GROUP Banking Corporation and the market shares
GROUP ASSIGNMENT FINANCE FOR BUSINESS HI5002 (S1) GROUP MEMBERS: WASEE MOON ISLAM. ID: MEE2047 ANKUSH.
ID: PCC2714 SHAHRIAR KABIR. ID: RIA2455 SUBMITTED TO: ISWAN MASTRO SUBMISSION DATE; 29/05/2018 Financial analysis of Westpac Banking CorporationTable of Contents TOC o “1-3” h z u Introduction PAGEREF _Toc514621989 h 31.Description of Westpac Banking Corporation PAGEREF _Toc514621990 h 32.Governance and Ownership structure PAGEREF _Toc514621991 h 33.Performance ratio analysis of Westpac Banking Corporation PAGEREF _Toc514621992 h 54.Changes in the share price of Westpac Banking Corporation PAGEREF _Toc514621993 h 75.4.
1 Graphical presentation for the changes in the share price of Westpac Banking Corporation over the period of two years PAGEREF _Toc514621994 h 76.4.2 Comprising between the share price movement of Westpac Banking Corporation and the market shares listed on the all ordinary stock exchange PAGEREF _Toc514621995 h 77.Announcements PAGEREF _Toc514621996 h 88.Research via internet PAGEREF _Toc514621997 h 96.2 Computation of required rate of return by using CAPM method PAGEREF _Toc514621998 h 106.
3 Determining the investment method (Conservative investment) PAGEREF _Toc514621999 h 109.Weighted average Cost of Capital PAGEREF _Toc514622000 h 119.1Computing cost of Equity using CAPM method PAGEREF _Toc514622001 h 117.2 Implications that a higher WACC on investment decision of Westpac Banking Corporation PAGEREF _Toc514622002 h 1110.Debt ratio consideration of Westpac Banking Corporation PAGEREF _Toc514622003 h 128.1 Stable Debt to equity ratio of the company PAGEREF _Toc514622004 h 128.2 Gearing ratio discussion PAGEREF _Toc514622005 h 1311.
Divided policies of the company PAGEREF _Toc514622006 h 1312.Letter of recommendation PAGEREF _Toc514622007 h 13Conclusion PAGEREF _Toc514622008 h 1513.References PAGEREF _Toc514622009 h 1614.
Appendix PAGEREF _Toc514622010 h 17Introduction:There are several financial tools which could be used by investors before making investment decisions. The Westpac Banking Company has been selected in this report. The discussion emphasises on the financial performance of the company, weighted average cost of capital, share price analysis, dividend policy.
It also contains the letter of recommendation used by the investors to make the financial decision.Description of Westpac Banking Corporation:Westpac banking Corporation, known as Westpac, is an Australian bank and financial service provider. It was the first bank in Australia and one of Australia’s “big four” banks.
Westpac provide a broad range of banking and financial services in the market which includes consumer, business and institutional banking and wealth management services.The current CEO of the company is Brian Hartzer who is performing all the activities for an effective run of business.Governance and Ownership structure:The management team of the corporation have several managerial persons who make decision for the effective run of the business.(Yahoo finance, 2017)The chart shows the shareholding of members who owned the highest shareholding in Westpac. These key managerial persons takes all the important decisions in business. The governance of Westpac has shown that it comply with all the rules and regulations. Westpac has strengthen legal compliance program.
(Yahoo finance, 2017)Source: Yahoo FinancePerformance ratio analysis of Westpac Banking Corporation:Ratio analysis is used to identify the future financial trend and current financial performance (Westpac Bank Corporation. 2016).Information about Westpac Banking CorporationWestpac Banking CorporationParticulars (Amount in Million 2014 2015 2016 2017 AUD$ AUD$ AUD$ EBIT 13,548 14,267 15,148 15,516Interest 18,706 18,028 16,674 15,716Net profit 19,937 20,596 20,954 21,506Total Assets 7,70,482 8,12,156 8,39,202 8,51,728Total Liabilities 7,21,505 7,58,241 7,81,021 7,90,533Shareholders’ Equity 48,456 53,098 58,120 61,288The details given show the financial items which Westpac has shown in the financial statement. There is a slight change in the equity shareholding of the company.
Return on assets:1. Return on Assets 2014 2015 2016 2017A. Net income 19,937 20,596 20,954 21,506B. Total assets 7,70,482 8,12,156 8,39,202 8,51,728 (A/B) 2.59% 3% 2% 3%Interpretation of the data:As the report shows the net return on assets of the company has increased with 1% in 2017, which has a positive fluctuation as compared to the last two years. The given data shows that the profitability of the company has increased over the years which resulted as the increment in its overall return on capital employed (Westpac Bank Corporation.
2018).Return on equity of the company:2. Rate of Return on Equity 2014 2015 2016 2017A.
