Analysis Report On Macquarie Group

BUSN 7008 Financial Statements and Reporting Group assignment
10 INTRODUCTION The purpose of this report is to analyse whether to invest 10 % of the equity of the diversified financial service company - Macquarie Group Limited (Macquarie) on the 13th of May 2011 for an investment horizon of 3 years. Macquarie, which constituted by five operating groups, provides a wide range of financial services to clients, including banking, financial, investments and funds managements (Appendix 1). Through conducting a serious of multiple valuations, the analysis will offer a suggestion on whether the 13th May is the appropriate time for the investors to perform the investment. 2.0 MACROECONOMIC ANALYSIS1 It is essential to assess Australias macroeconomic performance during the valuation period. As a services provider, the financial performance of Macquarie group is strongly ties up with Australian business cycle and has a procyclical relationship with Australian economy (Gordy & Howells 2004).
The economic conditions are favourable for the development of Macquarie business since the main economic indicators of Australia (provided in the table above) are expected to increase (Details in Appendix 2), householders have more disposable income (Appendix 3) and investors are increasing their confidence about investment environment (Appendix 4). However, there are certain potential risks of higher interest rate and inflation for the business, which may increase the risk of borrowing and lending.
1 Although there is a significant portion of Macquaries business is operated in other countries, this report is
more focus on analysing the sectors in Australia.
3.0 MACROECONOMIC ANALYSIS The Porters Five Forces Model is used to analysis the Macquaries competitive position 2 in the industry (Details in Appendix 5) (Macquarie Annual Report 2011). The current rivals in existing markets are high since many rivals can offer financial services company with competitive price and quality. The threat of new entrants is low due to the highly regulated financial industry in Australia and high capital requirement associated with the establishment. The potential substitute is high due to the existence of the highly competition and similar financial services. The Bargaining power of suppliers is low because the large number of suppliers, especially for the diversified companies. The Bargaining power of buyers is high because there are 55 banks offering financial services in Australia and customers have great number of choices when they purchase financial products (Banks 2011).
4.0 RISK ANALYSIS The identified business risks associated with Macquarie as well as risk mitigations are provided in the following table (Details in Appendix 6) (Macquarie Group Risk Management report 2011):
RISK Equity Risk
MITIGATION Equity Risk Limit Transaction Review and Approval Process
Credit Risk
Analysis and Approval of Exposures Independent Analysis Macquarie Group ratings Measuring and monitoring exposures Loan impairment review Country Risk Policy
Operational Risk
Operational Risk Management Framework Macquaries operational risk capital framework
Market Risk
Trading market risk
2 It is very hard to define Macquaries competitors because it is a diversified financial company. In this report, the major competitors are defined as the big four banks in Australia since they are usually compared with Macquarie by the media and industry profession.
Aggregate measures of market risk Trading revenue Capital adequacy assessment Risk appetite setting The Risk Appetite Test Risk-adjusted performance measurement Liquidity Risk Liquidity management Liquidity policy and principles Scenario analysis Liquid asset holdings Liquidity contingency plan Funding transfer pricing Legal and Compliance Risk Reputation Risk Assesses compliance risk Corporate governance structure and risk management framework
Therefore, although Macquarie is facing several risks, from the risks identified along with the mitigations presented above, it has successfully applied its own unique strategy to mitigate the risks associated with finance companies.
