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Your group is required to do the following tasks:

  1. Prepare a brief description of the company, outlining the core activities, the market(s) in which it operates within and any factors in the companies’ history which you consider help present a “picture” of your company.
  2. Specify ownership-governance structure of the company:
  3. i) Name the main substantial shareholders:

With higher than 20.00% of shareholdings. Based on this argument you should classify a firm as a family or non-family company, and Ø With higher than 5.00% of shareholdings.

  1. ii) Name the main people involved in the firm governance:

The Chairman

Board members

CEO.

Whether any of these people have the same surname as any of substantial shareholders (>20% share capital). If yes- you could use this as an argument for the presence of an owner or family member(s) in the firm’s governance. o Whether any of shareholders with more than 5% share capital are involved in firm governance.

Calculate the following Fundamental Ratios for your selected company for the past 2 years. Annual reports are accessible via company websites:

- Short term solvency (Liquidity ratios)

- Long term solvency (Financial Leverage ratios)

- Asset utilization (efficiency or turnover ratios)

- Profitability ratios

- Market value ratios

Using the information from the ASX website: www.asx.com.au you must complete the following tasks:

  1. i) Prepare a graph / chart for movements in the monthly share price over the last two years for the company that you are investigating. Plot them against movements in the All Ordinaries Index.
  2. ii) Write a report which compares movements in the companies’ share price index to the All Ords Index. For instance, how closely correlated is the line with the All Ords Index. Above or below? More or less volatile?
  3. Research via the internet or financial/business publications:

From research via the internet (using credible sources) or financial/business publications, note any significant announcements which may have influenced the share price of your company. These factors could include merger activities, divestitures, changes  in management’s earnings forecasts, changes in analysts’ forecasts, unusual write-offs or abnormal items, macroeconomic factors, industry widefactors, significant management changes, changes in the focus of the company, impact of competitors or law suits etc. (Restrict the number of announcements to 5).

  1. i) What is their calculated beta (β) for your company?
  2. ii) If the risk free rate is 4% and the market risk premium is 6%, use the Capital Asset Pricing Model (CAPM) to calculate the required rate of return for the companies’ shares.

iii) Is the company you have chosen a “conservative” investment? Explain your answer.

  1. i) Using information from the latest company report for the company (i.e. interest rate on their major source of long-term loans) and the estimated cost of equity capital calculated (in part 6ii above), calculate the WACC for your company.
  2. ii) Explain the implications that a higher WACC has on management’s evaluation on prospective investment projects.
  3. Consider the debt ratio for your company over the past two years:
  4. i) Does it appear to be working towards the maintenance of a preferred optimal capital structure? (i.e., does it appear to be “stable”?). Explain your answer.
  5. ii) What have they done to adjust/amend their gearing ratio? Increase or repay borrowings? Issue or buy back shares? Has the Director’s Report given any information as to why they have made any adjustments?

Fundamental Ratios for National Australian Bank Company

In this report, financial management analysis tools have been used to analysis the business. It is observed that there are several financial tools such as ratio analysis, capital structure analysis, and capital budgeting analysis top down analysis. In this report, National Australian Bank Company has been taken to prepare this report.  This report emphasises upon the financial performance, weighted average cost of capital, share price analysis, dividend policy and letter of recommendation which could be used by investors to make the effective financial decisions.

National Australian Bank is Australian Bank which is one of the four biggest financial banks in Australia. This Bank is the four largest Banks in terms of the capitalization, revenue and profitability. This company has gained momentum in market by providing effective banking service in Australian Market.

There are several key managerial persons who take all the necessary decisions to run the business effectively.

(Yahoo finance, 2017)

The table reflects the numbers of shareholders who have owned the highest shares in National Australian Bank.

In addition to this, there are several key persons who take all the imperative decisions to run the business effectively.

The governance of National Australian Bank has shown that it has complied with the all the rules and regulation. It is observed that company has strong legal compliance program which strengthen its corporate governance program.

