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FIN203 Banking And Finance

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FIN203 Banking And Finance

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Course Code: FIN203
University: Kings Own Institute

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Country: Australia

Questions:
1. What is the current price of ordinary / common shares in AMP and CBA? How has each evolved over the past 5-years? Graph each series and discuss their evolution.
2. How may the Royal Commission inquiring into the activities of financial institutions in Australia affect systematic (market) risk and unsystematic (firm-specific) risk? Explain how items of news reported from the Royal Commission have moved the share prices of both AMP and CBA. 

Answer:
The current share price of AMP is mainly at the levels of 3.14, where the company’s overall share price has changed over the period of five fiscal year. The decline in share price has been witnessed due to the reduction in valuation of the company. The reduction in financial performance of AMP has mainly initiated the decline in share price of the organisation, where financial condition has reduced exponentially leading to the reduction in their current share valuation. The overall share price of the company has mainly increased from 2014 to 2015, while the decline has been initiated after 2015 March. The share value of the organisation has been declining since 2015, where the values have declined from the levels of 6.5 to 3.14 (Au.finance.yahoo.com 2018). The decline in the overall share value directly indicated a down trend for the organisation, which is continuously motivating the shareholders to sell it shares. The overall high made by the organisation during the financial year of 2015 has not been broken, while lower lows has been obtained by the stock. Tougher, Hanson and Goodman (2017) indicated that investor use the stock charts for understanding the current trend of the organisation and determine whether they can generate high level of returns from investment. 
The share price movement of Commonwealth Bank of Australia is relevantly depicted in the above figure, which indicates the overall shar price movement of the company. In addition, the company’s share price has been witnessing volatility, where no specific trend is been detected from the evaluation. The share price of the company is relevantly having a support line within the price range of 71.50 to 70, as the pricing structure has bounced the value back up since past 5 years. the fiscal year of 2014 mainly witnessed a sudden increment in the overall share value, where the price increased from the level of 72 to 98, which was initiated with the high financial performance of the organisation. However, after reaching the high of 98 the share price declined rapidly towards 71 during the financial year of 2015. This decline in the current share price valuation directly indicates the low financial performance of the company. During the period of 2016 the share price valuation of the company mainly traded within a range of 71 to 88, which was due to the deteriorating financial performance of the company. the current share price value of Commonwealth Bank is mainly at the levels of 71.50, where the current trend of the stock cannot be determined. However, after the break of the five-year support line the downtrend will be initiated, where share price structure will decay due to the reducing financial performance of Commonwealth Bank. In this context, Sharma et al. (2016) mentioned that investors using the technical analysis are able to understand the investment opportunities present within a stock, which helps them to maximise the level of income from investment.
Indicating how the Royal Commission inquiring into the activities of financial institutions in Australia affect systematic (market) risk and unsystematic (firm-specific) risk and explaining how the news reported from the Royal Commission have moved the share price of AMP and CBA:
The Royal Commission assigned by the Australian regulators have direct impact on the current operations of the financial institutions present in Australia. The commission is assigned to analyse the misconduct in banking sector, superannuation, and financial services industry, which has been operating in Australia. This commission is mainly assigned to identify the loopholes, which are present in the current operations of the financial organisations. The responsibility of the Royal Commission is to detect the level of problematic conditions, which is being faced by the financial organisations. This is directly affecting both the systematic and unsystematic risk of the financial organisation, as investors are concerned that the unethical measures conducted by the banking companies can surface. This relevantly increases the level of systematic and unsystematic risk involved in investment, which might negatively affect the return generation capability of the investor. In addition, the systematic and unsystematic risk of the financial organisations relevantly increases due to the possibility of wrong doings conducted by the management (Theguardian.com 2018).
The market (systematic) risk is relevantly on the rise, as the uncertainty within the investors is on the rise. The banking companies involved in the evaluation process of the Royal Commission are among the four largest banks operating within Australia, which increases the concern for investors and portrays the question of an unethical measures, which have been conducted by the management. The unsystematic (firm specific) risk is also considered to be high and us negative affecting the lively hoods of citizens. The Royal Commission was mainly established by the governor-general of Commonwealth for revealing the malpractices, which has been conducted by the financial services that ruined lives of citizens. The detection of malpractices within the operations of the banking companies will directly increase both systematic and unsystematic risk (Theguardian.com 2018).
The share price of AMP and CBA has mainly declined after the Royal Commission has been assigned, as relevant news regarding the manipulation conducted by both the financial organisations are declared by the commission. The scandal was unfolded by the Royal Commission regarding the operations of AMP, where the financial institution was charging high fees for their super account. This disclosure directly indicated the loopholes in the management, where AMP disclosed about the paying a compensation of $5 million to almost 50,000 superannuation fund members. Therefore, the disclosers conducted by the Royal Commission is directly affecting the share price valuation of the company, as the fraudulent activities are being highlighted. Hence, the decline in share price of the organisation can be witnessed in figure 1, which was initiated from the state of 2018 February, where the relevant news was disclosed by the Royal Commission (Theguardian.com 2018).
The Royal Commission also disclosed about the criminal offences which was being conducted by CBA. These allegations were conducted by CBA where the relevant information regarding the current unethical practices conducted by the management was disclosed. The future reports of the Royal Commission will hold the relevant information, which is needed for the disclosure of unethical activities conducted by CBA (Theguardian.com 2018).
Capital Budgeting 
Distinguishing between the required rate of return and internal rate of return (IRR):
There are major differences between the required rate of return and internal rate of return, as they have different level of usage, which are conducted by company is deriving the financial significance of the proposed project. Baum and Crosby (2014) mentioned that internal rate of return is conducted to be one the major component of the investment appraisal techniques, which are used by company to analyse the current financial performance of the project. Th major differences between the internal rate of return and required rate of return are depicted as follows.

