Financial Analysis Of AMP Limited

Prepare an excel spreadsheet calculating whether this product will satisfy the investment parameters set by Saturn Group global.

(i) Required:

For the proposed ‘Buddy’ capital investment calculate the following:

After-tax cash flows (3 marks).

Payback period (2 marks).

Net present value (3 marks).

Profitability index (2 marks).

Nathan Quinlivan advises you that he is concerned about the increasingly challenging business environment facing Saturn Petcare and would like to conduct some ‘what if’ analysis of the proposed ‘Buddy’ product line capital investment. Nathan is particularly concerned that traditional financial analysis does not take into account the operating leverage impact caused by the high fixed cost component in modern automated manufacturing facilities. He asks you to develop spreadsheet analysis which shows the impact of achieving 10% lower and 10% higher than the budgeted sales projections of 16,000,000 units. Nathan asks that this analysis include the leveraging impact of utilising fixed costs by showing manufacturing costs broken down between fixed and variable components.

(ii) Required:

(a) For the proposed ‘Buddy’ capital investment with sales at 5% higher than estimated calculate the following:

After-tax cash flows (3 marks).

Net present value (3 marks).

(b) For the proposed ‘Buddy’ capital investment with sales at 5% lower than estimated calculate the following:

After-tax cash flows (3 marks).

Net present value (3 marks).

 #IMPORTANT: In your analysis remember that Fixed Costs do not vary with increases/decreases in production/sales. Include Fixed and Variable Costs separately to

show how operating leverage will impact on costs per unit and enable you to identify any multiplier effect on expected cash flows.

Discuss your findings in the three cash flow analyses developed (above) and make a recommendation to Mr Quinlivan as to whether to proceed with the ‘Buddy’ proposal.

Discuss any other issues or items that you think will (or should) impact on his decision including the impact of spare production capacity at the proposed new factory (8 marks)

Table 1: Statement for the proposed Buddy capital investment after tax cash flows  

(In Million AUD)
Particulars	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
Number of unit sold	16	16	16	16	16	16	16	16	16	16
selling price (per unit)	1.25	1.28	1.31	1.34	1.37	1.40	1.44	1.47	1.51	1.54
Total Revenue	20	20.47	20.95	21.44	21.95	22.46	22.99	23.53	24.08	24.65
Raw Material Cost	7	7	7	7	7	7	7	7	7	7
Fixed cost	5.6	5.6	5.6	5.6	5.6	5.6	5.6	5.6	5.6	5.6
Variable Cost	1.4	1.4	1.4	1.4	1.4	1.4	1.4	1.4	1.4	1.4
Gross Profit	6	6.47	6.95	7.44	7.95	8.46	8.99	9.53	10.08	10.65
Depreciation	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95
Profit Before Tax	4.05	4.52	5	5.49	6	6.51	7.04	7.58	8.13	8.7
Tax @ 30%	1.22	1.36	1.50	1.65	1.80	1.95	2.11	2.27	2.44	2.61
Profit After Tax	2.84	3.16	3.50	3.85	4.20	4.56	4.93	5.31	5.69	6.09
Non-cash expense (Depreciation)	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95
Residual Value	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	5.00
Cash Flows after Tax	4.79	5.11	5.45	5.80	6.15	6.51	6.88	7.26	7.64	13.04

Table 2: Statement showing computation of payback period

Years	Cash Flows (Amount in Million $)	Cumulative Cash Flow
0	-20	-20
1	4.79	-15.21
2	5.11	-10.1
3	5.45	-4.65
4	5.8	1.15
5	6.15	7.3
6	6.51	13.81
7	6.88	20.69
8	7.26	27.95
9	7.64	35.59
10	13.04	48.63
Payback Period
		3 + (1.15) / 5.80
		3.19 Years

Table 3: Statement showing computation of NPV

(In Million AUD)
Particulars	Year 1	Year 2			Year 3	Year 4		Year 5		Year 6	Year 7			Year 8		Year 9	Year 10
Cash Flows after Tax	4.79		5.11	5.45			5.80	6.15	6.51			6.88	7.26		7.64			13.04
Present Value Factor @ 20%	0.833		0.694	0.579			0.482	0.402	0.335			0.279	0.233		0.194			0.162
Present Value of Cash Flows	3.99		3.55	3.16			2.80	2.47	2.18			1.92	1.69		1.48			2.11
Total Present Value of Cash Flows	25.34
Initial Capital Outlay	20
Net Present Value	Total present value of cash flow less initial outflow
	5.344206

