Financial Analysis: BHP, CBA Share Prices & Fiscal Policy in Australia

This project analyzes the share price evolution of BHP Billiton Ltd and Commonwealth Bank of Australia (CBA) over a 5-year period, examining the impact of news events on systematic and unsystematic risks affecting their stock prices. It further investigates Australia's fiscal position, focusing on debt levels, taxes, and government spending. The analysis includes an examination of target cash rates, yield curves, and the applicability of the Expectation Theory and Segmented Market Theory to the Australian context. The project concludes by assessing how Australia's fiscal position influences yield curves, providing insights into the interplay between financial markets, company performance, and macroeconomic factors. Desklib provides a platform to access this and other solved assignments for students.

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Commonwealth Bank of Australia
CBA is one of the best known banks in the city of Australia and it serves its clients as a
commercial bank. This means the bank is involved in the business of borrowing and lending cash
to its depositors on a given interest rate (CBA 3). Commercial banks are regulated by a central
body which ensures that bank lends to customers at an affordable rate without exploitation and
distortion in the amount of money supply in the economy. Creating any shortages within the
economy may result to rising inflation as well the inability of clients to get loans since the
margin on interest on saving and lending is so huge for customers to believe that the lending rate
is feasible. Therefore regulation of banks has become so critical in many countries so is the case
in Australia (Sims 1) The Federal government may at times decide to introduce taxes on banking
industry and it, therefore, means that the share prices of the industry will plummet especially in
such instances where the all the banks are operating at the same tier. Therefore, it is the duty of
the regulating body to ensure that all banks listed in ASX can provide credit, accept deposits and
pay their customers dues on demand whenever the customers demand their money.
2014 2015 2016 2017 2018
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Commonwealth Bank of Australia
Share Price

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The share prices of CBA rose from 2014 from 75.62 AUD to 83.39 AUD in 2015 then
fell to 78.88 AUD in 2016 and rose again in 2017 to 84.13 AUD and it is on declining date
today. The inconsistencies behavior of the CBA share prices has been attributed by forces of
demand and supply which more affects how the operations of a commercial bank run. For
example, the rising share prices may be have been as a result of increasing demand for CBA
shares because of its profitability or might have been attributed to better management of
company finances or the market or the financial markets at that particular year was favoring to
the banking industry. However, other factors may have played a role in declining of share prices
for the commercial banks. Some of such factor may have rotated within the changes in
management which made the shareholders have cast doubts on the new management systems.
The industry might have been having affected by the stringent laws by the regulatory bodies
revolving interest capping and tax laws. Therefore, it makes a lot of sense to say that CBA
operation has not been worse as depicted by the five years series analyzed by the graph above.
The election of present Donald Trump has acted in the favor of financial sector which has made
the prices of CBA shares to be on the rise compared to others. However, the investors have been
warned to be cautious because they may tempt to invest in the company shares without knowing
that the dividends paid by the bank have declined over the years. Therefore, investors should be
warned about the impact of impulse buying without conducting due diligence on their nature of
investment which might cause them to lack merits based on their risk appetite.
BHP Billiton Ltd

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The shares prices of BHP Billiton Ltd traded at 34.02 AUD in 2014 and since then they
have been on a declining trajectory. The share is trading at a minimum of 29.57 AUD in 2018. In
2014, the company reported a profit of $4 billion after a long period of losses and low profits.
The company is in the mining industry of copper and oil as the main drivers of its total revenue.
Iron ore business has been flat for quite a long period of time due to low demand for the same
products (BHP Billiton 19). However, the management has developed mechanisms to ensure that
it has the capacity to collect all its revenue by developing a mechanism of mixing a different
kind of products such diamond and gold which will see its revenue go high. It is prudent to assert
that the higher commodities prices and solid performance delivered free 4.19 billion in revenue
(Yahoo 23). Additionally, the company was in a position to reduce it total debts by 10% and
managed to pay some of its suppliers. But since then the operations of BHP has ever changed
and things might not turn the way they were previously as a result of increased debts and losses
accompanied by tax evasion cases.
2014 2015 2016 2017 2018
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BHP Billiton Ltd
Share Price