5.0 BUSINESS STRATEGY The current Macquarie business strategy is To focus over the medium term on key fundamentals: the provision of services to our clients; the alignment of interests with shareholders, investors and staff; a conservative approach to risk management; incremental growth and evolution; maintaining operations that are diversified by business and geography; and an ability to adapt to change (Macquarie Annual Report 2011) By considering the detailed SWOT analysis in Appendix 7, the strategy is suitable to minimize the weakness (strong Australia dollar), overcome the threats (market downturn and strong competitors), maximize the strength (diversity, unique structure and management style) and grasp the opportunities effectively and efficiently (global growth and more corporations)
60 TREND ANALYSIS (Macquarie Annual Report 2006-2011)
6.1 Historical data analysis

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6.11 Income Statement
for year ended 31 March (in million AUD) 2007%change 2008%change 2009%change 2010%change 2011 Interest and similar income 4632 44.60% 6,698 -4.15% 6,420 -28.49% 4,591 15.53% 5,304 Interest expense and similar charges-3904 -50.64% -5,881 6.78% -5,482 35.95% -3,511 -14.75% -4,029 Net interest income/(expense) 728 12.23% 817 14.81% 938 15.14% 1,080 18.06% 1,275
With the recovery of global crisis, Macquaries operating capability is recovered as well. As is shown in the table, the net interest income of Macquarie had increased from $ 728 million in 2008 to $ 1,275 million in 2011. The main reason for this is because there is a decrease in the interest expense as well as the similar charge (due to the influence of economic crisis).
(in million AUD) Fee and commission income Net trading income Share of net (losses)/profits of associates and joint ventures Other operating income and charges Net operatingincome/(expense)
for year ended 31 March 2007%change 2008%change 2009%change 2010%change 2011 3540 31.21% 4,645 -12.92% 4,045 -8.01% 3,721 4.57% 3,891 1047 75.26% 1,835 -36.95% 1,157 12.27% 1,299 5.31% 1,368 242 -35.54% 156 -52.56% 74 -410.81% -230 177.83% 179 1624 -51.05% 795 -186.54% -688 211.63% 768 21.22% 931 7,181 14.86% 8,248 -33.00% 5,526 20.12% 6,638 15.16% 7,644
Similar to the interest income trend, the trend of net operating income decreased as well during the three consecutive years from 2008 to 2009, which because the fees based on transaction declined during the period of economic crisis. However, Macquarie has struggled to minimize the loss by recovering the net trade income and other operating income in the following years.
for year ended 31 March (in million AUD) 2007%change 2008%change 2009%change 2010%change 2011 Employment expenses -3733 -11.89%-4,177 43.52%-2,359 -31.45%-3,101 -25.44%-3,890 Brokerage and commission expenses -421 -66.75% -702 2.42% -685 5.84% -645 -21.71% -785 Occupancy expenses -226 -16.81% -264 -48.86% -393 -22.65% -482 -0.21% -483 Nonsalary technology expenses -163 -31.29% -214 -22.90% -263 -7.60% -283 -11.66% -316 Other operating expenses -710 3.38% -686 -22.01% -837 0.48% -833 -7.92% -899 Total operatingexpenses -5,253 -15.04%-6,043 24.92%-4,537 -17.79%-5,344 -19.26%-6,373 Operatingprofit/(loss) before income tax 14.37% 2,205 -55.15% 989 30.84% 1,294 -1.78% 1,271 1,928 Income tax (expense)/ benefit -377 15.92% -317 95.27% -15 -1240.00% -201 -40.30% -282 Profit/(loss) from ordinary activities after income tax 1,551 21.73% 1,888 -48.41% 974
12.22% 1,093 -9.52% 989
There is a decrease trend in operating expense of Macquarie. In 2007, the figure was dropped from $5253 million to $4537 million in 2009. However, this is a common phenomenon in the financial industry in this year. It is reasonable for the group to suppress operating expense to keep maintaining a satisfactory lever of profit. Noticeably, the fact that the operating profit in these years maintained nearly stable should not be ignored. Therefore it is believed that the MQG has the potential capability to catch up with these four banks.
