HI5002 Research on Financial Market and Capital Budgeting Analysis Assessment Answer
Trimester T1 2020
Unit Code HI5002
Unit Title Finance for Business
Assessment Title Research on Financial market and Capital Budgeting Analysis
In this report, the knowledge of activities of Australian Stock Exchange (ASX) is given by the analyst. ASX is consider in one of the world’s leading financial market exchanges. According to the list provided at ASX, under the Australian stock exchange 2133 companies are listed. Australia’s primary stock market index is S&P/ASX 200(XJO). In the ASX listed stocks, this index is compromised of the 200 largest ASX.
In this report, the analyst distinguished between commercial banks, insurance companies, investment banks and investment funds in Australia. The comparison is done on the basis of different perspectives which includes the group of financial institutes it belongs to, the market sector of operation, the main source of income and key business activities. In this report, examples are also given for better understanding of different institutes.
In the second portion of this report, the knowledge of capital budgeting, capital structure and working capital management is provided by the analyst. Under this report, it is mentioned that the facts for listing of the company on ASX such as to improve the profit margin, criteria that the organization must have to follow, and how the listing is benefited for the company.
In the case of financial advisor, the analyst gives information which includes who can become financial advisors, in Australia how financial advisory registration is performed, the financial register’s function, and the financial advisor’s working, financial product on which advice is provided by financial advisor according to the market research. This reports also includes information on cash flow analysis on the project in the given case. In this report, the analyst analysed and understood all the information.
Part 1: Research and fact-finding of Australian financial market
Comparison of four key financial institutions:
In Australia, from the perspective of a potential investor there are four major financial institutes.
Comparison between these four financial institutes are given below:
|S.NO.||COMPARISON CRITERIA||COMMERCIAL BANKS||INSURANCE COMPANIES||INVESTMENTS BANKS||INVESTMENTS FUNDS|
Banks which deals with business activities directly with the public are known as commercial banks.
These type of institute deals with accepts deposits, offer checking accounts service, offers basic financial products and make various loans.
Ax profit seeking institutes, as its name suggest that this institute is established to earn profit (Australian Security market, (2020)..
The institutes that gives various insurance to individual or business agencies by paying regular fee i.e. premium, those institutes are known as insurance companies.
It is divided into profit organization and non-profit organization.
An insurance companies operates its business by pooling risk among large number of policyholder (Australian Security market, (2020).The premiums are depends upon the probability of occurring that particular events and the average financial loss associated with each.
The institutes that is based for performing the role of intermediary for a variety of service, these institutions are known as investment banks.
Most of investment banks are specialized in huge and complex financial transaction between the public investing and securities issuers.
The role of investment banks start with pre-underwriting counselling and continues to give advice as the distribution of securities.
The institutes that is emerging in the supply of capital belonging to various investors which they used to purchase of stock and securities collectively, these institutes are known as investment funds.
Each investor has its ownership and control of stock and securities.
|2.||Market sector of operation||They deals with retails and commercial sectors.||They deals with individual insurance and business insurance.||They basically deals with business investments.||They deals with market area of investments.|
|3.||Key business activities|
In the form of savings, current and fixed deposits, they accept deposits (Corporate governance regulation, 2019).
They give loan and collect interest from entrepreneurs.
They give facilities to individual and business enterprises of discounting of bill of exchange, lockers, overdraft, purchase and sales of securities as per their requirements.
|They provide life insurance, health insurance, accident insurance, business insurance if they face any uncertain circumstances.|
First of all, they rise capital and gives security underwriting to companies.
Emerged in manage the wealth of their clients.
Facilitate research service to their client.
Performs financial statement analysis, financial forecasting, and financial modelling.
They give facilities to public offering of equity and debt securities.
Emerged in managing client’s wealth, risk management and placement in all securities.
|4.||Main source of income|
By difference in the earned interest and paid interest.
By non-commercial activities like locker rent.
|By taking premium for various insurance from customers.||By taking fees for facilitating various service to their clients.|
By charging on purchase and sales of several securities.
By taking fees for different services.
By taking commission on trade.
AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED
First listed: 1969
Current market capitalization: 43.65bn
Dividend yield: 10.4% (Australian Security market, (2020).
AUB GROUP LIMITED
First listed: 2005
Current market capitalization: 941.93m
Dividend yield: 3.68%
KINA SECURITIES LIMITED
First listed: 2015
Current market capitalization: 168.63m
Dividend yield: 9.16% (Australian Security market, (2020).
ACORN CAPITAL INVESTMENT FUND LIMITED
First Listed: 2014
Current Market Capitalization: 47.48 m
Dividend Yield: 8.15%
Analysis of three financial management question
Capital budgeting: The process which is used to evaluate potential major projects or investments by business entrepreneurs is called as capital budgeting. With the help of this process, a company assessed the lifetime of cash inflow and outflow of project. Also used to analyse the potential of project to generated sufficient target benchmark (Australian Security market, (2020).
For example: Oil and gas supermajor Exxon Mobile Crop. Cuts it capital budgeting by 30% in 2020, by collapsing demand in order to low energy prices. Exxon stated that to survive in this downturn, they also cut its cash flow expenses by 15% (Australian Prudential Regulation Authority (APRA) (2020).
Capital structure: The process which is used to finance overall growth and operations by the company by combining the debt and equity is called as capital structure. Debenture issues or loans are debt whereas preference share, common stock, retained earning are equity. In quantitative term, capital structure is defined as debt-equity ratio that means ration of shareholder’s equity against debt. There are different capital structures for the companies it is divided into two types that are aggressive (high debt against equity) and conservation structure (low debt against equity) (Australian Security market, (2020).
For example: General electronics (GE) has retained its debt level over last 12 months by $134.59B. Here, the equity is lower than total debt level. Therefore, GE is considered in the company which have high leverage (Australian Security market, (2020).
Working capital management: This process is a business strategy which is used to make sure that the organization is efficiently operates its current liabilities and current assets. The primary purpose of working capital management is to maintain sufficient cash flow of the company and also enables its short-term debt obligation and operating costs. The term working capital is refers to the difference between current liabilities and current asset. If higher liquidity available with the company or no adequate utilization of funds that means higher working capital (Australian Security market, (2020). For example: In the time of corona virus pandemic, the eight largest banks of Australia decided to retain its capital by not purchasing back shares from the market. If bank buy the shares back then it will difficult to meet its operating cost.