Project Report on Accounting and Finance

Running Head: Accounting and finance
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Project Report: Accounting and finance

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Executive summary
Evaluation on the final financial statement of a business is important for each of the
analyst and the investors to reach over a conclusion about the position of the business and the
return from the business. The various financial tools make it easier for the investors to reach
over a conclusion rapidly. In the report, the capital structure, WACC position and financial
ratio study has been performed on the company to evaluate that whether the company is a
good option for the purpose of investment or not.

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Contents
Introduction.......................................................................................................................4
Capital structure................................................................................................................4
WACC..............................................................................................................................5
Changes into capital structure...........................................................................................6
Ratio analysis....................................................................................................................7
Material risk......................................................................................................................7
Conclusion........................................................................................................................8
Bibliography.....................................................................................................................9
Appendix.........................................................................................................................10

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Introduction:
AMP is a Australian company which offers various banking services to its clients.
The main product of the company includes superannuation, investment products, insurance,
banking products and the financial services to Australian and New Zealand people. In the
year of 1989, the company has come into existence. The bank is performing well in the
Australian market along with a good market share.
Capital structure:
In the case of AMP, the debt and equity level of the business has been collected and
measured to identify the capital structure position of the business.
The debt level of the company is 13% against the total capital and on the other hand,
the weight of equity position is 87%. It brief higher equity of the company which would lead
to business towards lower associated risk but higher cost of capital of the business1.
AMP
Debt 1,116 13.42%
Equity 7,202 86.58%
8,318 100.00%
The capital structure position of AMP has been compared with the ANZ bank of
Australian to recognize that capital level of the business in the industry. On the basis of the
below chart, it has been recognized that the debt level of Amp is higher and the equity level
of ANZ is higher. Further, it explains that the AMP is required to improve the debt level in
the market to manage the cost and the financial gearing position of the business.
1 Brigham, E, and Phillip D. Intermediate financial management. Nelson Education, 2012.

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Figure 1: Capital structure
WACC:
After the evaluation on the capital structure position, the study has been performed on
the WACC position of AMP. On the basis of the below calculations, it has been recognized
that the cost of debt of the business is 3.85% which describes that the company has to pay
3.85% cost against the debt amount of the company2.
Calculation of cost of debt
Outstanding debt 1,116
interest rate 5.50%
Tax rate 30.0%
Kd 3.85%
Further, the study has been performed on the cost of equity of the company to
recognize the total amount which would be paid by the business to its shareholders against
the equity amount. The below table represents the cost of equity of the company is 11.42%
which is quite higher than the cost of debt of the company.
Calculation of cost of equity (CAPM)
2 Rose, P. S., and Sylvia C. H.. Bank management & financial services. McGraw-Hill
Education, 2012.

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RF 2.41%
RM 8.54%
Beta 1.470
Required rate of
return 11.42%3
On the basis of the cost of equity and cost of debt of the business, further WACC of
the business has been calculated. On the basis of the study, the WACC of the business is
10.41%. It expresses that the company is required to at least earn 10.41% return from the
investment to pay the capital cost to the debt holders and equity holders of the business.
WACC calculations of AMP
(Amount in $ million)
Price Cost Weight WACC
Debt 1,116 3.85% 0.13 0.52%
Equity 7,202 11.42% 0.87 9.89%
8,318 Kd 10.41%
Changes into capital structure:
The capital structure of the company of last 3 years have been evaluated to measure
that how much changes have occurred into the performance of the business. It explains that
the company has reduced the equity level from 2015 in 2017 to reduce the cost level and
manage the financial gearing position of the company4. the company is required to make
more changes in order to improve the capital structure level of the business.
Capital structure
2017 2016 2015
Debt 1,116 13.42% 864 10.38% 967 10.19%
Equity 7,202 86.58% 7,462 89.62% 8,519 89.81%
8,318 100.00% 8,326 100.00% 9,486 100.00%5
3 Annual Report. AMP Limited. [2018],
http://member.afraccess.com/media?id=CMN://2A1072055&filename=20180320/
AMP_01963508.pdf (accessed 24th Sept, 2018).
4 Brigham, E. F., and Joel F. H.. Fundamentals of financial management. Cengage Learning,
2012.
5 Annual Report. 2018.

