BUSN20016 Research in Business, Trimester 1, 2019 Project

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BUSN20016 RESEARCH IN BUSINESS, T1, 2019
ASSESSMENT 3
PROJECT TITLE: Impact of Net profit (Financial performance)
on share prices: A case of Commonwealth Bank
Student’s full name:
Student ID:
Tutor’s name:
Campus:
ASSESSMENT SHEET
Criteria Total
marks
Marks
obtained
Overall comments
A detailed statement of the problem, research aim,
objectives and research questions
10
A detailed justification and potential output of the
research
10
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The conceptual framework 10
Methodology, organization of the study, project
budget and schedule
10
Accurate referencing, use of correct English and
logical sequences between sentences and paragraphs
and a good introduction
10
Total = 50
Mark reduction for Turnitin similarity (It's up to the
markers and unit coordinator's judgment)
Mark reduction for late submission(5% mark
reduction for each day of late submission)
Grand Total= 50
Key to grading and corresponding marking scale:
HD (42.5 and above out of 50 marks): Student demonstrates outstanding understanding and
interpretation of all aspects of the criteria.
D (37.25 to 42.24 out of 50 marks): Student demonstrates excellence in understanding and
interpretation of almost all aspects of the criteria with some minor corrections or additions needed.
C (32.25 to 37.24 marks out of 50 marks): Student demonstrates very good understanding and
interpretation of most aspects of the criteria with some need for additional work, additions or
improvement.
P (24.75 to 32.24 marks out of 50 marks): Student demonstrates good understanding and
interpretation of the criteria to warrant the award of a Pass but requires considerable additional
work, additions or improvement.
2

F (below 24.7 marks out of 50 marks): Student demonstrates an unsatisfactory understanding and
interpretation of the criteria and requires major additional work, additions or improvement to
achieve a passing grade.
June 2019
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Contents
1. Introduction............................................................................................................................5
2. Problem Statement.................................................................................................................6
3. Aims and objectives of research and questions of research...................................................7
4. Justification and potential output of research.........................................................................8
5. Conceptual framework and development of hypothesis........................................................9
5.1 Importance of stock price.................................................................................................9
5.2 Financial performance’s impact on prices of stock-......................................................10
5.3 Reflection of stock price by profits................................................................................10
5.4 Relationship between profits and share price............................................................of 11
5.5 Hypothesis development................................................................................................11
6. Research Methodology.........................................................................................................13
6.1 Approach of research and data source...........................................................................13
6.2 Proposed data collection and technique of analysis.......................................................13
6.3 Organization of study.....................................................................................................14
6.4 Budget, activities of project and Gantt chart..................................................................14
7. References............................................................................................................................17
8. Appendix..............................................................................................................................20
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1. Introduction
Investment in financial institutions through investors refers to make a logical attempt to earn
maximum profit in return. The stock market is playing a vital role in the market which
formulates the capital and sustainability of financial institution in the market. Market
investors operate their funds by analyzing each and every aspect such as demand of shares,
risk availability and by ensuring the profit in return through investment (Gupta, 2016).
The research mainly aims to analyze the impact of net profits on the stock price of
Commonwealth Bank. Further research aims to focus on the relationship between share
prices and net profit, likewise, it also helps in analyzing how goodwill and performance of a
company affect its share prices and engagement of investors. Economic policies and financial
growth of the company enhance its inflation rate which directly creates an impact on the
stock prices of the company and engages investment of shares.
Further, the report contains some essential data analysis methods which help in
accomplishing the research findings and analyze. The appropriate research methodology is
used in analyzing the data related to research. There are some hypothesis resulted through
research findings are analyzed in this research report. The main research goal is to analyze
the implications of net profit on the share market of Commonwealth Bank of Australia.
Along with this, the report includes some factors which influence share prices of the
company such as earning per share, market conditions, inflation, and economic conditions of
the company. These are the essential aspects evaluated in this report.
