Problem 1
Return on equity
It is calculated by dividing net income by shareholder’s equity. For the year 2017, the following was the return on capital for each bank;
ANZ
Net income = 14,872$m
Shareholder equity = 1249747899
R. O. E = 11.9%
CBA
Net income = 17600m
Shareholders equity = 1100000000
R. O. E = 16%
Westpac
Net income = 15516m
Shareholders equity = 1293000000
R.O.E = 12%
NAB
NET INCOME = 8181m
Shareholders equity = 818100000
R. O. E = 10%
Return on equity for the year 2018
ANZ
Net income = 14514M
Shareholders equity = 1319454545
R. O. E = 11%
CBA
NET INCOME =18341
SHAREHOLDERS EQUITY = 1210627063
R. O. E = 15.15%
WESTPAC
NET INCOME = 16505
SHAREHOLDERS EQUITY = 1269615385
R. O. E. = 13.0%
NAB
NET INCOME = 13505M
SHAREHOLDERS EQUITY = 905767941
R. O. E = 14.91%
Return on equity for the year 2019
ANZ
Net income = 14339M
Shareholders equity = 1315504587
R. O. E = 10.9%
CBA
NET INCOME =8486M
SHAREHOLDERS EQUITY = 48649M
R. O. E = 17.44
WESTPAC
NET INCOME = 4620
SHAREHOLDERS EQUITY = 45551
R. O. E. = 10.4%
NAB
NET INCOME = 13542M
SHAREHOLDERS EQUITY = 1367878788
R. O. E = 9.9%
Return on assets
It is calculated by dividing net income by average total assets.
2017
ANZ
Net income = 14872
Total assets = 897.33
R. O. A = 16.57%
CBA
Net income = 17600
TOTAL ASSETS = 14080
R. O. A = 1.25
Westpac
Net income = 15516
ASSTES = 648958
R.O.A = 2.39%
NAB
NET INCOME = 8181
ASSETS = 600546
R. O. A = 1.36%
2018
ANZ
Net income = 14514
Total assets = 943.18
R. O. A = 15.38%
CBA
Net income = 18341
ASSETS = 923.049
R. O. A = 19.87
Westpac
Net income = 165050
ASSETS = 668930
R.O.A = 24.67%
NAB
NET INCOME = 135050
ASSETS = 613351
R. O. A = 22%
2019
ANZ
Net income = 14339
Total assets = 981.14
R. O. A = 14.61%
CBA
Net income = 8486
ASSETS = 33577
R. O. A = 25.27%
Westpac
Net income = 4620
ASSETS = 906.6
R.O.A = 50.95%
NAB
NET INCOME = 13542
ASSETS = 596121
R. O. A = 2.27%
Equity multiplier
It is calculated by dividing the total assets by total shareholders equity
2017
CBA
ASSETS = 14080
SHAREHOLDERS EQUITY = 1100000000
E.M = 12.8%
ANZ
ASSETS = 897.33
SHAREHOLDRES EQUITY = 1249747899
E.M = 7.18%
NAB
ASSETS = 600546
SHAREHOLDERS EQUITY = 818100000
E.M = 73.4%
WBC
ASSETS = 668930
SHAREHOLDERS EQUITY = 1293000000
E.M = 51.73%
2018
ANZ
ASSETS = 943.13
SHAREHOLDRS EQUITY = 1319454545
E.M = 0.715
=7.15%
CBA
ASSETS = 923.049
SHAREHOLDERS EQUITY = 1210627063
E.M = 0.762
7.62%
NAB
ASSETS = 613351
SHAREHOLDERS EQUITY = 905767941
E.M = 677.161
WBC
ASSETS = 668930
SHAREHOLDERS EQUITY = 1269615385
E.M = 526.876
2019
CBA
ASSETS = 33577
SHAREHOLDERS EQUITY = 48649
E.M = 0.690
ANZ
ASSETS = 981.14
SHAREHOLDERS EQUITY = 1315504587
E.M = 0.746
NAB
ASSETS = 596121
SHAREHOLDERS EQUITY = 1367878788
E.M = 435.800
WBC
ASSETS = 906.6
SHAREHOLDERS EQUITY = 45551
E.M = 0.020
PROFIT MARGIN
It is calculated by dividing the net income by the net sales
2017
ANZ
NET INCOME = 14812M
NET SALE = 925.75M
P.M = 16%
CBA
NET INCOME = 17600M
NET SALE = 977.78M
P.M = 18%
NAB
NET INCOME = 8181M
NET SALE = 584.35M
P.M = 14%
WBC
NET INCOME = 15516M
NET SALE = 1410.54M
P.M = 11%
2018
ANZ
NET INCOME = 14514M
NET SALE = 967.6M
P.M = 15%
CBA
NET INCOME = 18341M
NET SALE = 1146.31M
P.M = 16%
NAB
NET INCOME = 13505M
NET SALE = 1038.84M
P.M = 13
WBC
NET INCOME = 16505M
NET SALE = 1178.92M
P.M = 14%
2019
ANZ
NET INCOME = 14339M
NET SALE = 843.47M
P.M = 17%
CBA
NET INCOME = 8486M
NET SALE = 565.73M
P.M = 15%
NAB
NET INCOME = 13542M
NET SALE = 967.28M
P.M = 14%
WBC
NET INCOME = 4620M
NET SALE = 288.75M
P.M = 16%
ASSETS UTILIZATION RATIO
It is the average of the total assets at the beginning and the end. It is the total revenue earned for every dollar of assets owned by the company. Net sale divided by total assets
2017
ANZ
TOTAL ASSETS = 897.33
NET SALE = 10524.33
UTILIZATION RATIO = 9627
CBA
TOTAL ASSETS = 14080
NET SALE = 32912
UTILIZATION RATIO = 18832
NAB
TOTAL ASSETS = 600546
NET SALE = 603113
UTILIZATION RATIO = 2567
WBC
TOTAL ASSETS = 668930
NET SALE = 680445
UTILIZATION RATIO = 11515
2018
ANZ
TOTAL ASSETS = 946.13
NET SALE = 10841.13
UTILIZATION RATIO = 9895
CBA
TOTAL ASSETS = 923.049
NET SALE = 10156.049