The first and foremost difference between the internal rate of return and required rate of return is its usage, which needs to be conducted by the company in deriving the accurate result. The organisation uses the internal rate of return calculation to determine the level of minimum returns, which the project can provide during its life time. On the other hand, the required rate of return is used as the minimum level of return that the project needs to provide over the period of time (Li and Trutnevyte 2017).
The second major difference between eh required return and internal rate of return is the usage for determining the financial viability of the project. The required rate of return is mainly used in the calculation of net present value, which depicts the financial performance of the project. In addition, the required rate of return is mainly calculated for addressing the time value of money and is used for determining the present value of the future cash inflows. However, the internal rate of return needs to be higher than the required rate of return of the project, which is a minimum criteria for each project (Lokman et al. 2017).

Determining the net present value of both the projects, which indicating whether they should be accepted:

Year

Project X

Discounting rate

Dis-cash flow

0

 $    (300,000)

                  1.00

 $ (300,000.00)

1

 $        80,000

                  0.89

 $    71,428.57

2

 $      140,000

                  0.80

 $ 111,607.14

3

 $      130,000

                  0.71

 $    92,531.43

4

 $      160,000

                  0.64

 $ 101,682.89

Discounted rate

12%

 

 

NPV

 $   77,250.04

 

 

 
The above table represents the overall net present value calculation of Project X, which directly indicates the level of income, which can be generated by the project over the period of four years. The calculation directly indicates that the current net present value is mainly at the levels of $77,250.04, which is depicted in the above table. The discount rate of 12% is taken into consideration in the above table for determining the level of returns, which can be generated from an investment.

Year

Project Y

Discounting rate

Dis-cash flow

0

 $    (300,000)

                  1.00

 $ (300,000.00)

1

 $      160,000

                  0.89

 $ 142,857.14

2

 $      160,000

                  0.80

 $ 127,551.02

3

 $      160,000

                  0.71

 $ 113,884.84

4

 $      160,000

                  0.64

 $ 101,682.89

5

 $      160,000

                  0.57

 $    90,788.30

6

 $      160,000

                  0.51

 $    81,060.98

Discounted rate

12%

 

 

NPV

 $ 357,825.17

 

 