(Yahoo finance, 2017)

This ratio analysis is used to analysis the relation between two financial factors which divulges the profitability and capital structure of company.

Details of the imperative information of National Australian Bank

National Australian Bank

Particulars (Amount in Million

2016

2017

 

AUD$

EBIT

27,629

27,403

Interest

14,699

14,221

Net profit

21,666

17,730

Total Assets

7,77,622

7,88,325

Total Liabilities

7,26,307

7,37,008

Shareholders' Equity

51,292

51,306

This above given details reflects the key financial items which National Australian Bank has reflected in the financial statement. The shareholder equity of company has been changed with the slight %.

Short term solvency ratio 

Current ratio

The current ratio of National Australian Bank has increased to 1.2 points in 2017 which shows that it has increased its investment in current assets to increase the productivity.

Liquidity ratio

Years

2017

2016

Current ratio

         1.2

.89

Quick ratio

         .92

.57

.  Quick ratio has also shown the slight changes as National Australian Bank does not have any capital investment in inventories

Note- current ratio has been considered on the basis of deposits otherwise it will be kept zero (National Australian Bank. 2015).

Proving the equation

Providing equation

2014

2015

2016

2017

Net profit After tax/OE

0.55154

0.475979385

0.42241

0.34557

EBIT/TA*NPAT/EBIT*TA/OE

0.55154

0.475979385

0.42241

0.34557

3.    Debt Ratio

 

2016

2017

A.  Total Liabilities

7,26,307

737008

B.      Total assets

7,77,622

7,88,325.00

(A/B)

93%

93%

Interpretation

The Debt to equity of the company has shown the relation between the total debts and equity of company. It divulges partition of the debt and equity in the capital of company.

The debt portion in the National Australian Bank is very high which shows the high financial leverage. This will also reduce the overall cost of capital of company. It is evaluated that company has reduced its debt to equity ratio to 93% which is 2% lower as compared to last four year data (National Australian Bank. 2015). Company needs to lower down its financial leverage if it wants to create value on its investment (Collier,  2015).

The share price graph reflecting movement

Gearing ratio discussion

The gearing ratio of company is too high as it has been earning good amount of investment in its business.

Gearing Ratio

 

2016

2017

Gearing Ratio

53%

52%

Significant Announcements Affecting National Australian Bank Company's Share Price

Inventory turnover ratio

National Australian Bank does not have inventory in its operations so kept zero.

Efficiency ratio

Years

2017

2016

Inventory turnover ratio

0

0

Asset turnover ratio

.82

.86

Receivable turnover ratio

16.5

17.1

Days' sales in inventory

2.1

2.2

Days' sales in receivables

24

23

Asset turnover ratio

It has asset turnover ratio of .86 which shows good amount of increment in its business.

Debtor turnover ratio

It shows that company has good amount of efficiency to deploy its funds in its business.

Return on Equity of Company

1.        The rate of Return on Assets

2016

2017

A.      Net income (AUD $ in Million)

21,666

17,730

B.      Total assets (AUD $ in Million)

7,77,622

7,88,325

          (A/B)

3%

2%

Interpretation of the data

The above given data has been fetched from the annual report of company. It has been analyzed that the net return on assets of company has gone down to 2% in 2017 which is .99 lower as compared to last two year data shown. It is considered that company has lower down its profitability which has eventually resulted to the reduction in its overall return on capital employed.

Return on equity of the company

2.       The rate of Return on Equity

2016

2017

A. Net income available to equity shareholders.

21,666

17,730

B. Shareholder’s Equity

51,292

51,306.00

(A/B)

42.24%

34.56%

Interpretation

 The return on equity of company has shown that dividend or earning available to equity shareholders. It is observed that return on equity of company has increased to 34.56% As compared to last year

Earnings per share

Company has good amount of earning in its business.