Net income available to equity shareholders. 19,937 20,596 20,954 21,506B. Shareholder’s Equity 48,456 17,981 58,120 61,288.
00(A/B) 41.14% 114.54% 36.05% 35.09%Interpretation:It shows the benefit give to shareholders on their investment.
It is observed that return on equity has decreased to 35.09% in 2017. The revenue total of the company has decreased but with the decreasing operating expenses it has resulted to the increase in overall profit of the business (Westpac Bank Corporation. 2018).Debt To equity Ratio:3. Debt Ratio 2014 2015 2016 2017A. Total Liabilities 7,21,505 7,58,241 7,81,021 790533B.
Total assets 7,70,482 8,12,156 8,39,202 8,51,728.00(A/B) 94% 93% 93% 93%Interpretation:Company has high financial leverage since very long time. It might destruct the company. As per the debt to equity ratio, Westpac need to lower down it debt to equity ratio to 30: 70 i.e. 30% debt and rest for the equity capital.
This affects the overall capital of the company. It is observed that company has the same debt portion in 2017, as the company has not make any change in its debt portion. The company needs to decrease its financial leverage to create the value on its investments (Westpac Bank Corporation. 2018).Proving the equation:Providing equation 2014 2015 2016 2017Net profit After tax/OE 0.41145 0.387886549 0.
36053 0.3509EBIT/TA*NPAT/EBIT*TA/OE 0.41145 0.
387886549 0.36053 0.3509 (The table shows the equation of the net profit and earnings before interest and tax).
Changes in the share price of Westpac Banking Corporation:4.1 Graphical presentation for the changes in the share price of Westpac Banking Corporation over the period of two years:(Yahoo Finance, 2017)4.2 Comprising between the share price movement of Westpac Banking Corporation and the market shares listed on the all ordinary stock exchangelefttop(Yahoo finance, 2017)It reflects the changes in share price of Westpac Corporation. It reflects how well Westpac has created value in its business. There is less fluctuation in the share price of Westpac.. It is observed that Westpac has maintained a good amount of movements in the share prices due to the factors like profitability.
The investors are more inclined towards gazing the share price analysis and determining whether Westpac has created value in its share price not. Since last two years, there is less fluctuation in its share price and It has created value in its market share price. The company has strong continuity to create value on their investment (Westpac Bank Corporation.
(2017).Announcements:The share price of Westpac Corporation has affected by the several facts and reasons. These factors are related to the investment decisions, strategic alliance, and increased profitability and market factors. Westpac has lower down its interest cost which will increased its turnover and result to increased profitability. In addition to this, Westpac has also hired more 200 staff members in last year which will eventually increase the sustainability of its business.
It also affects the share price movement of the Westpac Corporation positively. Company has also used strategic planning in its business to increase the overall share price. Increase in the dividend payment may be the positive indicator for the future growth of Westpac (Westpac Bank Corporation. 2018).
Research via internet: Stock information and Beta calculation Beta is the measurement tool to inter-related the market risk with the busienss risk. The beta value of Westpac Bank Corporation reflects the negative relation with the market changes. The beta of Westpac Bank Corporation is -0.009783397 (White, Sondh, and Fried, 2015).The beta value of Westpac CorporationRegression Statistics Multiple R 0.
005365944R Square 2.87933E-05Adjusted R Square -0.049969767Standard Error 0.044060174Observations 22ANOVA df SS MS F Significance FRegression 1 1.11796E-06 1.12E-06 0.000575884 0.
981092365Residual 20 0.038825979 0.001941 Total 21 0.038827097 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.
0%Intercept -0.003251498 0.009970593 -0.32611 0.747729714 -0.02404979 0.017547 -0.
02404979 0.017546795X Variable 1 -0.009783397 0.40768276 -0.
024 0.981092365 -0.860194732 0.840628 -0.860194732 0.8406279376.2 Computation of required rate of return by using CAPM method:E(R) = Rf+(?*Rp )Rf= Risk free rate of returnRe= required rate of return B= BetRp = Market risk factor (Westpac Bank Corporation.
(2017).Required rate of return Risk free rate (A) 4%Beta (B) -0.009783397Market Risk premium (C) 6%Required rate of return A+(B*C) 3.94% (Please see the excel)Notes- the risk free rate of return in this case is computed on the basis of rates offered under the RF (Watson, 2017).6.
3 Determining the investment method (Conservative investment):Westpac is having high growth in its busienss so it has been following the aggressive investment method. Its investment has been increasing throughout the time. It has been following the aggressive investment method in which it has invested more than AUD 800 billion capita for the better satisfaction of clients in banking and financial services. Westpac has been offering its banking and financial services at very low cost which increases its overall outcomes in efficient manner.
