As evident from the graphical representation it can be stated that the share price of the company has been relatively moderate with certain occasions of volatility being noticed. As understood the share price of the National Australian Bank has been in accordance with the all ordinary index (Gibbs et al. 2018). There have been instances during the month of December 2015 where the share price of National Australian Bank declined to stand at -8.41% while in the subsequent month of January 2016 the share price movement of National Australian Bank reflects further decline and stood negatively at -9.36.
Nevertheless, in the following month of February National Australian Bank posted a positive rise of 8.47 from the previous recorded downfall during the month of January (Radi? et al. 2018). It can be stated the three was very less volatility in the share price movement of National Australian Bank against the all ordinary index throughout the year of 2016 with share prices of the bank rising as high as 4.36% during the month of June 2016 (Simply Wall St 2018). Preceding to the following year of 2017 National Australian Bank reported a strong rise in the price of shares to stand positively at 5.47% while the all ordinary index stood 1.52%.
A significant decline in the share price was noticed during the month of April in 2017 when the prices of shares fell as low as -11.41 against the negatively standing all ordinary index of -3.17% (Alvesson and Robertson 2016). The financial year of 2017 reflects that the share prices of the National Australian Bank on certain occasion reported a negative decline against the all ordinary index. The year 2017 has witnessed a medium volatility in the share prices compared to the figures reported against the all ordinary index. Overall it can be stated on observing the share price movement of the National Australian Bank that there is an existence of moderate volatility in share price of the bank.
There are certain factors that creates an impact on the share prices of the National Australian Bank. The “Macroeconomic factors” includes the economic demand for loans. The economic growth creates the demand for the loans and creates an impact on the ability of the borrower to repay that directly impacts the share prices and the higher level of risk undertaken by the National Australian Bank (Iannotta 2014). Following the consequences of the global financial crisis tighter lending practices by the National Australian Bank has resulted in more conservative lending’s. The macroeconomic factors suggest that the credit creation is going strong in Australia at a rate of 2.5% of the GDP. As a result this creates an influence in the share prices of the National Australian Bank.
Another factor that create an influence in the share price of the National Australian Bank is the “changes in the company focus”. This includes an increased focus on the domestic mortgage market since the company has the reputation of working with the business (Wójcik, Knight and Pažitka 2017). The investors may opt for making an investment in the shares of National Australian Bank is primarily because of the rapidly growing business in Australia.
The calculated beta of the National Australian Bank stands 1.20.
(Source: As Created by Author)
Conservative Investment:
Concerning the conservative of making an investment in the shares of National Australian Bank it can be stated that the share prices of the National Australian Bank is lower than then was a year before (Macve 2015). The share prices of the National Australian Bank is presently 1 year low and with dividend yield of around 6.7% and the price earnings ratio of 13.4, the National Australian Bank is regarded as the best buy out among the Australian banks. The inevitable rise in the rates of the reserve bank of Australian would increase the National Australian Bank earnings and loans (Barillas and Shanken 2018). The rationale for making a conservative investment in the shares of National Australian Bank is that the share prices is below future cash flow value but not below the moderate discount of 20% and not below the substantial discount of 40%.
The National Australian Bank is regarded as the good value in terms of the earnings in comparison to the Australian market (Zabarankin, Pavlikov and Uryasev 2014). Additionally the earnings of the National Australian Bank has witnessed growth and it is anticipated to the go further than the low risk savings rate of 4.6%. Over the period of five years the National Australian Bank the annual earnings growth has been positive (Maynard 2017). Furthermore, the National Australian Bank has utilized its asset efficiently than the Australian banking industry with better return on assets. Therefore, the banks has low risk of dividend at the risk saving rate of 2.48% and the dividend of National Australian Bank is currently top among the market players.
Computation of WACC:
Weighted Average Cost of Capital for National Australian Bank:
Table 7: Representing Weighted Average Cost of Capital for National Australian Bank
(Source: As Created by Author)
Explanation of WACC has on management evaluation of investment prospective:
When it is noticed that the WACC is on the higher side then there prevails a sign of greater risk associated to the functional operations of the organization (Warren and Jones 2018). Generally investors require higher amount of return to believe the existence of added sum of risks. The weighted average cost of capital turns out to be an important instrument in ascertaining the anticipated costs that is involved in the financing of the overall resources (Martin and Roychowdhury 2015). This generally comprises of the imbursement of a sum associated to the obligations of the debt or alternatively the costs that originates from the debt financing and the required rate of return that is obligatory in management ownership or cost associated in equity financing.
A large number of the listed companies usually has numerous funding sources. The WACC aims to strike balance in the relative costs of several resources so that a single cost of capital figure is generated (Hoyle, J.B., Schaefer and Doupnik 2015). In usual theory the weighted average cost of capital comprises of the expenditure engaged in raising an additional amount of money. Investors may voice their distress on finding that the WACC is on the higher side of the actual return (Barberis et al. 2015). This results in warning sign a firm may be losing out its worth. As a result the investors may not choose to invest when they find that a higher return is available in the somewhere else in the market.
Debt Ratio:
The debt ratio of National Australian Bank for both the financial year of 2016 and 2017 stood stable at 0.93. The management of the National Australian Bank believes that would be able to repay its debts (Henderson et al. 2015). The management to adjust its adjust the gearing ratio bought a change in the capital structure was reported by National Australian Bank as the bank transitioned to the revised level 2 group structure that created an immediate effect on the capital position of the company (Jegadeesh et al. 2016). The remaining amount of the debt originating from the debt issued directly by the national wealth management holdings were not any required.
Dividend Policy:
The directors of National Australian Bank have declared a final dividend that stood 99 cents per share fully paid on the ordinary shares with 100% franked. The dividend policy of National Australian Bank states the company each year adjusts its dividend reinvestment plan to reflect the position of capital and outlook (Lee. and Parker 2014). The National Australian Bank offers its shareholders with 1.5 discount on the dividend reinvestment plan with no limit in participation.
Letter of Recommendations
To ABC
Adelaide, Australia
Respected Sir,
As evident from the above stated analysis we would like to draw your attention towards our letter that would be providing the recommendations for making investment in the shares of National Australian Bank. The present share price of the National Australian Bank is presently trading below the future cash flow but the share prices are not below the moderate discount of 20%. National Australian Bank is viewed as the better prospect of investment based on the earnings in comparison to the other Australian bank as the earnings of the bank is anticipated to go beyond the low risk savings rate of 2.48%.
The dividend paid by the National Australian Bank is presently at top in comparison to the other dividend payers in the market. A rise in the income of 6.93% is anticipated in the following year. Though the dividends per share have been on the volatile side over the last five years but simultaneously the dividend per share of National Australian Bank has increase in the last five years. The dividends paid by National Australian Bank is presently covered by its net profit.
Additionally, the bank has liabilities that are made up of lower risk funding sources with loans of the National Australian Bank is widely funded by the customer deposits. The level of assets for National Australian Bank comparatively moderate in respect to its equity. Bearing the mid the dividend that is paid by National Australian Bank, it is good prospect of making an investment.
We anticipate the recommendations provided have helped in better understanding of investment prospect in National Australian Bank.
Thank You
Conclusion:
A conclusion can be drawn by stating that share prices of the National Australian Bank is currently trading a below one year low but the bank is believed to have strong cash flow to meet its debts. From the perspective of investors the shares of bank is a good buy since it provides good value of earnings in the Australian market. The earnings growth though appears to be not above the Australian banking market average but it is in positive track and with low risk of savings rate the shares of the National Australian Bank is currently the good buy for the investors.
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