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1 Murdoch University SCHOOL OF BUSINESS AND GOVERNANCE MBS546 BUSINESS FINANCE Group Assignment CASH FLOW ANALYSIS AND VALUATION OF SECURITY AMP Limited Second Semester, 2019 Assignment submission summary Component Worth Due date Group Assignment 20% Tuesday, 8th Oct 2019 *Group Evaluation Tuesday, 8th Oct 2019 * A photocopy is to be submitted. The original is for your use and should be kept with your records. Please be aware that the material covered in this assignment is examinable. 2 CASH FLOW ANALYSIS AND VALUATION OF SECURITY Due Tuesday, 8th October 2098 Objective To evaluate the performance of a firm and its share’s value a financial analyst must be able to analyse the firm’s financial statements. When analysing these statements, the analyst must focus on cash flows of the firm because ultimately it is changes in the cash flows of the firm that determines its value. This is also a market consensus. Hence understanding how and why cash flows change is an indispensable component of valuation of securities. The objectives of this assignment are: 1. To equip you with a good understanding of the financial statements of the firm; 2. To build up your analytical skills in the area of cash flows analysis; 3. To apply the methods of valuation to value a real world company. In addition to developing your knowledge of financial statements and valuation of security, the assignment aims to develop the ability to work in groups: learning how to coordinate with and learn from peers as well as how to deal with any negative issues that may arise in the group process. As such, the assignment submission will include an evaluation of the group process. The group evaluation will not attract any marks; however the rest of the assignment will not be marked without a group evaluation. To assist in the smooth running of groups some guidelines are included with the assignment instructions. These are to be used as a guide only. Groups have their own personalities, so it is important to establish your group norms and plans in a way that best suits your group. Please ensure that group process problems are discussed and resolved as they arise. If your group encounters any problems that it cannot resolve you can ask your course coordinator to join the group for advice or mediation. Do not leave this to the last minute. Your course coordinator will require all group records to have been kept so that an objective record of proceedings is available. Group evaluation: As professionals, you are required to design your own evaluation form for your group assignment. The evaluation should assess whether your group has achieved your stated goals in completing the assignment. Group formation: Assignment groups will be formed in week 2, week commencing August 5th. It is your responsibility to ensure you are a member of a group. The group assignment can be done in groups of 3 or 4. The assignment takes the form of case studies or research projects. Each group member will provide all other group members with contact details, either phone number or email address. A date and time within the next 7 days will be set for the first group meeting. 3 First group meeting Ensure that all group members have their say in this meeting. This ensures that everybody is aware of each other’s expectations. To ensure that meetings run efficiently one group member should undertake the role of facilitator, and another the role of note taker. These roles can be filled on a rotating basis. The role of the facilitator is to manage the meeting, ensure the group code of behaviour is adhered to and ensure that everybody has a chance to contribute. Reaching a consensus regarding a desired code of behaviour ensures that all members know what is expected of them. If all group members observe the code of behaviour everybody should learn from and enjoy the group experience. Establishing strategies now for if a member does not conform to the group code of behaviour, or does not undertake their assigned task by an appropriate time or to an acceptable standard means that all group members have been involved in establishing these strategies. Therefore if somebody does not conform to the group standard they are more likely to see the subsequent course of action as fair and objective. Determining the skills of the various group members allows for tasks to be allocated in a manner that optimises the group output. When allocating tasks; remember that one of the objectives is to learn from each other. At the end of this and every meeting you should set the next meeting date, time and venue. Subsequent group meetings: A record will be kept of – Meeting date, time and place Members in attendance If any members are late and whether they have informed other members. Who undertakes the roles of facilitator and note taker. Tasks achieved since the last meeting. Decisions made by the group (point form OK) Where tasks are assigned: who is to do what by when. Next meeting details – date, time, place. If any disputes arise that require mediation from outside of the group a copy of these records will be required. Group Evaluation is to be submitted on Thursday, 8th October 2019 together with your group assignment. 