As compared to the other industries, the company has average profitability. To expand the business activities the Westpac Corporation has started to provide merchant services for SME’S, superannuation funds, landlord insurance, car insurance as well as other products. It has also undertaken the business of securitization and value creation on their investments. The low WACC of Westpac is the trigger point for following the aggressive investment method (Magnan, Menini, and Parbonetti, 2015). Weighted average Cost of Capital:Computing cost of Equity using CAPM method:Cost of capital- 3.
55%Computed by using the CAPM methodCost of debt- 1.93%Cost of debt= . interest/ debt *100 WACC = cost of debt* portion of the debt capital+ cost of Equity * portion of the Cost of equityEquity=AUD $ 61288 Million % of portion = 7%Debt= AUD $ 790533 (% of portion = 97%)WACC= 2.13%(Please see the excel sheet)Westpac has 2.13% weighted average cost of capital.This lower WACC will be useful for the company to create value on it investment.
Eventually, it will assist Westpac Bank Corporation to take more capital projects. 7.2 Implications that a higher WACC on investment decision of Westpac Banking Corporation:The higher WACC will increase the financial risk of the business. It will lower down the amount of earning and viability of the project accepted. It will destruct the earning capacity of the business.It will also impact other ratio such as profitability, return on assets and efficiency of the business. Due to this reason the company could reduce its overall efficiency.
To avoid such situation and to reduce the WACC the company should accept the option of debt funding (Magnan, Menini, and Parbonetti, 2015).Westpac Banking (Debt to equity):8.1 Debt to Equity:Westpac has 93% debt to equity ratio. It should lower down its debt portion otherwise when market will be sluggish, it may destruct the business of Westpac. It is observed that due to the lethargic market conditions, the company has decreased its overall output.
The financial leverage of the company can be reduced by it, if it able to reduce its debt to equity ratio. It also helps the company to assist the stable capital structure (Magnan, Menini, and Parbonetti, 2015).Computation of debt to equity of Company3. Debt Ratio 2014 2015 2016 2017A. Total Liabilities 7,21,505 7,58,241 7,81,021 790533B.
Total assets 7,70,482 8,12,156 8,39,202 8,51,728.00(A/B) 94% 93% 93% 93%InterpretationHigh debt to equity reflects the negative factor to the business sustainability of company. Here the company has 93% portion of its business a debt (Weygandt, Kimmel, and Kieso, 2015)8.2 Gearing ratio discussion:The gearing ratio denotes the paying capacity of the company. The increased gearing ratio shows that Westpac increased its profitability with the increased interest payment.
The debt portion of the company sustained as before but the company has decreased the overall interest payment. The high financial risk showing in the company’s financial leverage needs to be managed by the Westpac Corporation, to maintain the business with less risk. Gearing Ratio 2014 2015 2016 2017Gearing Ratio 138% 126% 110% 101% The impact of the gearing ratio based on the efficiency of the business and profitability of the company.Divided policies of the company:The dividend policy is prepared in context with the betterment of the shareholders. After evaluate the annual reports and cash flows of the Westpac Corporation, it could be estimated that the company has followed by the profits based on the dividend policy. In the interest of shareholders, the bonus shares and incentive programs introduced by the company are the good indicators. Dividend policy needs to be adjusted by Westpac if it wants to attract more investors to invest their capital in Westpac.
The investors of the company need to be aware with the fact that they should invest the capital with proper strategic planning to expand the business on higher level. It has been evaluated that to reduce the debt portion of the capital the company has offer the bonus shares instead of the dividend to the shareholders of the company (Zhang, and Zhang, 2014).Letter of recommendation:To,Directors of Westpac CorporationAddress:-There are several facts and financial performance of Westpac which needs to be improved by Westpac Corporation. The increase in profitability of the company also assists by the increase in the operating expenses. The positive beta will be useful for the company to run the business effectively.
Company has low value of cost of WACC which will be positive indicators for the future growth of Westpac Company. It will assist company to take more projects in its investment kitty. It is evaluated that the debt portion of the Westpac Corporation is 93%, which reflects the lower cost of capital of the company. It is analyzed that if company has low cost of capital then it will increase its overall outcomes of business (Watson, 2017).
After considering all the data and discussion of the business, it could be concluded that the company experiencing a good amount of return on its capital and investments. For the increases in the value on the capital investment, the company should follow the proper strategic plans and should carefully opt for the dividend policy and business expansion policy. Company should also consider the plan to change the debt to capital of the company (Towery, 2017).In the end, it could be concluded that Westpac Corporation has experienced with good amount of profitability and effective functioning of business. For the long rum sustainability in the functioning of the business the company needs to lower down its debt funding.Conclusion:Westpac Corporation has been known for its sustainable growth and profitability in the business. The return on the assets of the company is 3% in 2017, which is comparatively more than the last year’s data.