Market Value ratios

Years

2017

2016

Earnings per share

-        2.80

-        7.40

P/E ratio

             -   

             -   

Dividend pay-out ratio

             -   

             -   

Price to earnings ratio

The National Australian Bank good amount of flow in its business and kept high market price the  PE ratio to .68 in 2017 which is 20% higher as compared to last year data.  

Dividend payment ratio

National Australian Bank good amount has dividend payout ratio of 1.26 in 2017 which shows high amount of cash outflow.

Movement in the share price of National Australian Bank

Graph reflecting the movement in the share price of National Australian Bank

Comparison between movement in the share price of National Australian Bank and share price return of the all ordinary stock exchange

The above given graph reflects the movement in the share price of National Australian Bank in last two years as compared to last two year ordinary index price movement. It is observed that the share price movement of National Australian Bank has reflected high fluctuation in its share price due to its high profitability.

The share price movement of the all ordinary index of the Australia reflected the positive increment of average 20% since last three years. It is observed that National Australian Bank has good amount of increment in its share price due to several factors such as profitability, financial leverage and business efficiency (Ehiedu, 2014).

It is analyzed that if investors invest their capital in National Australian Bank for short term then they might have less amount of capital creation but if they keep their capital invested for long run then it would increase the overall capital value. Company has strong sustainability to create value on their investment (Baños-Caballero et al, 2014).

There are several facts and reasons which have impacted the share price of National Australian Bank. It is observed that company has high value creation in their share price since last three years. The main announcements were related to the reduction in the repo rate or capital reserve requirement. Due to the decrease in the capital reserve requirement, National Australian Bank increased its business efficiency and resulted to the increased return on capital employed. It also impacted the share price movement of National Australian Bank in positive manner.

Is National Australian Bank Company a Conservative Investment?

The share price movement is highly based on the positive announcement of company.

National Australian Bank increased its dividend payment by 20% since last three years which shows the positive impact on the share price of company.

Stock information and Beta calculation

The beta value calculation shows the % change in the share price of company based on the % change in the market risk factors or index value. The positive side reflects the changes in the market price of company with the changes in influential factors of market.  

The beta of value of National Australian Bank is -0.07432 which shows that if the market changes by 1% then the share price of National Australian Bank will move by 0.07432 in negative direction (White, Sondh, and Fried, 2015).

Regression Statistics

 

Multiple R

0.124601

R Square

0.015525

Adjusted R Square

-0.0337

Standard Error

0.023978

Observations

22

ANOVA

 

df

SS

MS

F

Significance F

Regression

1

0.000181

0.000181

0.315406

0.580621

Residual

20

0.011499

0.000575

Total

21

0.01168

 

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept

0.009079

0.005347

1.697947

0.105024

-0.00207

0.020233

-0.00207

0.020233

X Variable 1

-0.07432

0.132334

-0.56161

0.580621

-0.35036

0.201724

-0.35036

0.201724

E(R) =

E(R) = Return on Capital required

 = % of risk free rate of return

β = Beta

= Market risk factor (National Australian Bank. (2017).

Calculation of Required rate of return

Risk-free rate (A)

4%

Beta (B)

-0.074320221

Market Risk premium (C)

6%

Required rate of return [A+(B*C)]

3.55%

(Please see the excel)

Notes- The risk free rate of return i.e. Fry is based on the 10 years government bonds

The annual report of National Australian Bank reflects that company followed conservative investment methods. It is observed that company has been investing its capital in other business sectors as well to create value on its investment The profitability of company is average which is low as compared to other industry sector. National Australian Bank has also undertaken other business such as securitisation and creating value on their investment.  It is inferred that conservative investment is followed when company has low weighted average cost of capital. In case of National Australian Bank, it has low WACC which eventually increases the overall capital investment of company in other projects (Zhang, and Zhang, 2014).

Cost of capital- 3.55%

Computed by using the CAPM method

Cost of debt- 1.93%

The cost of debt is computed by using the formula i.e. interest/ debt *100 (Brigham, and Ehrhardt, 2013).

