Analysis of Financial Statement of AMP Ltd for 2017
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This assessment analyzes the financial statement of AMP ltd for the year 2017, debt equity position, key financial ratios, changes in capital structure, and risk management policies.
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Running head: ACCOUNTING AND FINANCE Accounting and Finance Name of the Student: Name of the University: Author’s Note:
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1 ACCOUNTING AND FINANCE Executive Summary The main purpose of this assessment is to conduct an analysis of the financial statement of AMP ltd for the year 2017 in order to ensure that the business is meeting the performance standards. The assessment also analyzes the debt equity position of the business and also makes comment on the changes which have taken place in the same over the years. In order to analyze the financial performance of the business, key financial ratios of the business are computed and analyzed in a similar manner. Lastly, the assessment considers the material risks which are disclosed in the annual report of the business for the year 2017 and how well the business has managed such risks.
2 ACCOUNTING AND FINANCE Table of Contents Buddy Capital Investment...............................................................................................................3 Part B...............................................................................................................................................7 Introduction......................................................................................................................................7 Discussion........................................................................................................................................7 Capital Structure..........................................................................................................................7 Weighted Average Cost of Capital..............................................................................................8 CAPM Model...............................................................................................................................8 Comparison with NAB................................................................................................................9 Key Financial Ratios....................................................................................................................9 Changes in Capital Structure.....................................................................................................11 Risk Management Policies........................................................................................................11 Reference.......................................................................................................................................13
3 ACCOUNTING AND FINANCE Buddy Capital Investment Particulars012345678910 Initial Investment: Construction on Manufacturing Unit-$20,000,000 Total Initial Investment-$20,000,000 Operational Cash Flow: Selling price Growth Rate2.35%2.35%2.35%2.35%2.35%2.35%2.35%2.35%2.35% MAC30% Sales Volume16000000160000001600000016000000160000001600000016000000160000001600000016000000 Selling Price per unit$1.25$1.28$1.31$1.34$1.37$1.40$1.44$1.47$1.51$1.54 Annual Sales$20,000,000$20,470,000$20,951,045$21,443,395$21,947,314$22,463,076$22,990,959$23,531,246$24,084,230$24,650,210 Raw Material & Packaging Cost-$7,000,000-$7,000,000-$7,000,000-$7,000,000-$7,000,000-$7,000,000-$7,000,000-$7,000,000-$7,000,000-$7,000,000 Fixed Conversion Costs-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000 Variable Conversion Cost-$1,400,000-$1,400,000-$1,400,000-$1,400,000-$1,400,000-$1,400,000-$1,400,000-$1,400,000-$1,400,000-$1,400,000 Gross Profit$6,000,000$6,470,000$6,951,045$7,443,395$7,947,314$8,463,076$8,990,959$9,531,246$10,084,230$10,650,210 Depreciation on Plant-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000 Net Profit before Tax$10,500,000$11,440,000$12,402,090$13,386,789$14,394,629$15,426,152$16,481,917$17,562,492$18,668,461$19,800,419 Less: Income Tax @ 30%-$3,150,000-$3,432,000-$3,720,627-$4,016,037-$4,318,389-$4,627,846-$4,944,575-$5,268,748-$5,600,538-$5,940,126 Net Profit after Tax$7,350,000$8,008,000$8,681,463$9,370,752$10,076,240$10,798,307$11,537,342$12,293,744$13,067,922$13,860,294 Add: Depreciation on Plant$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000 Salvage value of Manufacturing Facility$5,000,000 After-Tax Cash Flows$8,850,000$9,508,000$10,181,463$10,870,752$11,576,240$12,298,307$13,037,342$13,793,744$14,567,922$20,360,294 Net Cash Flow-$20,000,000$8,850,000$9,508,000$10,181,463$10,870,752$11,576,240$12,298,307$13,037,342$13,793,744$14,567,922$20,360,294 Cumulative Cash Flow-$20,000,000-$11,150,000-$1,642,000$8,539,463$19,410,215$30,986,455$43,284,762$56,322,104$70,115,849$84,683,771$105,044,065 Discount Rate20%20%20%20%20%20%20%20%20%20%20% Discounted Cash Flow-$20,000,000$7,375,000$6,602,778$5,892,050$5,242,454$4,652,231$4,118,678$3,638,483$3,207,984$2,823,361$3,288,301 Payback Period (in years)2.214 Net Present Value$26,841,320 Profitability Index2.342 Years Capital Budgeting Analysis for "Buddy":
