Business Finance: Cash Flow Analysis and Valuation of AMP Ltd

This assignment analyzes the cash flow of AMP Ltd, a financial services company, focusing on its operations, financial statements, and valuation. The analysis includes a brief description of the company, its current operations, and the purpose of financial statement analysis. The assignment calculates the rate of return, required rate of return, and applies the dividend discount model to determine share valuation. It also presents a graphical representation of share price and returns, identifies areas of concern in cash flow, and provides recommendations for improvement. The analysis considers both demand and supply factors affecting the company, and the overall conclusion emphasizes the importance of cash flow management and strategic decision-making for enhancing the company's financial performance and shareholder value.

Running head: BUSINESS FINANCE
Business Finance
Name of the Student:
Name of the University:
Author’s Note

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Table of Contents
Introduction..........................................................................................................................2
Discussion............................................................................................................................3
Brief Description of the Company...................................................................................3
Purpose of Financial Statement Analysis........................................................................4
Current Operations of the Business.................................................................................4
Calculation of Rate of Return..........................................................................................7
Calculation of Required Rate of Return..........................................................................8
Application of Dividend Discount Model.......................................................................8
Graphical Presentation of Share Price and Returns.........................................................9
Areas of Concerns in Cash Flow...................................................................................11
Recommendations..........................................................................................................11
Conclusion.........................................................................................................................12
Reference...........................................................................................................................13

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Introduction
The main purpose of the analysis is to understand the cash flow items of the business and
identify the main cash inflows and outflows which are associated with a business. The company
which is selected for the purpose of this assessment is AMP ltd which is engaged in providing
financial and banking services to customers. The assessment would be considering the different
activities which are undertaken by the business and also apply dividend valuation method in
order to consider the valuation of shares of the business (Spglobal.com.). In addition to this, the
assessment would be identifying the areas of cash flows where the management of the company
needs to put special emphasis. The discussion would also be providing appropriate
recommendation for ensuring how the management can make improvements in the overall
operational structure of the business.
Discussion
Brief Description of the Company
The business of AMP is engaged in providing financial services and different
superannuation and investments products of the business. The company is known for its financial
products. The company has operations in both Australia and New Zealand. The company has a
rich history of 170 years and therefore for maintaining the status of the company in the changing
business environment, the business structure of the company has been changed. Some of the
popular products which is provided by the bank is related to home loans and savings products.
The headquarter of the business is situated in Sydney and the company is regarded to be one of
the best companies providing financial solutions to the customers (Asx.Com.Au.). The company
also have the largest shareholders register constituting both in Australia and New Zealand. The
financial analysis for the company reveals that the revenue which is generated by the business

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has increased in 2018 which shows that the business has achieved growth in the operations of the
business and the same is expected to continue further in future.
As per recent survey, the company is aligned with wealth manager which has a capital
holding of more than A$ 128 billion. The company is regarded as a market leader in providing
financial products which are superannuation, risk management products to the residents of
Australia. The company is well established in the market is aa preferred choice for customers
who are looking for financial products in the market.
Purpose of Financial Statement Analysis
The analysis of the financial statement is conducted so that the users of the financial
statements are able to use the information for the purpose of taking major decisions regarding the
operations of the business. The financial information which are incorporated in the financial
statements are considered. The financial statement of a business is used by businesses for the
purpose of communicating the financial performance of the business. All the three parts of the
financial statements when combined can provide valuable information to the users and the
management so that important decisions can be taken (Williams and Dobelman). The decision
which are important for a management are related to profitability and business structure
decisions which is taken by the management of the company. The financial statement is use to
identify the performance of the business during the period and also for identifying if any area of
the business needs improvements. In order to conduct financial statement analysis different tools
are available at the disposal of the management which are ratio analysis, horizontal and vertical
analysis, trend analysis (Palepu, Healy, and Peek). These tools effectively help the management
to analyse the performance of the business and also helps the management to take strategic
decisions regarding the operations of the business.