Table 4: Statement showing computation of profitability index

A	Present value of cash inflow	25.33
B	Present value of cash outflow	20
	Profitability Index (A/B)	1.2665

Table 5: Statement for the proposed Buddy capital investment after tax cash flows by increasing 20%

(In Million AUD)
Particulars	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
Number of unit sold	16.80	16.80	16.80	16.80	16.80	16.80	16.80	16.80	16.80	16.80
selling price (per unit)	1.25	1.28	1.31	1.34	1.37	1.40	1.44	1.47	1.51	1.54
Total Revenue	21.00	21.49	22.00	22.52	23.04	23.59	24.14	24.71	25.29	25.88
Raw Material Cost	7.07	7.07	7.07	7.07	7.07	7.07	7.07	7.07	7.07	7.07
Fixed cost	5.6	5.6	5.6	5.6	5.6	5.6	5.6	5.6	5.6	5.6
Variable Cost	1.4	1.4	1.4	1.4	1.4	1.4	1.4	1.4	1.4	1.4
Gross Profit	6.86	7.35	7.86	8.38	8.9	9.45	10	10.57	11.15	11.74
Depreciation	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95
Profit Before Tax	4.91	5.4	5.91	6.43	6.95	7.5	8.05	8.62	9.2	9.79
Tax @ 30%	1.47	1.62	1.77	1.93	2.09	2.25	2.42	2.59	2.76	2.94
Profit After Tax	3.44	3.78	4.14	4.51	4.87	5.25	5.64	6.03	6.44	6.85
Non-cash expense (Depreciation)	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95
Residual Value	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	5.00
Cash Flows after Tax	5.39	5.73	6.09	6.46	6.82	7.20	7.59	7.98	8.39	13.80
Present Value Factor @ 20%	0.833	0.694	0.579	0.482	0.402	0.335	0.279	0.233	0.194	0.162
Present Value of Cash Flows	4.49	3.98	3.52	3.11	2.74	2.41	2.12	1.86	1.63	2.24
(b) calculation of NPV
Total Present Value of Cash Flows	28.09
Initial Capital Outlay	20
Net Present Value	Total present value of cash flow less initial outflow
	8.094429

Table 6: Statement for the proposed Buddy capital investment after tax cash flows by decreasing 20%

(C) (IN Million AUD $)
Particulars	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
Sales (unit)	15.2	15.2	15.2	15.2	15.2	15.2	15.2	15.2	15.2	15.2
selling price per unit	1.25	1.28	1.31	1.34	1.37	1.40	1.44	1.47	1.51	1.54
Total Sales	19	19.4465	19.90	20.37	20.85	21.34	21.84	22.35	22.88	23.42
Raw Material Cost	6.93	6.93	6.93	6.93	6.93	6.93	6.93	6.93	6.93	6.93
Fixed Cost	5.6	5.6	5.6	5.6	5.6	5.6	5.6	5.6	5.6	5.6
Variable Cost	1.33	1.33	1.33	1.33	1.33	1.33	1.33	1.33	1.33	1.33
Gross Profit	5.14	5.59	6.04	6.51	6.99	7.48	7.98	8.49	9.02	9.56
Depreciation	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95
Profit Before Tax	3.19	3.64	4.09	4.56	5.04	5.53	6.03	6.54	7.07	7.61
Tax @ 30%	0.96	1.09	1.23	1.37	1.51	1.66	1.81	1.96	2.12	2.28
Profit After Tax	2.23	2.55	2.86	3.20	3.53	3.87	4.22	4.58	4.95	5.33
Depreciation	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95
residual Value	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	0.00	5.00
Cash Flows after Tax	4.18	4.50	4.81	5.15	5.48	5.82	6.17	6.53	6.90	12.28
Present Value Factor @ 20%	0.833	0.694	0.579	0.482	0.402	0.335	0.279	0.233	0.194	0.162
Present Value of Cash Flows	3.48	3.12	2.79	2.48	2.20	1.95	1.72	1.52	1.34	1.99
Calculation of NPV
Total Present Value of Cash Flows	22.60
Initial Capital Outlay	20
Net Present Value	Total present value of cash flow less initial outflow
	2.598246

By considering the sensitivity analysis proposal should be accepted by Saturn pet care as even in adverse circumstances it is able to generate positive returns.

