MBS546 Business Finance

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.

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.