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Current Operations of the Business
The current operations of AMP bank have undergone significant changes due to change
in internal business structure which is done in 2018. In addition to this, there has also been
significant changes in the global business environment o the company which has affected the
revenue which is generated by the business. The financial performance of the business is
analysed on the basis of the income statement, balance sheet and cash flow statement which is
managed by the business.
The income statement of the business shows the income and expenses which is generated
or incurred by the business during the period. The income statement of the business shows that
the main revenue generating sources which are life insurance contract revenue, life insurance
claims recovered and fees received have all declined in 2018 in comparison to previous year.
Besides this, there has been an increase in the operational costs of the business which is not a
positive sign for the business (Lawrence,). The net profit which is made by the business is shown
to be $ 51 million in 2018 while the same was $ 873 million in 2017. This shows that there is
significant decline in profitability and the same can be attributed to increase in operational costs
of the business and fall in the primary sources of revenue for the business. There are several
reasons for such a situation but the min reason can be the market conditions which has affected
the business in a severe manner. The management of the company needs to make improvements
in the profitability aspect so that the business is able to enhance the valuation of the company.
The investors would also be not happy with the current level of profits generated and the decline
in the dividends.
The balance sheet of the company presents a picture of the assets which are held by the
business and the same also represents financial strength of the company. The cash and cash

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equivalent balance has increased which shows that the liquidity of the business is still intact and
considering the total asset figure, there is a slight decline in the same. The balance sheet shows
that the liability of the business has increased mainly payables and borrowings of the business.
These are not considered to be positive indicators for the business.
Cash Flow Statement
The cash flow statement is considered to be important as the same shows the cash
position of the business and all the inflows and outflows of cash for the business. The cash flow
statement is used for ascertaining whether the liquidity position of the business is appropriate or
not. The cash from operations shows the main cash inflows for the business and the same is
shown to have declined from previous year. The cash receipts have declined while the cash
payments of the business have increased which is not a positive sign for the business. The cash
flow from operating activities is shown to be negative which is a major concern for the business.
The cash flow from investing activities is shown to be positive and the same is mainly
because the management of AMP ltd has sold some of its assets for proceeds which are
represented un the cash flow statement as cash inflows. This shows that the business is selling
off part of assets so that the business is able to generate revenue.
The cash flow from financing activities that there has been a decline in the deposits
which are made by clients which is the result due to which cash inflow from this section has
reduced. During the period as well, the management has repaid majority portions of debt of the
business which reveals the intention of the business to settle off the debts of the business and
thereby also reduce the risks which is associated with the business (Ross, Randolph and Jeffrey).
The cash balance is shown to be negative for this segment as well. The analysis of the cash flow

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statement reveals that the management of the company needs to take appropriate steps for
ensuring that the liquidity position for the business is appropriately maintained.
Demand and Supply Factors
The company has undergone significant changes in the operational structure of the
business and thereby improved the level of services which are provided by the business for the
period. The products which are offered by the business are mainly financial products and the
same mainly includes home loans which is offered by the business, SMSF products for the
purpose of meeting the retirement needs of the clients, advisory services. The products which s
offered by AMP ltd are popular in the market and therefore the same is also demanded by clients.
As per the current scenario of the business environment, the management of the AMP ltd
are considering of divesting the insurance sector business operations of the company as the same
has attracted significant losses for the business and the trend for growth is not positive as
estimated by the management (Francois,). The Australian Insurance sector have been facing
significant difficulties in the operations which is mainly due to the enquiry which is being
undertaken by the Royal commissions on the workings of finance companies. This is the main
reason that the growth of insurance industry has declined over the years and the trend is also not
positive. The operations of the business are not limited to just Australia, as New Zealand is also
one of the regions where the business has expanded the operations of the business and offering
similar products in the market.
Calculation of Rate of Return
AMP ^AXJO
Daily Average Return -0.01% 0.02%
Annual Average Return -3.67% 4.78%

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The computation of required rate of return is done with the help of share price of the
business for a period of 10 years. The period is taken for analysis is appropriate as the same
would provide a more accurate presentation of the actual rate of return which is offered by the
business. The above table shows that the annual average rate of return is taken as rate of return
for the business and the same is considered judging from the share price fluctuations. The rate of
return on the investments is a very important component and it is one of the factors on which
users of the financial statement take decisions.
Calculation of Required Rate of Return
Particulars Value
Rate of
return for S&P/ASX 200 4.78%
Beta 1.13
Risk free rate 0.94%
Required rate of return for AMP 5.29%
In order to compute the required rate of return for the business, Capital Asset Pricing
model (CAPM) is used for computation and the same is considered to be most effective method
for computing required rate of return for the business. The beta which is shown in the above
table represents the risks which the securities or bond of the business faces in the business. The
required rate of return which is computed is shown to be 5.29%. The shareholders of the business
need to decide on the basis of the estimate whether it is viable to invest in the shares of the
business.
Application of Dividend Discount Model
Dividend year Amount %
2018 0.245 -14.04%
2017 0.285 1.79%
2016 0.28 1.82%
2015 0.275 14.58%
2014 0.24