WACC = cost of debt* portion of the debt capital+ cost of Equity * portion of the Cost of equity

WACC

Capital Amount

Cost of capital

% of portion

WACC

Equity

51,306

3.55%

7%

0.00323%

Debt

7,37,008

1.93%

93%

1.80%

Total capital

7,88,314

WACC

2.04%

The weighted average cost of capital is 2.04% which shows that company could invest its capital in many projects to create value on it investment.  This lowest WACC reflects that company should accept more and more projects if it wants to increase the return on capital. Ti will also improve the profitability of company in long run (Williams, and Best, 2014). 

National Australian Bank is having very low weighted average cost of capital. It is evaluated that company. If National Australian Bank has higher weighted average cost of capital then it will negatively impact the investment decision of company. It is analyzed that if National Australian Bank has higher WACC then it will fail to accept the projects for its investment (Dahmash., 2007). 

The higher WACC will negatively impact the return on capital employed of company.  The National Australian Bank could decrease its overall efficiency if it has higher WACC. In order to reduce the WACC, National Australian Bank should raise funds by using the debt funding.

Key Managerial Personnel of National Australian Bank Company

The financial leverage of National Australian Bank has been stable for a very long time. It maintained 92% debt to equity ratio which reflects that company has high financial leverage. It is considered that National Australian Bank has reduced its overall output due to the sluggish market condition. If Company could manage to reduce the debt to equity ratio then it will not only reduce the financial leverage but also assist the stable capital structure (Ehiedu, 2014).

Computation of debt to equity of Company

Debt Equity

2016

2017

A.  Total Liabilities

7,26,307

737008

B.      Total assets

7,77,622

7,88,325.00

(A/B)

93%

93%

Interpretation

The debt to equity of National Australian Bank is 93% which is 2 % lower  as compared to last year data. The higher debt to equity portion shows that it will eventually reduce the overall cost of capital of company. It is observed that company has very least cost of capital due to the low cost of debt. In addition to this, company already has 93% debt portion in its business (Libby, 2017).

The gearing ratio shows the interest payment and company’s ability to pay off interest from its earning. The Company has increased its gearing ratio to 52% in 2017 which is 3% lower as compared to 2013. Company has reduced the overall interest payment throughout the time but the debt portion of company has been maintained stable. The financial leverage of company is showing high financial risk which needs to be managed by National Australian banks to maintained less risky business.

Gearing Ratio

 

2016

2017

Gearing Ratio

53%

52%

The effectiveness of the gearing ratio depends upon the profitability and efficiency of the business (Dagwell, Wines, and Lambert, 2015).

The dividend policy of company plays pivotal role in the business success of organization. After analysing the annual report and cash flow statement of National Australian Bank, it could be inferred that company has followed profit based dividend policy. The bonus share and incentive program followed by company shows the good indicators for the shareholders (Weygandt, Kimmel, and Kieso, 2015). However, company has good amount of profitability in its business which shows that National Australian Bank instead of offering dividend to its shareholders should plug back its investment in its business back.  The dividend policy of National Australian Bank is highly acceptable if company want to attract more shareholders to invest their capital in the business. The dividend policy of company could be changed with the changed business factors of organization. It is analyzed that investor needs to implement the effective strategic program i.e. using the retained earnings to expand the business on international level. It has been observed that company should lower down its debt portion by increasing the equity funding. National Australian Bank instead of offering dividend should offer bonus shares which will reduce the debt portion (Heitzman, and Huang, 2018).