6.12 Statement of Financial Position
for year ended 31 March
(in million AUD)
2007
2008
2009
2010
2011
Assets Change Change Change Change Loan assets held at amortised cost 45,796 14.44% 52,407-14.61% 44,751 -1.08% 44,267 3.95% 46,016 Derivative financial instruments positive values 11,913 77.42% 21,136 29.77% 27,428 -21.39% 21,561 -1.74% 21,185 Investment securities available for sale 6,060 171.52% 16,454 10.14% 18,123 0.54% 18,221 -6.42% 17,051 Trading portfolio assets 15,518 1.86% 15,807-41.42% 9,260 31.08% 12,138 22.74% 14,898 Other Assets 57,102 7.61% 61,446-19.31% 49,582 0.34% 49,753 17.42% 58,418 Total Assets 136,389 22.63%167,250-10.83% 149,144 -2.15%145,940 7.97%157,568
for year ended 31 March
(in million AUD)
2007
2008
2009
2010
2011
Liabilities Change Change Debt issued at amortised cost 51,365 11.19% 57,115-15.49% Deposits 12,403 27.25% 15,783 38.55% Derivative financial instruments negative values 11,069 93.32% 21,399 27.91% Other liabilities 54,033 16.40% 62,892-33.10% Total Liabilities 128,870 21.97% 157,189-11.20%
Change Change 48,270 -11.72% 42,614 -3.37% 41,177 21,868 2.82% 22,484 57.17% 35,338 27,371 -20.70% 21,706 -0.62% 21,572 42,075 12.58% 47,367 0.38% 47,549 139,584 -3.88%134,171 8.55%145,636
for year ended 31March
(in m illion AUD)

E quity Contributed equity Ordinary share capital Treasury shares Exchangeable shares Reserves Retained earnings Minority interests T l equity ota
2007
%
Change
2008
%
Change
2009
%
Change
2010
%
Change
2011
3,103 -7 0 380 2,795 1,248 7 1 ,5 9
46.12% 4,534 8.20% -71.43% -12 83.33% 100.00% 133 -12.78% 20.00% 456 -96.27% 33.02% 3,718 -2.45% -1.28% 1,232 -27.27% 3 .8 % 1 ,0 1 -4 8 3 1 0 6 .9 %
4,906 42.48% 6,990 2.15% 7,140 -2 -22050.00% -443 -65.01% -731 116 18.10% 137 -24.09% 104 17 1547.06% 280 10.71% 310 3,627 17.67% 4,268 7.33% 4,581 896 -40.07% 537 -1.68% 528 9 6 ,5 0 2 .1 % 1 ,7 9 1 8 1 ,9 2 3 1 1 6 .3 % 1 3
From the three tables presented above, the assets are always higher than the liabilities which give a signal of better performance. In addition it is easy to find that there is no significant reduction in assets and liabilities even in the financial crises year and in 2011. Both assets and liabilities have increased by 7.97 and 8.55 respectively. When turning the eyes to the equity graph, discovers has been found that except the 2009(the global financial crisis) Macquaries equity presents an increasing tendency. It jumps from $6662 million in 2007 to $11404 million in 2011, which raises nearly 71.18%. The balance sheet is remains solid and conservative due to the increase in retained earnings as mentioned previously. The strength of our balance sheet, integrated with their pursuit of opportunities for continued growth, resulted
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in a range of successful initiatives. According to the 2011 annual report, the balance sheet in 2011 is tended to be characterized by high cash balances because of the CMT/CMA initiative, which is expected to be continue to deploy in the next following years. All the message presented above, it is not difficult to find that even though there was adverse remuneration in 2009, the balance sheet still maintains a conservative trend, which has demonstrate powerful potential development strength. The increasing trends in total equity throughout the projection years, again, show a favourable sign for investor.
P rojectiona a 3 Ma s t 1 rch
(in m illion AUD)

Total assets Total liabilities Total equity
2012
162,130 149,578 12,552
2013
167,655 154,418 13,237
2014
174,172 160,175 13,997
2015
181,724 166,883 14,841
2016
190,371 174,588 15,783
6.2 Future trends of projection The projection of income statement, statement of financial position and cash flow from 31 March 2012 to 2016 has performed in the following tables (Assumption is shown in the Appendix).
