Financial Analysis And Risk Mitigation For AMP Limited

AMP Limited is a large financial services company which commenced trading in 1e49 as the Australian Mutual Provident Society (AMP). It dem utual ised and listed on the Australian Stock Exchange (ASX) in 1998. AMP provide a range of financial services to customers in Australia and New Zealand including banking, financial planning, wealth management and superannuation services. As part of the finance team of AMP Limited you have been tasked with reviewing and preparing a report on the capital structure of the firm and critique whether the firm has been successful in maximising wealth generation for shareholders. 

Your report should be approximately 1000 words (In total) and cover the following areas:

• Using data from the firm's 2017 financial year annual report and other sources assume that the firm has a Beta of 1.47 (Reuters) and that capital return on the market for 2017 was 8.54%: Categorise the AMP's current capital structure into debt and equity. Calculate the firnYs after-tax Weighted Average Cost of CapitaL Using the CAPM calculate whether the firm is providing an appropriate return given its risk. Compare the firm's capital structure with at least one other firm operating within a similar industry

• Identify and critically analyse key financial ratios for AMP Limited.

• Outline and discuss any significant changes to have occurred to the firm's capital structure during the past three.

• In the 2017 Annual Report (p.24) AMP's Directors identified seven (7) material risks facing the business. Given the impact on the share price of AMP following evidence given to the Financial Services Royal Commission discuss whether you believe this list is adequate or properly represents the risks that AMP were facing at the end of the 2017 calendar year. In your response critically evaluate the extent to which the firm has been successful in managing its risk and maximising wealth for shareholders in the past three years.

After-tax cash flows

(A) Statement Showing After-tax Cash Flows for the proposed "Buddy" Capital Investment (IN Million AUD $)
Particulars	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
Unit Sales	16.00	16.00	16.00	16.00	16.00	16.00	16.00	16.00	16.00	16.00
Sales 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 Revenue	20.00	20.47	20.95	21.44	21.95	22.46	22.99	23.53	24.08	24.65
Cost of Raw Material	7.00	7.00	7.00	7.00	7.00	7.00	7.00	7.00	7.00	7.00
Fixed Conversion Cost	5.60	5.60	5.60	5.60	5.60	5.60	5.60	5.60	5.60	5.60
Variable Conversion Cost	1.40	1.40	1.40	1.40	1.40	1.40	1.40	1.40	1.40	1.40
Gross Profit	6.00	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	5.00	5.49	6.00	6.51	7.04	7.58	8.13	8.70
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
Depreciation	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95
Salvage 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

 Payback period

Computation of Payback Period
Years	Cash Flows (IN Million $)	Cumulative Cash Flow
0	-20	0
1	4.79	4.79
2	5.11	9.90
3	5.45	15.35
4	5.80	21.15
5	6.15	27.30
6	6.51	33.81
7	6.88	40.69
8	7.26	47.94
9	7.64	55.59
10	13.04	68.63
	Payback Period =	3 + (21.15 - 20) / 5.80
		3.19 Years

 Net present value

(C) Statement Showing Net Present Value for the proposed "Buddy" Capital Investment (IN Million AUD $)
Particulars	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
Unit Sales	16.00	16.00	16.00	16.00	16.00	16.00	16.00	16.00	16.00	16.00
Sales 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 Revenue	20.00	20.47	20.95	21.44	21.95	22.46	22.99	23.53	24.08	24.65
Cost of Raw Material	7.00	7.00	7.00	7.00	7.00	7.00	7.00	7.00	7.00	7.00
Fixed Conversion Cost	5.60	5.60	5.60	5.60	5.60	5.60	5.60	5.60	5.60	5.60
Variable Conversion Cost	1.40	1.40	1.40	1.40	1.40	1.40	1.40	1.40	1.40	1.40
Gross Profit	6.00	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	5.00	5.49	6.00	6.51	7.04	7.58	8.13	8.70
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
Depreciation	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95
Salvage 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
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	3.988	3.551	3.154	2.795	2.471	2.180	1.920	1.688	1.481	2.106
Total Present Value of Cash Flows	25.33
Initial Capital Outlay	20.00
Net Present Value	5.334