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Ratio analysis:
The ratio analysis has been performed further on AMP limited to recognize that
whether the company is a good option for the purpose of investment or not. On the basis of
the given calculations in the appendix, the financial analysis position of the company is
better. Company is required to make the changes into capital structure and current assets to
lower the cost of the business6.
Material risk:
The AMP has categorised the risk of the business in the seven categories in its annual
report (2017). The risk which has been given in the annual report of the business is credit
risk, insurance risk, market risk, liquidity risk, strategic risk, concentration risk and
operational risk. All of these risks have been categorized by the business on the basis of the
nature of the business and the current risk position of the company. All of the above stated
risk plays crucial part in the business. The effect on any of this risk because of internal and
external factor of the business affect negatively in the performance and profitability level f
the business. The affect of such risk on the stock price of the business is also higher.
Such as, the strategically risk of AMP limited has taken into the concern and it has
been found that the changes into the strategically performance could be better or worse for
the company. If the strategically changes have affected negatively on the business than the
stock price of the company would also be decreased. The negative impact on the business
affects the interest of the stakeholders of the business and due to which they start divesting
their amount from the stock of the company7.
At the time of Financial Services Royal Commission, an apology has been made by
the company to all the shareholders and other stakeholder because of the mistakes done by
the business. Due to these mistakes, the loss level of the company has been improved. And it
has leaded the less interest of the stakeholders of the business. However, after the apology,
6 Home. AMP Limited. [2018], https://www.amp.com.au/ (accessed 24th Sept, 2018).
7 Brigham, 2012.

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the stakeholders against started showing their interest and the changes of the business have
lead against better position of the business8.
On the basis of the operations, activities and nature of the business, it has been
recognize that the financial and non financial performance of the company have been lowered
last year. But the changes into the operations and strategies have been improved the position
of the business9. It has been found through the study that the position of the company has
been improved and still, the company is required to focus on the strategic risk, marketing risk
and the operational risk of the business as these risk (strategic risk, marketing risk and the
operational risk) are the main risk of the business which could affect the performance and the
stock position of the business at any time.
Conclusion:
To conclude, strategic risk, marketing risk and the operational risk of the business is
higher. Capital structure and short term solvency position of the business is also not good.
Few changes must be done by the business to improve the overall level.
8 News. AMP Limited. [2018], https://www.amp.com.au/news/2018/may/AMP-and-the-
Royal-Commission (accessed 24th Sept, 2018).
9 Annual Report. 2018.

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Bibliography:
Annual Report. AMP Limited. [2018],
http://member.afraccess.com/media?id=CMN://2A1072055&filename=20180320/
AMP_01963508.pdf (accessed 24th Sept, 2018).
Brigham, E. and Phillip D., Intermediate financial management. Nelson Education, 2012.
Brigham E. F., and Joel F. H., Fundamentals of financial management. Cengage Learning,
2012.
Home. AMP Limited. [2018], https://www.amp.com.au/ (accessed 24th Sept, 2018).
News. AMP Limited. [2018], https://www.amp.com.au/news/2018/may/AMP-and-the-Royal-
Commission (accessed 24th Sept, 2018).
Rose P. S. and Sylvia C. H., Bank management & financial services. McGraw-Hill
Education, 2012.
Shapiro, A. C., Multinational financial management. John Wiley & Sons, 2008.

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Appendix:
Ratio Calculations 2017
Profitability Ratios: 2017
Return on assets
Net profit / 848
Total assets
148,08
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Answer: % 0.57%
Return on equity
Net profit / 848
Total stockholder's equity 7,283
Answer: % 12%
Profit margin
Net profit / 848
Sales Revenue % 6,444
Answer: 13.16%
Liquidity Ratios 2017
Current Ratio
Current Assets / 141,160
Current liabilities 44,692
Answer: 3.16
Capital Structure Ratios 2017
Debt to assets ratio
Total debt / 116,000
total assets 148,085
Answer: % 0.783
Debt to equity ratio
Total debt / 116,000
Total equity 7,283
Answer: %
15.92
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Investor's Ratios 2017
Earnings per share
Net income 848
Weighted average shares
outstanding 246
Answer: 0.290