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2. Problem Statement
The bank's financial performance especially the record of dividends, earnings, future
prospects, and growth are the base of forming the share price’s primary trends. The financial
statements of the company reflect on the company’s accounting information along with its
performance. For making decisions with respect to the decisions of investment, the financial
performance of the company is useful for investors. Stock can be termed as the type of
security that is traded in the capital market. The high rate of return is offered by making an
investment in the stock. But high degrees of risks are also contained due to risks of
uncertainty (Normazia, et. al, 2013).
Company’s financial performance has been researched by the various researchers for the
different aspects but it can be observed that there is very less research that has been
conducted with respect to the impact of bank’s financial performance on its stock price. Thus,
the main aim of this business project report is to find out if there is a positive relation
between net profits and stock price of the company. In this report, Commonwealth Bank of
Australia has been taken into consideration for studying the subject matter and analyzing the
collected data (Hoque, 2013).
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3. Aims and objectives of research and questions of research
Aims- the main aim of this business report is “To identify the impact of a company's
financial performance on the prices of its stock"
Objectives- For achieving the main aim following objectives are there-
 To identify the role of FP (financial performance) on stock price
 To investigate the relationship between net profit and stock price
 To analyze the correlation between these two variables
Research Questions-
 What is the impact that FP of Commonwealth Bank has on its stock prices?
 Does any kind of relationship exist between the company's net profits and stock price?
 Does correlation (positive or negative) exist between stock price and FP?
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4. Justification and potential output of research
After making the review of the different authors' articles it is not wrong to say that there are
various articles on FP impact on goodwill of the company, or what role FP plays in building
relations with the stakeholders, or in gaining the competitive advantage. But a very limited
study of research was found on FP and the company’s net profits impact on the stock price.
Evans, et. al, 2014, focus on making study related to the sector of banking but no focus is
made by the author on net profits and the company's stock price. The main reason behind this
research study is to analyze the gap in the literature review with respect to the investigation of
company's FP and the market price of the share (Evans, et. al, 2014).
On the basis of the collected data, all the questions of research will be answered, data analysis
will be made on the findings’ basis. The research problems that have been identified in this
proposal of research, the output for the same will be found out. By the research output,
various end users will get the benefit.
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5. Conceptual framework and development of hypothesis
5.1 Importance of stock price
Seyed Mohamad Fahimi, & Hossein, (2017) in his view present share price as the amount of
money that will cost in making a purchase of company's share or fund. There is a number of
factors by which the share prices of the company can fluctuate. If the reports of earnings are
growing then investors can feel more optimistic regarding its potential profitability. If the
stock price’s demand will climb then its price will also rise (Seyed Mohamad Fahimi, &
Hossein, 2017).
According to Ghulam, et. al, (2015), the price at which the stock buys is considered as a
current price of the stock. Stock price plays an important role in making the investment
strategy. The stock price is the proportional and relative value of the worth of company and
percentage changes are represented by this in the market cap (Ghulam, et. al, 2015). Forson,
& Janrattanagul, (2014) changes in the stock prices of the company will result in making
changes with the equal percentage in the value of the company. The prospects of the
company become more optimism with the higher value of stock prices. The financial health
of a company can be measured through the stock prices. With the analysis of the company's
financial data and stock price, the determination can be made by the investors about the
financial viability of the company (Forson, & Janrattanagul, 2014).
Chin-Hong, & Brahmana, (2016) said that constant scrutinizing of the earnings performance
of the company is done by the financial analyst. Investors and analyst look favorably on
different companies with performing stock prices along with the solid earning’s track record.
Company’s stock prices are used in calculating the different ratios of finance (Chin-Hong, &
Brahmana, 2016). The takeover prevention is another reason that the company is concerned
with the stock prices. Company’s ups and downs about the earnings can be reflected with
rising and fall in the share's price. According to Malhotra, (2018) the company is impacted by
indirectly by the rise and fall in share prices. The company can find it difficult in raising the
funds in case of falling in the share prices for the expansion of the future. More flexibility is
given by the increased share prices for raising the money from the company's shareholders.
The reputation of a company is affected by the share prices along with the morale of the staff
and the company's culture (Malhotra, 2018).