 Profitability index

Present Value of Cash Inflows / Present Value of Cash Outflows

25.33/20

1.267

(I) Statement Showing Net Present Value and After-tax Cash Flow for the proposed "Buddy" Capital Investment with 5% higher than Estimated (IN Million AUD $)
Particulars	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
Unit Sales	16.80	16.80	16.80	16.80	16.80	16.80	16.80	16.80	16.80	16.80
Sales 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 Revenue	21.00	21.49	22.00	22.52	23.04	23.59	24.14	24.71	25.29	25.88
Cost of Raw Material	7.07	7.07	7.07	7.07	7.07	7.07	7.07	7.07	7.07	7.07
Fixed Conversion Cost	5.60	5.60	5.60	5.60	5.60	5.60	5.60	5.60	5.60	5.60
Variable Conversion Cost	1.47	1.47	1.47	1.47	1.47	1.47	1.47	1.47	1.47	1.47
Gross Profit	6.86	7.35	7.86	8.38	8.90	9.45	10.00	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	5.40	5.91	6.43	6.95	7.50	8.05	8.62	9.20	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	4.50	4.87	5.25	5.64	6.03	6.44	6.85
Depreciation	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95	1.95
Salvage 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	6.45	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	4.489	3.981	3.522	3.110	2.740	2.410	2.117	1.856	1.626	2.230
Total Present Value of Cash Flows	28.08
Initial Capital Outlay	20.00
Net Present Value	8.081

(I) Statement Showing Net Present Value and After-tax Cash Flow for the proposed "Buddy" Capital Investment with 5% less than Estimated (IN Million AUD $)
Particulars	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
Unit Sales	15.20	15.20	15.20	15.20	15.20	15.20	15.20	15.20	15.20	15.20
Sales 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 Revenue	19.00	19.45	19.90	20.37	20.85	21.34	21.84	22.35	22.88	23.42
Cost of Raw Material	6.93	6.93	6.93	6.93	6.93	6.93	6.93	6.93	6.93	6.93
Fixed Conversion Cost	5.60	5.60	5.60	5.60	5.60	5.60	5.60	5.60	5.60	5.60
Variable Conversion 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	2.87	3.19	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
Salvage 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	4.82	5.14	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	3.486	3.122	2.787	2.480	2.201	1.949	1.722	1.519	1.337	1.983
Total Present Value of Cash Flows	22.59
Initial Capital Outlay	20.00
Net Present Value	2.587

By considering the above three analysis, it can be said that proposed investment should be accepted by the company as even by considering the sensitivity analysis project is providing a positive return. Along with the financial factor, the company is also required to consider non-financial factors on making decisions such as the impact of investment on existing operations and resources. Further, company should consider the fact that the project is providing non-financial benefits such as an increase in customer base and improvisation in the product portfolio of the company.

Required (iii)

In the present case both the replacement, the option has different lives hence Annualised Cost has to be considered for Capital Decision.

Annualised Yield = NPV of the Project / Cumulative Present Value Annuity Factor

Statement Showing Present Value of Cash Outflows
Years	Option A	Present Value Factor @ 6%	Discounted Cash Flows	Option B	Present Value Factor @ 6%	Discounted Cash Flows
0	475000	1.000	475000.00	475000	1.000	475000.00
1	100000	0.943	94339.62	80000	0.943	75471.70
2	100000	0.890	88999.64	80000	0.890	71199.72
3	100000	0.840	83961.93	80000	0.840	67169.54
4	100000	0.792	79209.37	80000	0.792	63367.49
5	100000	0.747	74725.82	80000	0.747	59780.65
6	100000	0.705	70496.05	80000	0.705	56396.84
7				80000	0.665	53204.57
8				80000	0.627	50192.99
9				80000	0.592	47351.88
	Total	5.917	966732.43		7.802	1019135.38
Annualised Cost of Option A =			163373.24
Annualised Cost of Option B =			130630.04

Since the annualised cost of Option B is lower than Option A. Hence, it should be selected for replacement.

AMP Limited offers wealth management services in and across Asia, Australia and New Zealand. It offers a variety of financial services and items inclusive of financial planning, banking items, retirement savings, investments and risks insurance. The present analysis shows the company has effective risk mitigation strategies aligned with the optimum capital structure.