Table 7: Statement showing comparative evaluation of available options

(In Million AUD)
Years	Option A	Present Value Factor @ 6%	present value of the cash flow	Option B	Present Value Factor @ 6%	present value of the cash flow
0	475000	1	475000.00	475000	1	475000.00
1	100000	0.943	94300.00	80000	0.943	75440.00
2	100000	0.89	89000.00	80000	0.89	71200.00
3	100000	0.84	84000.00	80000	0.84	67200.00
4	100000	0.792	79200.00	80000	0.792	63360.00
5	100000	0.747	74700.00	80000	0.747	59760.00
6	100000	0.705	70500.00	80000	0.705	56400.00
7				80000	0.665	53200.00
8				80000	0.627	50160.00
9				80000	0.592	47360.00
	Total	5.917	966700.00		7.802	1019080.00

Annualised cost= NPV of the project/ cumulative present value annuity factor

Annualised cost under option A= 966700/5.917

163376.77

Annualised cost under option B= 1019080/7.802

130617.79

By considering the analysis, it can be noticed that project A is more beneficial in comparison to project B.

Executive summary

AMP Limited is engaged in providing various financial services to Australian and New Zealand customers inclusive of banking, wealth management and financial planning services (AMP Limited, 2017). The present study shows that firm has continued to improvise its financial and capital structure, and has mitigated material risks excellently, with their risk management strategies, statements and proper management of debt and equity.

Introduction

The present study aims to conduct the financial analysis of AMP Limited, covering the WAACC comparative analysis, financial ratio analysis and material risks analysis. Along with this the study also assesses the considerable changes that took place in the firm's capital structure in the last three years.

Comparative analysis of WAACC and capital structure

Capital structure of AMP limited

	Amount	Weight
Debt	$21009	.74
Equity	$7202	.26
Total	$28211	1

WACC of AMP Ltd

	Weight	Cost of finance	Weighted Cost (Cost of finance * weight)
Debt	.74	1.95% Note 1	1.46%
Equity	.26	9.73% Note 2	2.53%
	1		3.99%

 

Note 1	Note 2
Cost of debt	Cost of equity
2.79%* (1-.3 /(tax rate))	=.29/3.22+8%
1.95%	=9.73%

Working note 1

Interest /Debt*100

585/21009

2.79%

Calculation of CAPM of AMP Ltd

Risk free rate + beta  (Return of market - Risk free rate

%)

Working note 2

Risk free rate is considered by yield rate delivered by Australian government bonds.

Comparison of capital structure of AMP Ltd and Common Wealth Bank

	Commonwealth bank	Weight	AMP Limited	Weight
Debt	63,716	.77	21009	.74
Equity	18726	.23	7202	.26
	82,442	1	28211	1

By analyzing the capital structure of the both companies, it has been observed that both the companies implement the parallel policy for retaining the capital structure.  Since both organizations are related with the banking industry along with the objective of earning profit therefore in the capital structure, the companies maintain the potion of debt higher than as compare with the equity, which leads to the ideal capital cost of the organizations.

Key financial ratios for AMP Limited 

Liquidity and solvency ratio	2017	2016	2015	2014	2013
Current ratio	0.67%	0.65%	0.78%	0.86%	0.85%
Long term debt	0.46%	0.45%	0.55%	0.52%	0.48%
Debt/equity ratio	0.88%	0.86%	1.24%	1.09%	0.970%

The ideal current ratio is 2:1, and by considering the above table the current ratio of company is not ideal, it is reducing overtime which shows that company has managed its working capital effectively and is required to work on the same (Market Watch, 2018). Since the company has given more weight to debt and less weight to equity in recent times, which is an ideal strategy because by considering trend of profits over the years, as with the stability in profits. It is because ensuring stability in financial costs is prudent decision in associated with the constant profits of the business

Profitability ratio	2017	2016	2015	2014	2013
Operating margin	20.58%	15.68%	21.00%	23.43%	20.01%
Net profit margin	12.31%	11.23%	12.83%	13.20%	11.91%

Profits of the company are stabilized over the years, reflecting that company has managed its assets and resources in an optimum manner.