The calculation depicted in the above table directly indicates the level of net present value for Project Y, which is mainly at the levels of $357,825.17. The calculation has been conducted for 6 years, where the overall cash inflows has been stable, which might help in generating high level of income. From the evaluation of both Project X and Project Y the financial viability of Project Y is considered to be high, which would eventually raise the level of income for the company. Warren and Seal (2018) mentioned that with the help of net present valuation calculation companies are able to segregate predicts and select the suitable investment opportunity, which can improve their firm value in future.
Determining the IRR for each of the project and detecting whether it should be accepted:

Year

Project X

0

 $    (300,000)

1

 $        80,000

2

 $      140,000

3

 $      130,000

4

 $      160,000

Internal Rate of Return

23%

The calculation of internal rate of return is mainly calculated at the above table, which depicts that the project will provide an internal rate of return value of 23%. The internal rate of return value is higher than the required rate of return, which indicates the positive valuation of the project in proving high returns from investment.

Year

Project Y

0

 $    (300,000)

1

 $      160,000

2

 $      160,000

3

 $      160,000

4

 $      160,000

5

 $      160,000

6

 $      160,000

Internal Rate of Return

48%

The calculation presented in the above table also depicts the internal rate of return value, which can help in depicting the performance that can generate high income from investment. The internal rate of return for Project Y is mainly at the levels of 48%, which is way higher than the current required rate of return of 12%. The evaluation of the relevant calculation directly indicates that from the two proposals Project Y need to be selected, as its overall internal rate of return is higher for the organisation. Hence, selecting Project Y will eventually allow the company to improve their return generation capability. Shortall et al. (2016) mentioned that internal rate of return calculation directly allows the managers of the organisation to detect the project with the highest internal rate of return generation capability.
Indicating whether change in conclusion will be conducted if the overall required rate of return decreases to 10%:

Year

Project X

Discounting rate

Dis-cash flow

0

 $    (300,000)

                  1.00

 $ (300,000.00)

1

 $        80,000

                  0.91

 $    72,727.27

2

 $      140,000

                  0.83

 $ 115,702.48

3

 $      130,000

                  0.75

 $    97,670.92

4

 $      160,000

                  0.68

 $ 109,282.15

Discounted rate

10%

 

 

NPV

 $   95,382.83

 

 

 
The changes in the overall discounting rate or required rate of return of the project has mainly helped in raising the level of NPV values. The discounted rate is used for detecting present value of the future cash flows that has been generated by the project. This decline in required rate of return from 12% to 10% has mainly increased the NPV from $77,250.04 to $95,382.83.

Year

Project Y

Discounting rate

Dis-cash flow

0

 $    (300,000)

                  1.00

 $ (300,000.00)

1

 $      160,000

                  0.91

 $ 145,454.55

2

 $      160,000

                  0.83

 $ 132,231.40

3

 $      160,000

                  0.75

 $ 120,210.37

4

 $      160,000

                  0.68

 $ 109,282.15

5

 $      160,000

                  0.62

 $    99,347.41

6

 $      160,000

                  0.56

 $    90,315.83

Discounted rate

10%

 

 

NPV

 $ 396,841.71

 

 