This part of the study shows the comparative analysis of WAACC along with its capital structure; this part also covers the determination and crucial financial ratio analysis. Further, this part also reflects the considerable changes held in the AMP limited’s capital structure in previous three years, which is followed by the risk analysis of the AMP limited by considering its annual reports and financial statements and reports.

Body

Comparative analysis of WAACC and capital structure

The categorisation of the capital structure of AMP Ltd into debt and equity

	AMP Limited	Weight
Long-term debt	21009	74%
Equity	7202	26%
	28211	100%

 Calculation of WACC

	Weight	Cost of finance	Weighted Cost
Long term debt	74%	1.95%*	1.46%
Equity	26%	9.73%	2.53%
	100%		3.99%

Cost of equity

Re = (D1 / P0) + g

=.29/3.22+8%

=9.73%

Cost of debt

Interest cost (1-tax)

2.79%* (1-.3)

1.95%

Interest cost

585/21009

2.79%

Calculation of CAPM

Rf+beta(Rm-Rf)

2.26%+1.47(8.54-2.26%)

=11.49%

Rf= Risk-free rate: Australian government bond yield.

Rm= Market return

By considering the calculation of CAPM, it can be said that the company is providing a lower return to shareholders in comparison to their expectations. However, retention strategy of profits of the company is viable as they are in the growth stage.

Comparison of the capital structure of AMP Limited and Canaccord Genuity Group

Table 1: Statement showing the capital structure of AMP Limited and Canaccord Genuity Group Inc. in 2017

	CanaccordGenuity Group Inc.	weight	AMP Limited	Weight
Long term debt	59.05	7%	21009	74%
Equity	762.18	93%	7202	26%
	821.23	100%	28211	100%

By considering the capital structure of both the companies it can be noticed that they have adopted contradictory strategies as the majority of operations of CanaccordGenuity Group Inc. are financed by equity source while the capital structure of AMP Ltd comprises debt.  Strategies adopted by both the companies are viable because of the past three years (Annual Report of Canaccord Genuity Group Inc, 2017).

CanaccordGenuity Group Inc. is generating loss or having low profits due to which they are not in a position to provide stable returns as there is the possibility of losses as well. On the other hand, profits of AMP Limited are constantly increasing due to which they are required to stabilize their financial cost to generate the optimum capital structure.

	2017	2016	2015	2014	2013
Current ratio	0.6744	0.6517	07756	0.8581	0.8521
Long term debt	0.4595	0.4542	0.5496	0.5162	0.4781
Debt/equity ratio	0.8835	0.864	1.2439	1.0886	0.9701
Operating margin	20.5841	15.672	20.9986	23.435	20.1
Net profit margin	12.3057	11.2346	12.8348	13.1969	11.9118
Asset turnover ratio	0.0816	0.0836	0.0837	0.0824	0.0775
Receivable turnover ratio	2.079	2.2026	2.3075	2.4404	2.4293
Return on Equity (ROE)	24.6749	22.8837	20.1337	21.5153	16.0095
Return on Tangible Equity	24.6749	22.8837	20.1337	21.5153	16.0095
Return on Assets (ROA)	1.0036	0.9398	1.1607	1.3453	1.0223
Return on Investment (ROI)	13.3369	11.3938	9.0689	10.4087	8.3559

The company has optimum capital on the basis of their current profitability. By considering the current ratios of the company it can be articulated that the company’s liquidity must be improvised as ideally, the current ratio is 2:1, and it is reducing over time. The net profit shows an increasing trend, which shows that the company is improvising their efficiency and generating wealth for the shareholder. Further similar has been shown by investment rations as these are showing increasing trend and reflecting the improvising efficiency of the business.

Significant changes occurred in the capital structure of AMP limited in past three years

Table 2: Statement showing the capital structure of AMP Limited over the past three years

(Amount in Million $)

	2017	Weight	2016	Weight	2015	Weight
Equity	7202	26%	7462	59%	8519	56%
Debt	21009	74%	5241	41%	6664	44%
	28211	100%	12703	100%	15183	100%

The above table shows that, company in the past years was giving weight to equity and investing in the same to stabilize their profits, but however now they have given consideration to debt, and by the main reason for investing in debt is that they are in pursuit to maintain their capital structure and  from effective profit stabilization, and by raising more debt they will be able to generate more of revenues and are not obligatory to provide more returns to shareholders, as their returns will be fixed, whereby the company can enjoy more profits and maintain an optimum financial structure(Annual Report of AMP Limited, 2016).

