University of Queensland FINM1415 Finance Project: CBA Analysis

This finance project analyzes the Commonwealth Bank of Australia (CBA). The project begins with a description of CBA's business and a SWOT analysis comparing it to Westpac, examining strengths, weaknesses, opportunities, and threats. The assignment then calculates free cash flow (FCFF) based on CBA's 2018 financial data, detailing the inputs and assumptions. Finally, the project determines the cost of equity using the Capital Asset Pricing Model (CAPM) and calculates the cost of debt. The analysis incorporates financial statements, market data, and relevant formulas to assess CBA's financial performance and risk profile. References are provided at the end.

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

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Table of Contents
Fundamental Analysis.....................................................................................................................2
Question 1........................................................................................................................................2
Question 2........................................................................................................................................4
Question 5........................................................................................................................................5
References........................................................................................................................................6

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Fundamental Analysis
Question 1
The Common Wealth Bank of Australia is a leading Australian Operating Multinational
Bank. The CBA was found and established in the year 1911 by the Government of Australia
under the Common-wealth Bank Act. The SWOT Analysis will be done for the CBA by taking
various internal and external factors that influences the operations and workings of the banking
group. The key competitor that has been considered for the purpose of analysis is the Westpac
Banking Group. It is important to note that as reported CBA was reported as one of the third
largest bank that is listed in the Australian Stock Exchange. The company is said to be one of the
largest bank amongst the major four banks operating in the Australian Banking Industry along
with NAB, ANZ and Westpac Bank. The current financial scenario of the banking industry can
be well analysed and viewed from the perspective of the various internal and external factors that
would be impacting the business operations of the company (Commbank.com.au 2019).
The competitive Analysis of the Common Wealth Bank can be done as follows:
Strengths: The key strength of the CBA is that it is one of the leading Australian Bank in
accordance with the Main Financial Institution (MFI) Ranking established. The loans and assets
classified in the books of accounts by the company has been of high quality and well diversified
in terms of credit portfolio presented (Commbank.com.au 2019). Emphasis and adaptation to
better technological tools and systems has comparatively allowed the banks to grow their
business effectively well. On the other hand Westpac Bank has been a major company that is
operating simultaneously in the Australian, New Zealand and Pacific Countries.

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Weakness: The key weakness of the Common Wealth Banking Company is that it is highly
dependence on various types of off-shore borrowings that is done by the banks. Embroilment in
the various types of money laundering scandals that was particularly investigated by the Royal
Commission of Australia impacted the goodwill and reputation of CBA Bank. In terms of
diversification in the geographical services CBA Bank has a limited geographical areas that it
covers. The operating expenses of the company has particularly increased for the bank which is
impacting the bottom line or the net profit margin of the company. On the other hand, Westpac
Bank had a diversified geographical distribution of various types of business services but the
same were not proving to be effective for the banks (Westpac.com.au 2019).
Opportunities: The key opportunities that the company would be facing will be primarily into
expanding into Asian and other emerging markets in which the company can expand its
operations. On the other, hand key opportunity for the Westpac Banking Corporation can be in
the field of various banking and financial services that the company would be providing in the
due course of their business operations (Commbank.com.au 2019). It is considerably well
important that business factors are well considered and analysed for the purpose of identifying
the various business opportunities that would be helping in expanding the business scale.
Threats: The key threats that the Common Wealth Banking Corporation faces is primarily in the
field of various phases of rules and regulations that binds the working and operations of the
banking corporation. The higher amount of capital deposits and requirement by the APRA would
be restricting the banking corporation from taking various set of business operations. On the
other hand, fragile business environment and economic slowdown in the Australian Economy
can particularly impact the banking operations. The Westpac Banking Corporation on the other

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hand, has been particularly impacted with the various macro-economic and business slowdown
that particularly impacted the operations and workings of the company.
Question 2
The free cash flow analysis has been done for the Common Wealth Bank by undertaking
and analysing the free cash flows associated with the Banks. The formula that has been applied
for the purpose of calculating FCFF is as follows:
FCFF: Net Income+ Interest Expenses-Tax Shield on Int. Expenses+ Non-Cash Expenses-
Change in Working Capital- Capital Expenditure.
FCFF: 9394+16202-4861+289+9414-477
FCFF: $29,961.
In order to well analyse and calculate the Free Cash Flow Analysis of the firm certain
assumptions like the tax shield on interest expenses, the interest paid by the company and the
applicable interest rate has been considered for analysis. The non-cash expenses for the company
can be well calculated with the help of reported depreciation for the company on the income
statement of the company. The changes in the working capital was well calculated with the help
of changes in current assets- current liabilities for the two respective years (Goh et al., 2016).
The capital expenditure that has been well taken into consideration into the analysis is the
expenses done for purchasing the property plant and equipment in the year 2018. The free cash
flow analysis of the firm are as follows:

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Free Cash Flow Analysis
Particulars Amt ($)
Net Income 9394
Interest Expenses 16202
Tax Shield on Int Exp. (Interest Expenses * Tax Rate) -4861
Non-Cash Expenses 289
Change in Working Capital (Current Asset -Current Liabilities) 9,414
Capital Expenditures (CAPEX) -477
Free Cash Flow 29961
Question 5
The Cost of equity for the company can be well calculated with the help of the Capital
Asset pricing model whereby the market returns and beta for the stock was well analyzed by
taking the returns generated by the stock and the corresponding returns generated by market
index. On the other hand, the risk free rate that has been well considered for the purpose of
analysis is the 10-Year risk free rate which was around 0.95% (Barberis et al., 2015). The
required rate of return for the stock has been calculated by using the formula:
CAPM (Re): Risk Free Rate + Beta*(Return on Market- Risk Free Rate).
CAPM (Re): 0.95% + 1.02*(5.13%-0.95%)
R(e): 5.20%.
On the other cost of debt for the company has been calculated based on the yield that has
been actually generated from the bond which is as follows:
Cost of Debt
Particulars 2018 2017
Interest Cost 16202 15758
Long Term Borrowings 622234 626655
Yield to Maturity 2.60% 2.51%

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References
Barberis, N., Greenwood, R., Jin, L. and Shleifer, A., 2015. X-CAPM: An extrapolative capital
asset pricing model. Journal of financial economics, 115(1), pp.1-24.
Commbank.com.au. 2019. [online] Available at:
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-
reports/CBA-2019-Annual-Report.pdf [Accessed 3 Oct. 2019].
Commbank.com.au. 2019. Enterprise Services Careers:Technology & IT Solutions - CommBank
Careers. [online] Available at:
https://www.commbank.com.au/about-us/careers/working-here/enterprise-services.html
[Accessed 3 Oct. 2019].
Commbank.com.au. 2019. Personal banking including accounts, credit cards and home loans -
CommBank. [online] Available at: https://www.commbank.com.au/ [Accessed 3 Oct. 2019].
Goh, B.W., Lee, J., Lim, C.Y. and Shevlin, T., 2016. The effect of corporate tax avoidance on
the cost of equity. The Accounting Review, 91(6), pp.1647-1670.
Westpac.com.au. 2019. Westpac - Personal, Business and Corporate Banking. [online] Available
at: https://www.westpac.com.au/ [Accessed 3 Oct. 2019].