill project was considered to be more stable and provide better returns than the Borehole
project and the same is seen to provide more stable returns. The application of NPV in
assessing the investment project is considered to be superior than the IRR method because of
the shareholder’s wealth maximisation approach taken into consideration by the investment
tool.

11BANKING AND FINANCE
Reference
Adam, K., Marcet, A. and Nicolini, J.P., 2016. Stock market volatility and learning. The
Journal of Finance, 71(1), pp.33-82.
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.
Arthur, W.B., 2018. Asset pricing under endogenous expectations in an artificial stock
market. In The economy as an evolving complex system II (pp. 31-60). CRC Press.
Asker, J., Farre-Mensa, J. and Ljungqvist, A., 2014. Corporate investment and stock market
listing: A puzzle?. The Review of Financial Studies, 28(2), pp.342-390.
Bekaert, G. and Hoerova, M., 2014. The VIX, the variance premium and stock market
volatility. Journal of Econometrics, 183(2), pp.181-192.
Burns, R. and Walker, J., 2015. Capital budgeting surveys: the future is now.
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.
Gay, R.D., 2016. Effect of macroeconomic variables on stock market returns for four
emerging economies: Brazil, Russia, India, and China. The International Business &
Economics Research Journal (Online), 15(3), p.119.
Jordan, B., 2014. Fundamentals of investments. McGraw-Hill Higher Education.
Kengatharan, L., 2016. Capital budgeting theory and practice: a review and agenda for future
research. Applied Economics and Finance, 3(2), pp.15-38.
Malenko, A., 2018. Optimal dynamic capital budgeting. Available at SSRN 1710884.

12BANKING AND FINANCE
Nurullah, M. and Kengatharan, L., 2015. Capital budgeting practices: evidence from Sri
Lanka. Journal of Advances in Management Research, 12(1), pp.55-82.
Rossi, M., 2015. The use of capital budgeting techniques: an outlook from
Italy. International Journal of Management Practice, 8(1), pp.43-56.
Travlos, N.G., Trigeorgis, L. and Vafeas, N., 2015. Shareholder wealth effects of dividend
policy changes in an emerging stock market: The case of Cyprus.
Waemustafa, W. and Sukri, S., 2016. Systematic and unsystematic risk determinants of
liquidity risk between Islamic and conventional banks.