Overall, the decision of the raising debt by the company is good, because the performance and profitability of the company are showing increasing trend, which in turns help in stabilizing the profits and fix the return of shareholders, so that company can grow and drive competitiveness and profitability thereof.

Risk analysis of AMP Limited

By considering the above table, it can be said that return on investments, equity and assets are improvising on a yearly basis, which is showing that company is performing well in the market and implementing strategies line to line with the material risks to ensure optimal operational management and smooth financial performance (MacroTrends, 2018). This approach shows that identified risks were supported by their core operations and it is mitigated in an appropriate manner which can be noticed by improvising health of shareholders, as the investment ratios are showing increasing trend.

The AMP’s managerial authorities are liable for determining, considering, monitoring and mitigating the business managerial risks. The unit teams of business have delegated the duty to make decisions and execute the daily business while mitigating risks and the ultimate profits and loss in light of the risk appetite of the board and effective risk management strategies. The AMP has managed the risks by designing, adopting and managing the practices and procedures to determine, consider and monitor risks and offer advice with assessing the material business decisions properly (Annual Report of AMP Limited, 2017).

The team of AMP also offers strategic advice and solutions to the decisions based on the first line while offering assurance to the board that the risk profile is lined with the expectations of the board. Further, the AMP has classified risks into seven types of material risks which are managed, considered and reported directly to the board and viable committees to make sure that the risk management is held in an appropriate way (Henisz and Zelner, 2015).

Below are the seven identified material risks of the AMP business:

• Strategy risk
• Credit risk
• Market risk
• Insurance risk
• Concentration risk
• Operational risk

The company has managed the above-identified risks by capturing all the material sources held by the material risks while meeting the high standards in adopting, defining and governing a detailed risks management structure.

Table 3: Investor ratios of AMP Limited

	2017	2016	2015	2014	2013
Return on Equity (ROE)	24.6749	22.8837	20.1337	21.5153	16.0095
Return on Tangible Equity	24.6749	22.8837	20.1337	21.5153	16.0095
Return on Assets (ROA)	1.0036	0.9398	1.1607	1.3453	1.0223
Return on Investment (ROI)	13.3369	11.3938	9.0689	10.4087	8.3559

The risk appetite statement and the strategy for risk management have supported the development of the corporate strategy of AMP and are developed to make sure that the effects of the strategic goals are based on the risk profile while considering that the risks are effectively managed (AMP Limited, 2018). The risk management buttress the informed decision making and helps in capitalizing on business opportunities in support of strategic objective achievement. Finally, the AMP limited approves the risk management framework, inclusive of risk appetite and risk management strategy, and monitor the effectiveness of same alongside.

Thus, the board is highly obligated to set the risk appetite for AMP, and plan strategically for risk management, while also monitoring business policies and practices line in line with the attainment of strategic objectives with the risk appetite and complied laws and norms of the AMP(Yoon and et al., 2018).

By considering the analysis, it can be concluded that the company is performing well as they had improvised their financial position and increasing wealth of shareholders by mitigating identified risks.

AMP Limited, (2018). Risk management(Online). Retrieved from < https://corporate.amp.com.au/about-amp/corporate-governance/risk-management>.

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://corporate.amp.com.au/content/dam/corporate/shareholdercentre/files/reports/2018/Investor_and_annual_reports/2017_annual_report_20_march_2018.pdf >.

Annual Report of Canaccord Genuity Group Inc, (2017). Retrieved from < https://communications.canaccordgenuity.com/legacy/cgg/EN/OnlineAnnualReport2017/index.html>.

Henisz, W.J. &Zelner, B.A., (2015). The hidden risks in emerging markets. In International Business Strategy (pp. 646-654). Routledge.

MacroTrends, (2018). Ameriprise Financial Financial Ratios 2005-2018 | AMP (Online). Retrieved from <https://www.macrotrends.net/stocks/charts/AMP/ameriprise-financial/financial-ratios>.

Yoon, J., Talluri, S., Yildiz, H. &Ho, W., (2018). Models for supplier selection and risk mitigation: a holistic approach. International Journal of Production Research, 56(10), pp.3636-3661.