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The company has failed in many avenues in pleasing its investors in terms of health and
having the ability to manage their business as well as maintaining sustainable development in
their the United Kingdom. The waste the company produce has been spilled all over the areas of
residence and this causes the organization to have a poor stakeholder management which has
seen it lost much of its revenue since most people are not willing to stake their money with the
company. The catastrophic collapse of tailings that is the fine waste at Samarco iron ore mine in
Brazil on 5 November 2015 led to a loss of lives for twenty people and polluted hundreds of
miles of rivers and sea.
The information by itself is much conclusive and it does outline the challenges the firm
has faced since then. The most intriguing part was BHP owns 50% stake of the dam that
collapsed affecting both the life of fauna and flora thus tainting their image to their stakeholders.
However, the company has been on redemption through the implementation of five strategies the
chairman of the organization brought to light in the Annual General Meeting: work safety was
guaranteed for both internal and external stakeholders, evaluation of portfolio to foster
diversification and reduce risks, cultivating capital discipline for all the employees and the
organization, rejuvenation of culture capability and social licensing to operate in different
geographical areas all over the world.
Another factor that has played a pivotal role in declining of BHP shares has been related
to non-compliance with regulatory authorities. The company has evaded taxes over the years
amounting to $5.7 billion in 2005 and 2014 and this has made it lose its image and relationship
with the regulatory authorities. The tax on precious stones has been on the rise and this has made
the organization have difficulties in clearing the taxes owed (Nakata 240). Additionally, taxes
levied has made the business of mining to be quite cost-intensive compared to other industries all

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over the world. However, the company has decided to seek for tax havens in order to generate
profits for the year 2017. Therefore, the BHP management is working at all cost to ensure
everything runs smoothly as expected to meet all their needs. The shares went ahead and
slumped after the company was forced to write down nearly US$1.4 billion and cut its target for
iron ore production amid falling prices. All these have contributed to declining level of stock
prices at BHP.
Part B
The fiscal position of Australia Federal Government has been wanting in terms of a level
of debts, taxes paid and level of spending across the whole industry. The debt level of the
government lose from -3% in 2007-2008 to 10% in 2011-2012 of the GDP which is quite
pleasing compared to any other country. It did hit the peak on 2015-2016 and reached 13% of the
country total GDP (Drucker 32).
The levels were not unprecedented in Australia during that period. The debt in this
country is comparatively lower compared to other countries all over the world. The government
fiscal position has been negative since the expenditure is more than the income generated for the
years beginning 1990 to 2015. Close attention should be taken to ensure that the government
increases its sources of revenue to strike a balance between expenses and income (Tuyon and
Ahmad 43). Additionally, it is clear that borrowing is made to finance its recurrent expenditure
which should not be the case at any point in time. Going forward the nation will be able to
mitigate its debt levels to acceptable limits that will ensure everything is carried out as expected

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and that no much hustle is experienced in borrowing from foreign countries. Much focus on this
two thing will boost the operations of the nation going forward.
Target Cash Rate
The above refers to the rate at which banks borrow from each and how the lending takes
place. The interbank lending is critical since it plays a major role in determining how the firms
are operating in a perfect. The curve is declining to show the yield on treasury bonds for the
Australian Federal government has been falling.
0 1 2 3 4 5 6 7
0%
2%
4%
6%
8%
10%
12%
2%
3%
5% 5%
7%
10%
Rate
Rate
Axis Title
Axis Title
The above yield curve shows that interest rates rise with the increasing maturity period.
The longer the time a security takes to mature, the higher the rate of interest it will be applied.
This is because it acts as a compensation of holding investor money.
According to the Expectation Theory in terms of interest rate structure. It asserts that
short-term interest rates determine the long-term interest rates. However, the target cash rate for
the Federal government does not comply with the above assertion as much of what is happening
the target cash rate for the Federal government has declined ever 2001 at an increasing rate. The