P rojectionfor yea ended3 Ma r 1 rch (inm illionAUD ) Net interest income/(expense) Net operating income/(expense) Total operatingexpenses Opera tingprofit/(loss) before incom ta e x P rofit/(loss) fromordina a ry ctivitiesa fterincom ta e x Profit attributable to minority interests P rofit/(loss) a ttributa to ordina equityholdersof ble ry Ma cqua GroupL ited rie im D ividendsa distributionsPa nd id
2012
1,411 8,314 -6,898 1 1 ,4 5 1 0 ,2 8 -31
2013
1,560 9,069 -7,486 1 8 ,5 4 1 5 ,3 2 -30
2014
1,721
201 5
1,897
2016
2,088
9,925 10,897 12,005 -8,146 1 7 ,7 9 1 1 ,5 9 -29 -8,890 2 0 ,0 7 1 1 ,7 3 -28 -9,733 2 7 ,2 2 1 4 ,9 0 -27
1 7 ,1 7 72 2
1 2 ,3 2 81 1
1 9 ,4 0 94 1
1 8 ,6 6 1 3 ,0 4
1 1 ,9 3 1 7 ,1 3
From the projection of income statement presented above, Macquaries profit will keep an increasing profitable rate from 2011 to 2016 (and beyond 2016 in the Appendix, since we only show 2012 to 2016 figure for simplicity). As economic condition improved, a
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reasonable growth in net interest income and net operating income occurred. Furthermore the total operating expenses increased as well in order to support the growth in business. Along with these increase in profit, the increasing trend in dividends and distributions paid is comes as nature. Thus this factor should be treated as a positive signal for investors in Macquarie shares.
70 RATIO ANALYSIS (Macquarie Annual Report 2006-2011)
By conducting a detailed ratio analysis could help investors to compare these scandalised ratios across the industry and competitors. A full vision of ratio data calculation and more detailed analysis is conducted in this report (Appendix 9). The following crucial ratios are analysed by accessing their trends and comparing with its major competitors. 7.1 Profitability
Profita bility Net Interest Margin Return On Total Asset Return On Ordinary Equity Earnings Per Share (in cent) Price-Earnings Ratio Earnings Yield Dividend Yield Dividend Payout
20 07 0.69% 4.27% 21.96% 592.30 14.51 11.67% 3.81% 21.53%
20 08 0.64% 4.83% 20.73% 760.26 8.09 12.36% 6.53% 19.13%
20 09 21 00 21 01 0.90% 1.05% 1.15% 4.34% 3.29% 3.36% 10.05% 9.35% 8.38% 309.96 320.12 282.40 8.76 14.85 13.27 11.42% 6.72% 7.53% 6.84% 3.94% 5.08% 21.24% 17.71% 19.46%
Net interest margin is the dominant ratio of measuring the profitability of the Macquarie since interest earning is the main revenue of financial institutions. Similar to the gross margin of non-financial companies, net interest margin measures the companys real return on its investment relative to its interest earning assets. Macquarie groups had continuously generating positive net interest margin over the past five years. It indicates that the overall investments made by Macquarie group did success because the interest revenue excesses the expenses which paid for interest generating. In details, the following table shows that how the growth of the expense relative to the growth of the interest income made the real change in the net interest margin ratio. Although by comparing with the big four banks figure (e.g. Westpac: 2.15 ANZ: 2.52 in 2010), the ratio is relative low, it is reasonable for the firm due to the development of global platform in the recent years.