4 In order for individuals and the group to review the group process a group evaluation will be conducted at the end of the group assignment. This is primarily for your use. Please take time to conduct this review, as it provides an opportunity for improving the group process for continuation of the assignment. A photocopy of this evaluation will be submitted with the group assignment Assignment requirements: 1. Download all available financial data for AMP Ltd (ASX Code: AMP) from DataAnalysis Premium (Murdoch library’s databases). 2. Give a brief description of AMP. 3. Explain the purpose of financial statement analysis. 4. Analyse the firm’s current operation using its financial statements (i.e. income statement, balance sheet and cash-flow statement, in particular, three types of cash flows). You should also take into account supply and demand factors (i.e. you need to look at the market conditions at both industry and economy levels). 5. Download the S&P/ASX 200 from Yahoo Finance website and calculate the rate of return for S&P/ASX 200. 6. Use the Capital Asset Pricing Model, an appropriate government bond yield as risk- free interest rate, and the result from (5) to calculate the required rate of return for AMP. 7. Use an appropriate dividend valuation model to value AMP's shares (Hint: use the total dividend figures). 8. Draw graphs for AMP’s adjusted share price and return (you can use daily, monthly or quarterly return). Compare the company's share price and return with your analyses in questions (6) and (7) above. 9. Use the information and results from your analyses in questions 4-8 above, identify areas of cash flows (i.e. operating, investing and financing) where the firm needs to pay attention to. 10. Suggest relevant investment and financing strategies to improve the firm’s cash flow position. 11. Justify your recommendation in terms of shareholders’ wealth maximisation. Note: You should use data for the period 2009-2019 in your analysis. Hint: Look at the entire operation of the company from a finance perspective as well as the growth prospect of the company with a focus on changes in the company's cash flows over time. Report Submission: Write a professional looking report for the management of the selected company with your recommendation. Your recommendation(s) should be succinct and you need to highlight expected outcomes or possible financial consequences of your recommendations. 5 The report should not exceed 2,500 words plus appendices. The body of the report should be self-contained, while the appendices should provide further details for interested readers. It is your decision as to what to be included in your report and in the appendices. However, make sure they are relevant to your analysis. You should state any assumption that you think necessary for your analysis. You should also report any difficulty encountered in obtaining the data for this assignment. It is up to you to decide which course of action is appropriate in the circumstances. I do not expect every group to use the same assumptions. However, I do expect your assumptions to be plausible and for you to justify them. Referencing Ensure you reference all sources of information used for the report. When indicating the source of a point-of-view / evidence it is essential to include the reference both in the body of your writing and in the bibliography. The referencing style used in Finance is Chicago, where the author’s name(s) and the publication data of the reference are included in brackets after the relevant material and full details are provided in the bibliography. The Murdoch library website has information on referencing techniques. Under ‘Find’ type citation guides. Recommended references: In addition to your textbook, you should read at least the relevant chapters in the following references (available in reserve section in the library): Penman, S.H., 2010. Financial Statement and Security Valuation. Fourth Edition, McGraw-Hill. Peirson, G., Brown, R., Easton, S., Howard, P., and S. Pinder. 2012. Business Finance, 12th edition. Mc-GrawHill, Australia. Viney, C., 2009. McGrath’s Financial Institutions, Instruments and Markets, 6th edition, McGraw- Hill, Australia. Pike, R. And B. Neale, 2009, Corporate Finance and Investment: Decisions and Strategies, 6th edition, Financial Times Prentice Hall, Limited. You might also find the following websites useful: Australian Securities Exchange: https://www.asx.com.au/ Australian Prudential Regulation Authority: www.apra.gov.au Australian Financial Markets Association: www.afma.com.au Australian Taxation Office: www.ato.go.au Australian Securities and Investments Commission: www.asic.gov.au Reserve Bank