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5.2 Financial performance’s impact on prices of stock-
According to T. I’ons, & M. Ward, (2012), there is an empirical relationship that exists
between various variables such as earnings per share, dividend per share, ROCE (return on
capital employed), payout, and P-E ratio on the share’s market price. It has been concluded
by him that BVPS (book value per share) and EPS are two essential share price’s
determinants as they are considered as the company’s health position of finance (T. I’ons, &
M. Ward, 2012). In addition to this Didar, et. al, (2018) is of the view that higher earnings,
ROI, favorable valuation, and growth possibility are having a positive impact on the price of
shares and negative impact is imposed by the stock market movement (Didar, et. al, 2018).
5.3 Reflection of stock price by profits
As per Adaramola, et.al, (2018) there can be a rise in the prices of stock of banks if the profits
of banks are increasing. The reason behind this is that there is confidence which investors of
banks feel regarding the future of the bank and its demand for the stock increase with this.
Stock buybacks and dividends’ issuance can also result from the increased profits which
ultimately increase the market price of the stock. The stock price can be influenced by the
market perceptions that keep on changing and confidence of investors are also influenced due
to this. Quarterly earnings reports are issued by the company in which the net profits of the
company are revealed per share (Adaramola, et.al, 2018). Before releasing of earnings,
analyst of stock market issues their estimation about their belief with respect to the
company’s earnings and net profit which have been calculated by them on the basis of the
guidance of the company, management performance, market conditions, and other metrics
and models that help them in making forecasts of the performance.
Chipeta, & Gladysek, (2012) argued that there is a jump in the stock price of the banks if the
bank's earnings are more than the estimation made by the market analyst. The bank's stock
price falls in meeting the estimation then the share price of the stock falls down due to the
investor’s confidence failure in company’s ability in generating profits (Chipeta, & Gladysek,
2012). According to Astuty, (2017), the reports of positive earnings help in increasing the
value of stock even if the dividend is not offered by the company. The earnings are often
reinvested back by the company into the company for helping growth that will be signaled by
the future reports of positive earnings. There is growth in the profitable companies that no
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longer need to have significant reinvestment and a portion of profit will be returned back to
the shareholders through buyback of stock or dividend from investors (Astuty, (2017).
Rastogi, & Mazumdar, (2016) is of the view that reports of earnings and their estimates are
the two essential factors in bank's stock prices. There can be a change in the other conditions
about the pricing of stock by the market. The financial performance of the company can be
analyzed in the company’s FS which includes debts, assets, cash flow, and data related to the
other performance by which the stock prices can be moved. The news of stock also plays a
role in affecting the stock price of the company (Rastogi, & Mazumdar, 2016).
5.4 Relationship between profits and share price
According to Sabzevar, et. al, (2017), there are various factors due to which the share price of
the company get influenced and there is one factor that is a profit of the company which is
having a relationship with the share price. As the profit is the factor which is tracked by the
market experts in order to find the information about the company that is going in profit and
is earning high. Company’s rate of earnings can also increase with the rise in the company’s
profits on a consistent basis unless the additional capital is issued, the use of which is not
made productively (Sabzevar, et. al, 2017). Malik, & Amir Shah, (2013) said that the share
prices are not impacted by profit alone but also by the prospects of profits and the
sustainability by share price’s upping in the near future. The high profitability is not always
rewarded by the market by an increment in the share prices but there is downfall also in the
share prices when company’s profit is not good (Malik, & Amir Shah, 2013).
Kushwaha, & Sharma, (2016) said that price-earning of the company (P-E ratio) help in
measuring the relationship between the stock price of company and EPS of the issued stock.
The company’s stock price reflects the share’s value that is being placed by investors. The
stock's market prices are needed in calculating the P/E ratio (Kushwaha, & Sharm, 2016).
5.5 Hypothesis development
With respect to the literature review following hypothesis will be studied-
Hypothesis 1 H0:- FP has no impact on the bank’s share prices.
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H1:- FP has a significant impact on the bank's prices of shares
Hypothesis 2 H0:- Net profit is not related to the share price of banks
H1:- NP is essentially related to the share price
Hypothesis 3 H0:- No correlation exists between share price and FP
H1:- correlation exists between FP and share price
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