Efficiency ratio	2017	2016	2015	2014	2013
Asset turnover ratio	0.08%	0.08%	0.08%	0.08%	0.08%
Receivable turnover ratio	2.07%	2.20%	2.31%	2.44%	2.43%

Similar to the profitability, company had maintained their efficiency over the assets appropriately, by focusing equally on retunes as well as available resources. However, company is required to improvise the current situation to ensure sustainable growth. This can be attained through investing in new technology to enjoy higher returns.

Investor ratio	2017	2016	2015	2014	2013
Return on Equity (ROE)	24.67%	22.88%	20.13%	21.51%	16.01%
Return on Tangible Equity	24.67%	22.88%	20.13%	21.51%	16.01%
Return on Assets (ROA)	1.00%	0.94%	1.16%	1.35%	1.02%
Return on Investment (ROI)	13.34%	11.39%	9.07%	10.41%	8.36%

Investor ratios are showing an increasing trend, stating that company has focused more on shareholder wealth of business.

Significant changes to have occurred to the firm's capital structure during the past three years

AMP Limited

	2017	Weight	2016	Weight	2015	Weight
Equity	7202	2.06%	7462	5.09%	8519	5.06%
Debt	21009	7.04%	5241	4.01%	6664	4.04%
	28211	1.0%	12703	1.0%	15183	1.0%

It can be asserted that the firm has maintained an effective balance between debt and equity, neither higher nor is lower. The management of firm is optimally good, and by the same it has enjoyed stabilized profit over time. The firm has provided preference towards debt currently in the year 2017, because if they earn more proceeds, then it not mandatory for them to provide more proceeds to shareholders as well. Hence, this strategy of increasing debt strengthens the financial performance and structure of the company, thereby assisting them in gaining more of profits and success.

Material risks faced by the business

AMP Limited has segregated risks into seven types of material risks which are managed, considered and reported to the board and reliable committees of make sure that there is proper and adequate management of risk. The risk appetite statement are based on these risks that include the main material risks types impact valid to AMP which can be employed to manipulate risks and support the expected risk culture of AMP (Annual Report of AMP Limited, 2017).

The seven material risks types are; strategic risks which is caused by lost or foregone value linked with key decisions, credit risks which is held by non-payment of an agreed payment by a counterparty, market risk caused by adverse changes in prices of market and investment values, insurance risks of drastic developments of insurance rates, liquidity risks is the risk that means inability to fund, concentration risks is caused by variety of exposures inclusive of credit concentration etc and the last is operational risks led from failure of internal procedures (AMP Limited, 2017).

On the basis of above analysis, conclusion can be drawn that the risk management strategy with the effective ERM structure properly deals with the AMP material risks, in this way the risk exposures are adequately  determined, assessed and mitigated by the firm. Thus, the firm has also continued to deliver effective financial performance from the last three years

AMP Limited, (2017). Retrieved from < https://www.amp.com.au/>.

AMP Limited, 2017. (2017). corporate governance statement Retrieved from < https://corporate.amp.com.au/content/dam/corporate/aboutus/files/2017%20corporate%20governance%20statement.pdf>.

Annual Report of AMP Limited, (2016). Retrieved from < https://www.asx.com.au/asxpdf/20170320/pdf/43gx9bppxvx00n.pdf>.

Annual Report of AMP Limited, (2017). Retrieved from < https://www.annualreports.com/HostedData/AnnualReports/PDF/OTC_AMLTY_2017.pdf>.

Annual Report of Common Wealth Bank, (2016). Retrieved from < https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-reports/annual_report_2017_14_aug_2017.pdf>.

Market Watch, (2018). AMP Ltd. Retrieved from < https://www.marketwatch.com/investing/stock/amp/profile?countrycode=au>.