Assignment on the Corporate Finance of Commonwealth Bank of Australia (CBA)

Part 2

Introduction of Commonwealth Bank of Australia (CBA)

Commonwealth Bank of Australia (CBA) is a multinational banking organization of Australia. CBA has its operations into different parts of the world which include countries like the United States, the United Kingdom, and New Zealand. The organization was established in the year 1911 as a government bank. The headquarter of the corporation is located in the city of Sydney Australia. According to the statistics of 2017 the bank has employed approximately 51800 employees. Over the years the bank has experienced a significant amount of growth. The bank has more than 1100 branches.

Defining beta and what does it mean in finance

Beta is a measure of systematic risk. In the capital asset pricing model beta evaluates the volatility of security and compares it with the market volatility. The CAPM (capital asset pricing model) utilizes the beta to describe the relationship among the expected return and the system risk of assets. The formula for calculating the beta coefficient is mentioned below:

The beta evaluation provides the information to the investors regarding whether the stock of the particular company is moving in the same direction as the market is moving or not. In simple words, beta provide information about how risky is the stock.

Type of Beta of Commonwealth Bank of Australia (CBA)

The beta evaluated in part 1 is the equity beta. Equity Beta is a measure of systematic risk. In the capital, asset pricing model Equity beta is a major component that evaluates the volatility of security and compares it with the market volatility. The equity beta is also known as levered beta (Mohana, 2011). The equity beta or levered beta is different from asset beta. The asset beta is also called unlevered beta and it is the beta of that organization that has no debt (Fridson & Alvarez, 2011).

Brief Explanation of Financial Ratios

P/E ratio of Commonwealth Bank of Australia (CBA)

The price-earnings ratio is usually used by the investors of the company to get information about the shares of the corporation. Through this ratio the investors get information about the value of shares (Pandey, 2015). The P/E ratio relates to the organization’s share price to its earnings. The high P/E ratio might indicate that the stocks of the organization are overvalued. The high P/E ratio also cloud means that the investors are expecting growth of the corporation in the upcoming years. The organizations that are not generating profit or are going into loss do not have a P/E ratio because the price to earnings ratio cannot be calculated without earnings (Fridson & Alvarez, 2011).

D/E ratio of Commonwealth Bank of Australia (CBA)

The debt to equity ratio is a financial leverage ratio that provides information about the capital structure of the corporation. The organization finances its assets from debt and equity methods. The organization is recommended by the financial analysts to maintain the optimum capital structure. The optimum capital structure means to finance the assets of the organization from both debt and equity financing. It is recommended to finance 40%assets from debt and 60% assets from equity. By doing this the organization can lower its overall cost of capital (Mohana, 2011).

TIE Ratio of Commonwealth Bank of Australia (CBA)

The time's interest earned ratio has huge significance for the financial managers and the top management of the organization. The time interest earned ratio (TIE) indicates the ability of the organization to pay its debt. TIE ratio indicates how much time the organization can pay its interest from the pretax income. TIE ratio is also known as the interest coverage ratio. A high TIE ratio means that the organization has enough cash from which it can pay its long term obligations (Fridson & Alvarez, 2011).

MV/BV Ratio of Commonwealth Bank of Australia (CBA) The Market to Book value ratio is usually used by the investors of the company to get information about the shares of the corporation. Through this ratio the investors get information about the market value of organization the high MV/BV ratio might indicate that the stocks of the organization are overvalued. The high MV/BV ratio also cloud means that the investors are expecting the growth of the corporation in the upcoming years.

R square of the Regression of Commonwealth Bank of Australia (CBA)

The R square of the regression shows the strength of the relationship between the dependent variable and the model. The R square shows how well the data fits the model. In other words r square can be described as the goodness of fit measure.

Results of Regression

In the above table the regression results of Beta and P/E ratios can be seen. The p-value here is 0.009 which is less than alpha 5%. The R square is 0.59%. The adjusted r square is 0.54. Beta vs D/E shows the p-value of 0.40 which is greater than alpha 5%. The R square is 0.08%. The adjusted r square is 0.02. Beta vs TIE shows the p-value of 0.35 which is greater than alpha 5%. The R square is 0.10%. The adjusted r square is 0.003. Beta vs MV/BV indicates the p-value of 0.35 which is greater than alpha 5%. The R square is 0.10%. The adjusted r square is 0.003 (Chandra, 2011).

For Beta vs P/E, It can be said that the regression model is significant and can be used
at a confidence level of (1-α). However, for the rest of the financial ratios, it can be said that the regression model is insignificant and cannot be used at a confidence level of (1-α) (Chandra, 2011).

Observation of Graphs of Commonwealth Bank of Australia (CBA)

If the graphs are observed then it can be said that when P/E ratios increase the beta moves downward. In other words the beta here shows a downward trend. When the debt to equity ratio increases the beta also increases as a result. A similar trend can also be seen in the MV/BV ratio as well.

Conclusion of Commonwealth Bank of Australia (CBA)

It is concluded that the beta evaluated in part 1 is equity beta. Equity Beta is a measure of systematic risk. In the capital, asset pricing model Equity beta is a major component that evaluates the volatility of security and compares it with the market volatility. The equity beta is also known as levered beta. The equity beta or levered beta is different from asset beta. The asset beta is also called unlevered beta and it is the beta of that organization that has no debt. For Beta vs P/E, It can be said that the regression model is significant and can be used
at a confidence level of (1-α). However, for the rest of the financial ratios, it can be said that the regression model is insignificant and cannot be used at a confidence level of (1-α)

References of Commonwealth Bank of Australia (CBA)

Chandra, P., 2011. Financial Management. s.l. Tata McGraw-Hill Education.

Fridson, M. S. & Alvarez, F., 2011. Financial Statement Analysis: A Practitioner's Guide. s.l.: John Wiley & Sons.

Mohana, R. P., 2011. Financial Statement Analysis and Reporting. s.l.: PHI Learning Pvt. Ltd.

Pandey, I., 2015. Financial Management. s.l. Vikas Publishing House.