The calculations that has been conducted in the above table represents the overall net present value of Project Y, which might help in improving the level of income from investment. The overall reduction in the current discount rate of Project Y has mainly increased its net present value from $357,825.17 to $396,841.71. This increment in the overall net present value directly portrays the level of income, which can be generated from investment (Almarri and Blackwell 2014). Therefore, from the evaluation it can be detected that the decline in overall required rate of return from 12% to 10% will have no impact on the decisions for selecting the level project for the organisation. The overall net present value of Project Y is relevantly high than Project X.
Indicating under what circumstance the IRR and NPV will offer different recommendations:
The alteration in the IRR and NPV recommendation can be conducted under different circumstances, where the overall financial viability project cannot be detected. The alternations in the expected rate of return of the project will directly have negative impact on the overall valuation of NPV value, while the IRR of the project will remain same. This directly indicates that the recommendations of the project will change for NPV, while the IRR valuation will remain same. The second measure which will alternate the recommendation of IRR and NPV is the variation of the cash outflow timing, where the recommendations of the NPV will not alter, while IRR will depict multiple or negative values. Hence, under the circumstance of variation in timing of the cash flow the IRR valuation will have alternative output. The third factor, where the recommendations of IRR and NPV differ is the tenure of the project (Oesterreich and Teuteberg 2018). The values depicted for IRR will relevant change with the alternation of the project life, while it depicts the accurate internal rate of returns, which is being provided by the project. Therefore, IRR recommendation can be different from the NPV, as NPV aims in discounting the cash inflows of the project, while IRR represents the internal rate of return depicted by the project. Thus, under the above-mentioned situations the overall recommendation depicted by the NPV can differ from the IRR results.
References and Bibliography:
Albertijn, S., Drobetz, W. and Johns, M., 2016. Maritime investment appraisal and budgeting. In The International Handbook of Shipping Finance (pp. 285-313). Palgrave Macmillan, London.
Almarri, K. and Blackwell, P., 2014. Improving risk sharing and investment appraisal for PPP procurement success in large green projects. Procedia-Social and Behavioral Sciences, 119, pp.847-856.
Au.finance.yahoo.com. (2018). Yahoo is now a part of Oath. [online] Available at: https://au.finance.yahoo.com/ [Accessed 16 Sep. 2018].
Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.
Götze, U., Northcott, D. and Schuster, P., 2015. Simultaneous Decision-Making Models. In Investment Appraisal (pp. 209-243). Springer, Berlin, Heidelberg.
Guerra, M.L., Magni, C.A. and Stefanini, L., 2014. Interval and fuzzy Average Internal Rate of Return for investment appraisal. Fuzzy Sets and Systems, 257, pp.217-241.
Higham, A.P., Fortune, C. and Boothman, J.C., 2016. Sustainability and investment appraisal for housing regeneration projects. Structural Survey, 34(2), pp.150-167.
Li, F.G. and Trutnevyte, E., 2017. Investment appraisal of cost-optimal and near-optimal pathways for the UK electricity sector transition to 2050. Applied energy, 189, pp.89-109.
Lokman, S., Volker, D., Zijlstra-Vlasveld, M.C., Brouwers, E.P., Boon, B., Beekman, A.T., Smit, F. and Van der Feltz-Cornelis, C.M., 2017. Return-to-work intervention versus usual care for sick-listed employees: health-economic investment appraisal alongside a cluster randomised trial. BMJ open, 7(10), p.e016348.
Oesterreich, T.D. and Teuteberg, F., 2018. Looking at the big picture of IS investment appraisal through the lens of systems theory: A System Dynamics approach for understanding the economic impact of BIM. Computers in Industry, 99, pp.262-281.
Sharma, A., Fix, B.V., Delnevo, C., Cummings, K.M. and O’Connor, R.J., 2016. Trends in market share of leading cigarette brands in the USA: national survey on drug use and health 2002–2013. BMJ open, 6(1), p.e008813.
Shortall, J., Shalloo, L., Foley, C., Sleator, R.D. and O’Brien, B., 2016. Investment appraisal of automatic milking and conventional milking technologies in a pasture-based dairy system. Journal of dairy science, 99(9), pp.7700-7713.
Theguardian.com. (2018). AMP to compensate super investors after fresh humiliation at royal commission. [online] the Guardian. Available at: https://www.theguardian.com/australia-news/2018/aug/16/amp-admits-fees-were-so-high-100000-super-investment-made-a-loss [Accessed 16 Sep. 2018].
Theguardian.com. (2018). Banking inquiry accuses NAB and CBA of possible criminal offences. [online] the Guardian. Available at: https://www.theguardian.com/australia-news/2018/aug/25/banking-inquiry-accuses-nab-and-cba-of-possible-criminal-offences [Accessed 16 Sep. 2018].
Tougher, S., Hanson, K. and Goodman, C., 2017. What happened to anti-malarial markets after the Affordable Medicines Facility-malaria pilot? Trends in ACT availability, price and market share from five African countries under continuation of the private sector co-payment mechanism. Malaria journal, 16(1), p.173.
Warren, L. and Seal, W., 2018. Using investment appraisal models in strategic negotiation: the cultural political economy of electricity generation. Accounting, Organizations and Society.

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