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4 ACCOUNTING AND FINANCE 5% lower Sales: Particulars012345678910 Initial Investment: Construction on Manufacturing Unit-$20,000,000 Total Initial Investment-$20,000,000 Operational Cash Flow: Selling price Growth Rate2.35%2.35%2.35%2.35%2.35%2.35%2.35%2.35%2.35% MAC30% Sales Volume15200000152000001520000015200000152000001520000015200000152000001520000015200000 Selling Price per unit$1.25$1.28$1.31$1.34$1.37$1.40$1.44$1.47$1.51$1.54 Annual Sales$19,000,000$19,446,500$19,903,493$20,371,225$20,849,949$21,339,922$21,841,411$22,354,684$22,880,019$23,417,699 Raw Material & Packaging Cost-$6,650,000-$6,650,000-$6,650,000-$6,650,000-$6,650,000-$6,650,000-$6,650,000-$6,650,000-$6,650,000-$6,650,000 Fixed Conversion Costs-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000 Variable Conversion Cost-$1,050,000-$1,330,000-$1,330,000-$1,330,000-$1,330,000-$1,330,000-$1,330,000-$1,330,000-$1,330,000-$1,330,000 Gross Profit$5,700,000$5,866,500$6,323,493$6,791,225$7,269,949$7,759,922$8,261,411$8,774,684$9,300,019$9,837,699 Depreciation on Plant-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000 Net Profit before Tax$9,900,000$10,233,000$11,146,986$12,082,450$13,039,897$14,019,845$15,022,821$16,049,367$17,100,038$18,175,398 Less: Income Tax @ 30%-$2,970,000-$3,069,900-$3,344,096-$3,624,735-$3,911,969-$4,205,953-$4,506,846-$4,814,810-$5,130,011-$5,452,620 Net Profit after Tax$6,930,000$7,163,100$7,802,890$8,457,715$9,127,928$9,813,891$10,515,975$11,234,557$11,970,026$12,722,779 Add: Depreciation on Plant$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000 Salvage value of Manufacturing Facility$5,000,000 After-Tax Cash Flows$8,430,000$8,663,100$9,302,890$9,957,715$10,627,928$11,313,891$12,015,975$12,734,557$13,470,026$19,222,779 Net Cash Flow-$20,000,000$8,430,000$8,663,100$9,302,890$9,957,715$10,627,928$11,313,891$12,015,975$12,734,557$13,470,026$19,222,779 Cumulative Cash Flow-$20,000,000-$11,570,000-$2,906,900$6,395,990$16,353,705$26,981,633$38,295,524$50,311,499$63,046,056$76,516,082$95,738,861 Discount Rate20%20%20%20%20%20%20%20%20%20%20% Discounted Cash Flow-$20,000,000$7,025,000$6,016,042$5,383,617$4,802,139$4,271,126$3,788,999$3,353,438$2,961,651$2,610,581$3,104,586 Payback Period (in years)2.358 Net Present Value$23,317,179 Profitability Index2.166 Capital Budgeting Analysis for "Buddy": Years
5 ACCOUNTING AND FINANCE 5% Higher Sales: Particulars012345678910 Initial Investment: Construction on Manufacturing Unit-$20,000,000 Total Initial Investment-$20,000,000 Operational Cash Flow: Selling price Growth Rate2.35%2.35%2.35%2.35%2.35%2.35%2.35%2.35%2.35% MAC30% Sales Volume16800000168000001680000016800000168000001680000016800000168000001680000016800000 Selling Price per unit$1.25$1.28$1.31$1.34$1.37$1.40$1.44$1.47$1.51$1.54 Annual Sales$21,000,000$21,493,500$21,998,597$22,515,564$23,044,680$23,586,230$24,140,506$24,707,808$25,288,442$25,882,720 Raw Material & Packaging Cost-$7,350,000-$7,350,000-$7,350,000-$7,350,000-$7,350,000-$7,350,000-$7,350,000-$7,350,000-$7,350,000-$7,350,000 Fixed Conversion Costs-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000 Variable Conversion Cost-$1,750,000-$1,470,000-$1,470,000-$1,470,000-$1,470,000-$1,470,000-$1,470,000-$1,470,000-$1,470,000-$1,470,000 Gross Profit$6,300,000$7,073,500$7,578,597$8,095,564$8,624,680$9,166,230$9,720,506$10,287,808$10,868,442$11,462,720 Depreciation on Plant-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000 Net Profit before Tax$11,100,000$12,647,000$13,657,195$14,691,129$15,749,360$16,832,460$17,941,013$19,075,617$20,236,884$21,425,440 Less: Income Tax @ 30%-$3,330,000-$3,794,100-$4,097,158-$4,407,339-$4,724,808-$5,049,738-$5,382,304-$5,722,685-$6,071,065-$6,427,632 Net Profit after Tax$7,770,000$8,852,900$9,560,036$10,283,790$11,024,552$11,782,722$12,558,709$13,352,932$14,165,819$14,997,808 Add: Depreciation on Plant$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000 Salvage value of Manufacturing Facility$5,000,000 After-Tax Cash Flows$9,270,000$10,352,900$11,060,036$11,783,790$12,524,552$13,282,722$14,058,709$14,852,932$15,665,819$21,497,808 Net Cash Flow-$20,000,000$9,270,000$10,352,900$11,060,036$11,783,790$12,524,552$13,282,722$14,058,709$14,852,932$15,665,819$21,497,808 Cumulative Cash Flow-$20,000,000-$10,730,000-$377,100$10,682,936$22,466,726$34,991,278$48,274,000$62,332,709$77,185,641$92,851,459$114,349,268 Discount Rate20%20%20%20%20%20%20%20%20%20%20% Discounted Cash Flow-$20,000,000$7,725,000$7,189,514$6,400,484$5,682,769$5,033,337$4,448,357$3,923,528$3,454,317$3,036,141$3,472,016 Payback Period (in years)2.093 Net Present Value$30,365,462 Profitability Index2.518 Years Capital Budgeting Analysis for "Buddy":