The company has high debt portion in its capital which results into a high financial leverage of the company. However, no further increase has been done in the debt portion of capital of the company in 2017, but to maintain its long run operations of business, the company needs to lower down its debt portion to 30% to 40%. The high portion of debt increases the financial risk and it will lastly results as an impact on the business of the company when the market factors goes adverse.References: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.
Towery, E.M., 2017. Unintended consequences of linking tax return disclosures to financial reporting for income taxes: Evidence from Schedule UTP.
The Accounting Review, 92(5), pp.201-226.Watson, L. (2017).
Discussion of’Does the Deferred Tax Asset Valuation Allowance Signal Firm Creditworthiness?’.Westpac Bank Corporation. (2015). Annual report. Available at https://www.
, Accessed on 19th May, 2018Westpac Bank Corporation. (2016). Annual report. Available at https://www.westpac.com.au/about-westpac/investor-centre/financial-information/annual-reports/.
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com.au/about-westpac/investor-centre/financial-information/annual-reports/., Accessed on 19th May, 2018Weygandt, J.J., Kimmel, P.D.
and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.
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AppendixWestpac Banking CorporationParticulars (Amount in Million 2014 2015 2016 2017 AUD$ AUD$ AUD$ EBIT 13,548 14,267 15,148 15,516Interest 18,706 18,028 16,674 15,716Net profit 19,937 20,596 20,954 21,506Total Assets 7,70,482 8,12,156 8,39,202 8,51,728Total Liabilities 7,21,505 7,58,241 7,81,021 7,90,533Shareholders’ Equity 48,456 53,098 58,120 61,2881. Rate of Return on Assets 2014 2015 2016 2017A. Net income 19,937 20,596 20,954 21,506B. Total assets 7,70,482 8,12,156 8,39,202 8,51,728 (A/B) 2.59% 3% 2% 3%2.
Rate of Return on Equity 2014 2015 2016 2017A. Net income available to equity shareholders. 19,937 20,596 20,954 21,506B. Shareholder’s Equity 48,456 17,981 58,120 61,288.00(A/B) 41.
14% 114.54% 36.05% 35.09%3. Debt Ratio 2014 2015 2016 2017A. Total Liabilities 7,21,505 7,58,241 7,81,021 790533B.
Total assets 7,70,482 8,12,156 8,39,202 8,51,728.00(A/B) 94% 93% 93% 93%Gearing Ratio 2014 2015 2016 2017Gearing Ratio 138% 126% 110% 101%Date Ad Close Westpac Banking Corporation (WBC.AX) Adj Close (All ordinary share index) Average Return 30-04-2016 null null 31-05-2016 25.89648 4947.899902 30-06-2016 27.38508 – 5151.799805 0.04 31-07-2016 25.94932 – 0.05 5316 0.03 31-08-2016 25.99337 0.00 5447.799805 0.02 30-09-2016 26.83896 0.03 5310.399902 – 0.03 31-10-2016 27.54363 0.03 5644 0.06 30-11-2016 29.70082 – 5529.399902 – 0.02 31-12-2016 29.1583 – 0.02 5525.200195 – 0.00 31-01-2017 30.98816 0.06 5402.399902 – 0.02 28-02-2017 32.23872 0.04 5502.399902 0.02 31-03-2017 32.23872 – 5719.100098 0.04 30-04-2017 28.04566 – 0.13 5675 – 0.01 31-05-2017 29.27739 0.04 5761 0.02 30-06-2017 30.53447 0.04 5903.799805 0.02 31-07-2017 30.00669 – 0.02 5947.600098 0.01 31-08-2017 30.63043 0.02 5761.299805 – 0.03 30-09-2017 31.6572 – 5764 0.00 31-10-2017 30.19861 – 0.05 5773.899902 0.00 30-11-2017 31.35 – 5776.299805 0.00 31-12-2017 30.96 – 0.01 5744.899902 – 0.01 31-01-2018 30.77 – 0.01 5976.399902 0.04 28-02-2018 28.62 – 0.07 6057.200195 0.01 31-03-2018 28.64 0.00 6167.299805 0.02 30-04-2018 28.85 0.01 6130.399902 – 0.01 18-05-2018 28.85 6131.399902 0.00 ‘SUMMARY OUTPUT Regression Statistics Multiple R 0.005365944 R Square 2.87933E-05 Adjusted R Square -0.049969767 Standard Error 0.044060174 Observations 22 ANOVA df SS MS F Significance F Regression 1 1.11796E-06 1.12E-06 0.000575884 0.981092365 Residual 20 0.038825979 0.001941 Total 21 0.038827097 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.003251498 0.009970593 -0.32611 0.747729714 -0.02404979 0.017547 -0.02404979 0.017546795X Variable 1 -0.009783397 0.40768276 -0.024 0.981092365 -0.860194732 0.840628 -0.860194732 0.840627937