With the ramified changes in economic factor, there are several positive and negative factors which may impact the business of National Australian Bank. It is analyzed that the profitability of company has increased but it also increases the operating expenses of company. The beta value of Company is showing -.074 which shows the positive indicator for the sluggish market condition. The weighted average cost of capital of company has changed by 1% (National Australian Bank. 2018). The negative business factors are related to the increased financial leverage. It is observed that National Australian Bank has 93% debt portion in its capital structure. It reflects that company has lower cost of capital i.e. 2.3% which is positive indicator for creating value on the investment. The 2.3% WACC will increase the overall return on capital employed of business (Magnan, et al. 2015). 

After analysing all the details and financial factors of business, it could be inferred that company has good amount of return from its business. If company could follow proper strategic program such as changes in debt to capital structure, dividend policy and business expansion then it will eventually increase the value on the capital investment of National Australian Bank.

Now in the end, it could be inferred that National Australian Bank has good business profitability and efficient business functioning. If National Australian Bank wants to maintain sustainable business in long run then management of Bank needs to lower down its debt funding.

Conclusion 

National Australian Bank has been gaining momentum throughout the time by increasing its profitability and expanding business.  The return on asset of National Australian Bank has decreased to 2% in 2017 which is .99% lower as compared to last five year data. It is analyzed that company has kept high financial leverage in its all five years. Company has reduced its debt funding to 93% which is 2 % lower as compared to last five year. National Australian Bank needs to lower down its debt portion to 30% to 40% if it wants to maintain stable business in long run. The higher debt portion will increase the overall financial risk which will eventually impact the business of National Australian Bank if market shows the negative factors.

References

Baños-Caballero, S., García-Teruel, P.J. and Martínez-Solano, P., 2014. Working capital management, corporate performance, and financial constraints. Journal of Business Research, 67(3), pp.332-338.

Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.

Dagwell, R., Wines, G. and Lambert, C., 2015. Corporate accounting in Australia. Pearson Higher Education AU.

Dahmash, F.N., 2007. An Examination of the Value Relevance and Bias in the Accounting Treatment of Intangible Assets in Australia and the US Over the Period 1994-2003 Using the Feltham and Ohlson (1995) Framework. University of Western Australia.

Ehiedu, V.C., 2014. The impact of liquidity on the profitability of some selected companies: The financial statement analysis (FSA) approach. Research Journal of Finance and Accounting, 5(5), pp.81-90.

Heitzman, S. and Huang, M., 2018. Internal Information Quality and the Sensitivity of Investment to Market Prices and Accounting Profits.

Libby, R., 2017. Accounting and human information processing. In The Routledge Companion to Behavioural Accounting Research (pp. 42-54). Routledge.

Magnan, M., Menini, A. and Parbonetti, A., 2015. Fair value accounting: information or confusion for financial markets?. Review of Accounting Studies, 20(1), pp.559-591.

National Australian Bank. (2015). Annual report. Available at https://www.wellard.com.au/assets/ASX%20Announcements/160930%20Annual%20Report.pdf, Accessed on 29th April 2015

National Australian Bank. (2016). Annual report. Available at https://www.wellard.com.au/assets/ASX%20Announcements/160930%20Annual%20Report.pdf, Accessed on 29th April 2018

National Australian Bank. (2017). Annual report. Available at https://www.wellard.com.au/assets/ASX%20Announcements/160930%20Annual%20Report.pdf, Accessed on 29th April 2018

National Australian Bank. (2018). Annual report. Available at https://www.wellard.com.au/assets/ASX%20Announcements/160930%20Annual%20Report.pdf, Accessed on 29th April 2018

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.

White, G.L., Sondh, A.C. and Fried, D., 2015. Analysis of Financial Statement. Analysis.

Williams, K.M. and Best, G., 2014. Short study tours abroad: Internationalizing business curricula. Journal of Teaching in Travel & Tourism, 14(3), pp.240-259.

Yahoo finance, 2018 Available at https://in.finance.yahoo.com/.,  Accessed on 29th April 2018

Zhang, C. and Zhang, J., 2014. Analysing Chinese citizens' intentions of outbound travel: a machine learning approach. Current Issues in Tourism, 17(7), pp.592-609.

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