6 ACCOUNTING AND FINANCE As per the plan of the management of Saturn Pet care ltd, the company wants to open a new manufacturing facility which will be engaged in the production of new variety of wet dog food products. The decision is taken by the management so as to improve the sales of the business and thereby also the profitability of the business. The management considers that the sales of the business will increase but the business needs to produce 16,000,000 cans of food products. The management just wants to ensure that the decision regarding the investment are appropriately taken and therefore has also decided to consider a what if scenario where the production is 5% less than standard amount and another case where the production is 5% more than the standard amount. The calculations for all the three scenario is shown in the images provided above (Hu et al., 2013). The total investment which is required for the project is estimated to be $ 20,000,000. The cash flow from the project is estimated to be generated and the same is shown to be positive as per the estimation of the management The NPV of the project at its full capacity is shown to be $ 26,841,320 which is favorable and so are the payback period and profitability index of the project. In case of 5% les production as well the NPV of the project is shown to be favorable and the same is shown to be $ 23,317,179 and the profitability index and payback period is also shown to be positive which is a green signal that the management of company must invest in the project as the same is estimated to generate profits for the business in the long run (Venables, Laird & Overman, 2014). In case of 5% surplus production, the NPV of the project is shown to be $ 30,365,462 which is most favorable as the same suggest that if the business achieve such a level the profitability of the business will increase. The only other concern for the business which can be identified from the table shown above is related to the excessive costs which is incurred by the business during the period. The
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7 ACCOUNTING AND FINANCE increase in production capacity will increase the sales of the business tremendously and thereby also the costs of the business will increase. Part B Introduction The main purpose of this assessment is to analyze the financial performance of AMP ltd which is engaged in financial sector in Australia. The assessment also shows analysis of debt and equity capital which is utilized by the business for meeting the day to day business requirements of the business(Corporate.amp.com.au.2018).. The report also analyzes the key financial ratios of the business for the year 2017. The report will also identify the materials risks which the business faces as identified in the annual report of the business for the year 2017. Discussion Capital Structure ParticularsAmountWeightage (in $m) Total Equity$7,28326% Secured Borrowings$21,00974% TOTAL CAPITAL$28,292100% CURRENT CAPITAL STRUCTURE: The capital structure of the business is shown to be dominated by more of borrowings of the business and the weightage of debt is shown to be 74%.
8 ACCOUNTING AND FINANCE Weighted Average Cost of Capital WACC: Particulars2017201620152014 (in '000s)(in '000s)(in '000s)(in '000s) Net profit after Tax$873$192$1,713$971 Total Equity$7,283$7,541$8,895$8,385 Cost of Equity11.99%2.55%19.26%11.58% Weightage of Equity25.74%25.74%36.08%100.00% Interest Expenses for secured borrowings$585$551$732$685 Secured Borrowings$21,009$17,218$15,760$15,352 Cost of Debt2.78%3.20%4.64%4.46% Weightage of Debt74.26%69.54%63.92%64.68% Tax Rate30%30%30%30% WACC4.53%2.21%9.03%13.60% CAPM Model Cost of Equity under CAPM: ParticularsAmount Beta1.47 Market Return8.54% Risk Free Rate2.78% Expected Cost of Equity11.247% The cost of equity is computed under CAPM model and the same is shown to be 11.247% considering the beta to be 1.47 and the market return and risk free rate of return as 8.54% and 2.78%.