UTILIZATION RATIO = 9233
NAB
TOTAL ASSETS = 613351
NET SALE = 616256
UTILIZATION RATIO = 2905
WBC
TOTAL ASSETS = 668980
NET SALE = 677075
UTILIZATION RATIO = 8095
2019
ANZ
TOTAL ASSETS = 981.14
NET SALE = 10695.14
UTILIZATION RATIO = 9714
CBA
TOTAL ASSETS = 33577
NET SALE = 45340
UTILIZATION RATIO = 11763
NAB
TOTAL ASSETS = 596121
NET SALE = 591034
UTILIZATION RATIO = -5087
WBC
TOTAL ASSETS = 906.6
NET SALE = 7690.6
UTILIZATION RATIO = 6.784
The four banks are the giant banks in Australia and the ratios usually describes the performance and from the above ratios, the banks maintain their profit margins and they slightly change
Problem2
- Interest rate on five year loans issued by CBA
5.51 % P.A
ii) What is the interest rate payable by CBA on one-year deposit?
1% of every deposit between 50,000 to 1,999,999$
- What is the discount rate that you would use in cell B1 to do valuation
0%
- Limitation of this spreadsheet
In a spreadsheet, it is difficult to differentiate the real assets and the liabilities that do generate income.
- This model cannot be used to calculate the market value of equity for the bank
Problem 3
- The number of years being 0 means that someone is indifferent between having a benefit or cost currently against the near future. This literally means that in all the years, everything is constant and time is not a factor.
- Give examples of;
- The duration of short-term certificates of deposit can be 0.4 years
A short term CD is one with a term from 3-12 months. If there are two short term CDs of 4 and 5 months maturity and the amount are in the ratio such that their average duration results to 4.8 months or 0.4 years
- The duration of long-term certificate of deposit can be 2.5 years.
Long-term deposit on CDs is when it is more than 12 months. If there are two long-term CDS of 2 and 3 years, maturity and the amounts are in a ratio such that their average duration is 2.5 years.
- The duration of liquid security can be 0.5 years.
After 45 days, a bank can resale a security that is immediately eligible for sale, this can be 6 months, longer than the normal duration, this can be converted into 0.5 years.
- Duration of investments can be 3.5 years
This is the duration taken for a bond’s cash flow, weighted by length of time to receipt and divided by the bond market value. If the market price is 3.5 %, then the duration can be 3.5 years.
- The duration of fixed rate loans can be 2 years.
The duration can be two years as this is can be classified as a long-term loan and the fact that there are two variables.
- Explain why floating rate loan have low duration even though maturity could be very high.
These two different variables correlate but do not directly affect each other. The lower loan duration can be explain in a way that there are two variables with short-term period
Problem 4
- Market value of equity is also known as the market capitalization, this is the total value of the company’s equity. It can be calculated by multiplying the current price of stock by the total number of outstanding shares[ CITATION Pus12 l 1033 ].
- When the market value of equity is negative, then the company can be termed bankrupt. This can be due to many reasons including higher liabilities than assets.
- There are different shocks that can cause the market value of a company be negative. There are different types of shocks including an economic shock, a crash in stock or prices, a supply shock and a demand shock.
- A company can reduce the possibility of its equity turning negative by increasing its profitability, increasing the management of inventory and restructuring it debt. This can be achieved by proper timing in the market and in pricing the commodities[ CITATION Wag10 l 1033 ].
Problem 5
Problem6
- Formula for calculating the market value of equity assuming that the interest rates of assets and liabilities are different.
Let’s say that the new interest rate of assets is X and the new interest rate of liabilities is Y, the;
The difference in equity = (X – Y k) * A * {difference in rates/ (1 + R)
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