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Dividend growth rate 1.04%
Particulars Value
D0 0.245
Growth 1.04%
K 5.29%
Share price as per DDM 5.83
Current share price 3.35
Share status Overvalued
The above table shows the dividend discount model for ascertaining the growth which is
taking place in the business. The table clearly shows that there is a decline in the dividend which
is offered by the business over the years which indicate that the management of the company is
not able to generate appropriate profits. This is the reason that the dividend which is provided by
AMP ltd is shown to be negative and the same needs to be improved by the management of the
company. The results which can be drawn from Dividend discount model is that the shares of the
business is overvalued and therefore the same suggests that the share price of the business would
fall further in coming future.

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Graphical Presentation of Share Price and Returns
10/2/2009
2/12/2010
6/25/2010
11/5/2010
3/18/2011
7/29/2011
12/9/2011
4/20/2012
8/31/2012
1/11/2013
5/24/2013
10/4/2013
2/14/2014
6/27/2014
11/7/2014
3/20/2015
7/31/2015
12/11/2015
4/22/2016
9/2/2016
1/13/2017
5/26/2017
10/6/2017
2/16/2018
6/29/2018
11/9/2018
3/22/2019
8/2/2019
0
1
2
3
4
5
6
AMP Share price
Figure 1; (Share price Movement for AMP ltd)
Source: (Created by Author)
The above figure shows the share price movement for the business of AMP ltd is clearly
portrayed in the graph which is shown above. The graph also shows that the share price of the
business is on decline which is represented in the graph above in 2018. Therefore, the
computation which is shown in above table is consistent with the graph presented on share price
of AMP ltd.

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10/2/2009
2/12/2010
6/25/2010
11/5/2010
3/18/2011
7/29/2011
12/9/2011
4/20/2012
8/31/2012
1/11/2013
5/24/2013
10/4/2013
2/14/2014
6/27/2014
11/7/2014
3/20/2015
7/31/2015
12/11/2015
4/22/2016
9/2/2016
1/13/2017
5/26/2017
10/6/2017
2/16/2018
6/29/2018
11/9/2018
3/22/2019
8/2/2019
-30.00%
-25.00%
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
AMP Return
Figure 2; (Movement in Returns for AMP ltd)
Source: (Created by Author)
The above graph shows the returns trend for the business of AMP ltd and the same
represents that the return which is generated by the business is declining due to the fall in the
profitability of the business.
Areas of Concerns in Cash Flow
The major area of concern for the business of AMP ltd is the cash which is generated
from operational activities of the business. The revenue which is generated from operations is on
decline which has a direct impact on cash inflows of the business. The cash receipts and interest
received by the business has declined in comparison to previous year’s estimate while outflows
of the business have increased. This is the main reason that the cash flow from operations is
shown to be negative.

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The investing activities shows that the business is selling off certain assets for ensuring
that there are inflows in the business. However, the management needs to invest more in
financial assets as the revenue generated from such investments form major part of cash inflows
of the business. The cash from financing activities shows that company has undertaken policies
of paying off the debts of the business. The management needs to maintain its capital structure
for which appropriate steps needs to be taken by the management of the company.
Recommendations
The recommendations which can be given to the management of AMP ltd for improving
the business structure of the company are listed below in details:
 The business needs to increase its investments in financial assets as the same generate
appropriate amount of revenue from operations which can contribute to improving the
profitability of the business.
 The management of the company needs to make changes in the cost elements of the
business so that the high operational costs can be controlled in an appropriate manner by
the management.
 The management needs to maintain its liquidity position and for the same purpose,
appropriate capital structure needs to be maintained by the business.
Conclusion
The above analysis reveals that the business of AMP ltd needs to make significant
improvements so that the profitability and cash flow position of the business can be secured. The
discussion above shows the valuation of shares of the business and graphical representation of
the same for the business. In addition to this, the financial statement analysis for the business is