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above cash rates show that in case the amount is compounded it might come close to a range
close to ton10% annually. It is the same rates the commercial banks conduct their lending with to
affect their transaction on an overnight loan (Christopher 10). The expectation theory is of
opinion that as maturity rate of a security increases, the cash rate goes high too. The treasury bill,
in this case, is behaving otherwise since T-bills in 2001 has high cash rate than those in 2017
showing that they do not subscribe to the same school of thought.
Segmented Market theory
The theory suggests that cash rates are determined by the forces of demand and supply
which every other market player should understand so if they want to make prudent investments.
The yield for cash rates has not been consistent since 2001 to 2017 (Beck et al. 79). The above
may be explained by changes in demand and supply of the treasury bills in the bid to finance
their investments. It is important for investors to rely on the market segmentation theory which
focuses on the market behavior rather than focusing on any other factors which apply the rule of
thumb. The target rate was high 2007 and was lowest in 2017 due to changes in forces of
demand and supply (Wanna, Lindquist and De Vries 9). Therefore, in this case, the segment
theory tend to have much to say than any other theory since its theories are adding up to make a
lot of sense to the investor.

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2014 2015 2016 2017
0.000
1.000
2.000
3.000
4.000
5.000
6.000
7.000
8.000
Target Cash Rate
The Rate
The movement in Australia fiscal position will affect the yield on the curves negatively
since the investors will lack confidence in the ability of the nation will not be in a better position
to meet its short term and long terms obligations going forward (Braun 1). This makes the yields
to keep on declining over time and thus affecting the investors' initiative to invest in the
government treasury bills and bonds. Additionally, the yields may even slacken further to a
negative value due to the inability of the nation to raise money for investments rather than
covering its expenses over time.
The target cash rate has been increasing since 2001 until 2007 when it started falling until
2017. This was attributed by the government financing most of its recurrent expenditures using
debt and this led to an inability to conduct huge investments in projects that will generate high
returns with the project maturity (Makin & Pearce 424). However, the government has instituted
measures that will ensure much of government project are funded by debt and recurrent
expenditures funded by income generating projects within the nation.

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References
Australian Office of Financial Management – www.aofm.gov.au
Australian Securities Exchange – www.asx.com.au
Beck, R., Ferrucci, G., Hantzsche, A., & Rau-Goehring, M. (2017). Determinants of sub-
sovereign bond yield spread–The role of fiscal fundamentals and federal bailout
expectations. Journal of International Money and Finance, 79, 72-98.
BHP Billiton Limited - www.bhpbilliton.com
Braun, D. (2018). Fiscal policies in federal states. Routledge.
Christophers, B., 2016. Risking value theory in the political economy of finance and
nature. Progress in Human Geography, p.0309132516679268.
Commonwealth Bank of Australia - www.commbank.com.au
Drucker, P.F., 2017. The Theory of the Business (Harvard Business Review Classics). Harvard
Business Press.
Google! Finance – www.google.com/finance
Makin, A. J., & Pearce, J. (2016). Fiscal Consolidation and Australia's Public Debt. Australian
Journal of Public Administration, 75(4), 424-440.
Nakata, Taisuke. "Optimal fiscal and monetary policy with occasionally binding zero bound
constraints." Journal of Economic Dynamics and control 73 (2016): 220-240.
Reserve Bank of Australia – www.rba.gov.au
Sims, C.A., 2016, August. Fiscal policy, monetary policy, and central bank independence. In
Kansas Citi Fed Jackson Hole Conference.
Tuyon, J., and Ahmad, Z., 2016. Behavioral finance perspectives on Malaysian stock market
efficiency. Borsa Istanbul Review, 16(1), pp.43-61.

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Wanna, J., Lindquist, E.A., and De Vries, J. eds., 2015. The Global Financial Crisis and Its
Budget Impacts in OECD Nations: Fiscal Responses and Future Challenges. Edward
Elgar Publishing.
Yahoo! Finance – www.finance.yahoo.com