9 ACCOUNTING AND FINANCE Comparison with NAB ParticularsAmountWeightageAmountWeightage (in '000s)(in million) Total Equity$7,28325.74%$48,601.0028.60% Total Secured Borrowings$21,00974.26%$121,315.0071.40% TOTAL CAPITAL$28,292100%$169,916100% AMPNAB COMPARISON with National Bank of Australia The above table shows that the business of AMP ltd utilizes more debt capital in comparison to NAB which also operates in financial sector in Australia. Key Financial Ratios Profitability Ratios Particulars2017201620142015 Total Revenue18361147991402217587 Net Profit8731921713971 Total Assets148085140060139708134855 Total equity7283754188958385 Net Profit Margin4.75%1.30%12.22%5.52% Return on Assets0.59%0.14%1.23%0.72% Return on Equity11.99%2.55%19.26%11.58%
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10 ACCOUNTING AND FINANCE Particulars2017201620142015 Total Assets148085140060139708134855 Total equity7283754188958385 Total Liabilities140802132519130813126470 Finance Costs585551732685 Operating Profit222190927252499 Time Interest Earned Ratio3.7971.6503.7233.648 Debt-to-Equity Ratio19.33317.57314.70615.083 Debt Ratio0.9510.9460.9360.938 Equity Ratio0.0490.0540.0640.062 Solvency Ratio The profitability ratios of the business are shown by net profit margin, return on assets and return on equity of the business. The net profit of the business is shown to be 4.77%in 2017 which has improved significantly in comparison to previous year analysis (Ehiedu, 2014). There is also significant improvement in return om assets and equity balances of the business for the year 2017. The solvency ratio of the business shows that the debt equity ratio is quite high for the business which is mainly due to the application of more debt capital in the business (Delen, Kuzey & Uyar, 2013). The debt equity ratio of the business clearly shows increase in debt capital of the business in comparison to previous year performance.
11 ACCOUNTING AND FINANCE Changes in Capital Structure ParticularsAmountWeightageAmountWeightageAmountWeightageAmountWeightage (in '000s)(in '000s)(in '000s)(in '000s) Total Equity$7,28325.74%$7,54130.46%$8,89536.08%$8,38535.3% Secured Borrowings$21,00974.26%$17,21869.54%$15,76063.92%$15,35264.7% TOTAL CAPITAL$28,292100%$24,759100%$24,655100%$23,737100% Change in Total Capital14.27%0.42%3.87% 20152014 CHANGE in CAPITAL STRUCTURE: 20172016 The changes in the capital structure of the business is shown above which shows that the capital structure of the business is always dominated by debt capital of the business. Risk Management Policies The annual reports of the business which is presented for AMP ltd for the year 2017 shows the directors report of the business for the year. The director report of the business clearly sets out the risks which the business faces during the year. However, the risks which are disclosed in the director’s report are not showing full extent of the risks which is faced by the business during the year. The business of AMP ltd was revealed to have engaged in misconduct of charging fees of insurance from individuals for which no services was provided from AMP ltd. The company had failed to disclose the regulatory requirement and is likely to face a heavy penalty from Royal Commission for the misconduct which was identified (Alexander, 2013). This is one of risks which the business faces and due to this, the valuation of shares of the business has fallen tremendously. The management of the company has incorporated strategies which will be taking care of the risks which are associated with the business (Glendon & Clarke, 2015). The
12 ACCOUNTING AND FINANCE management has set up a strong internal control structure which looks into every risks and also established a separate risk management committee to tackle the various risks which are faced by the business. The regulatory risks associated with the business is mitigated by effectively addressing the issue by conducting internal investigations and also cooperating with the Royal Commission for making sure that the business is adhering to all ethical requirements of the company.
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13 ACCOUNTING AND FINANCE Reference Alexander, K. (2013).Facilities management: theory and practice. Routledge. Corporate.amp.com.au.2018.Reports.Retrieved30September2018,from https://corporate.amp.com.au/shareholder-centre/results-reporting/reports Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach.Expert Systems with Applications,40(10), 3970-3983. Ehiedu, V. C. (2014). The impact of liquidity on profitability of some selected companies: the financialstatementanalysis(FSA)approach.ResearchJournalofFinanceand Accounting,5(5), 81-90. Glendon, A. I., & Clarke, S. (2015).Human safety and risk management: A psychological perspective. Crc Press. Hu, Y., Li, X., Li, H., & Yan, J. (2013). Peak and off-peak operations of the air separation unit in oxy-coal combustion power generation systems.Applied energy,112, 747-754. Venables, A., Laird, J. J., & Overman, H. G. (2014). Transport investment and economic performance: Implications for project appraisal.