Return On Total Asset have decreasing trend since these returns increase reflected in Net Interest Margin are offset by growth trend of Macquaries asset as Macquarie keeps expanding its business. However, the ratio is relative low by comparing with the industry average of 12% (Finanalysis 2011) Return on Ordinary Equity is reported a stable return on equity of 21.96% and 20.73% in 2007 and 2008 respectively. By comparing with Westpac (average of 21.41%) (Finanalysis), the figure is reasonable within the industry. Because of the financial crisis and the unfavourable market condition, the return on equity dropped significantly. In 2009, while the average ordinary equity declined by 1.87%, the net income after tax dropped 52.40%. As a result, the return on equity was recorded at only 10.05%. In year 2010 and 2011, while the return of equity of the Macquaries competitors, ANZ and Westpac, increased back to around 15%, Macquaries data fall to 8.38% (Finanalysis 2011). The main reason of the declined figure is that a large portion of expenses had used for global business construction. Macquarie group has entered into a growth stage, especially in global business. Therefore, it is reasonably that the return on the ordinary equity was recorded lower than other major banks. The figure is expected to grow over the medium-term. Earnings Per Share is considered to be a appropriate measure of financial performance since they are regarded to be drivers of longer term shareholder returns. These figures decreased from 2008 to 2009 (global economic crisis) mainly due to a decrease profit from $ 1.9 billion to $974 million. The ratio reached a better record since the recovered economic condition in the global market in the following year. Nevertheless, in 2011, the increased dividend payments (from AUD 407 million in 2009 to 607 million in 2011) lead to a drop in the basic EPS (282.5 per share). Moreover, compared with Westpac in terms of current EPS of 191.9 in 2011 (Finanalysis 2011), Macquaries current EPS is higher, which indicate a positive signal for investors to invest in Macquaries shares.
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Price earnings ratio had risen from 2008 to 2010, indicating an increased expectation of investors for the company. However, in 2011, the earning per share dropped to 13.27 times due to the decreased share price of $36.6. Moreover, compared with the industry P/E of 14.03 in 2011 for finance sector (Finanalysis 2011), Macquarie have better P/E with lower value since investors pay lower amount of money for the same earnings in the industry. In addition, the high price earnings ratio demonstrates a fact that Macquarie is a financially strong blue chip company with a promising future prospect. Dividend payout ratio has performed in a constant manner during the past five years with an average of 20%. It enhances the firms credit standing and it is preferred by the shareholders due to the indication of stability in Macquaries market prices of shares (Articles 2011). since investors pay lower amount of money for the same earnings in the industry. In addition, the high price earnings ratio demonstrates a fact that Macquarie is a financially strong blue chip company with a promising future prospect. Dividend payout ratio has performed in a constant manner during the past five years with an average of 20%. It enhances the firms credit standing and it is preferred by the shareholders due to the indication of stability in Macquaries market prices of shares (Articles 2011).
L iquidity Current Ratio
20 07 1.23
20 20 08 09 1.20 1.09
21 00 1.16
21 01 1.13
Macquarie had maintained a consistent level of current asset relative to the current liabilities from 2001-2011. In details, these ratios declined to 1.09 during 2008 to 2009 due to global crisis that frozen most financial firms liquidity, but improved in the next year as economic conditions improved. 7.2 Financial stability
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F ncial S ina tability Debt Ratio Equity Ratio Capitalisation Ratio Times Interest Earned Asset Turnover Ratio 20 07 20 08 20 09 21 00 21 01 94.48% 93.98% 93.49% 91.93% 92.43% 5.51% 6.01% 6.41% 8.06% 7.57% 18.14 16.62 15.60 12.40 13.22 1.88 1.37 1.18 1.36 1.31 0.08 0.08 0.07 0.07 0.07
The total debt ratio is used to measure the safety of creditors equity in liquidation circumstance. Generally speaking, the lower the ratio, the better off the company will be. But as we mentioned above in debt-to equity ratio, the assessment is up to the industry. Individually, total debt ratio declined from 0.94 at 2007 to 0.92 at 2011, but by contrast, this ratio of Commonwealth was maintained around 0.94 in this period (Finanalysis 2011). Hence, it implies that the Macquaries performance is not abnormal in this industry. In order to less the misleading might be caused by tax and interest expenses when deciding the financial health of a business in short term, the interest coverage ratio(Appendix 9) has been considered by investors as one of the most important ratios. It offers a clear picture of a companys capacity to pay interests charges on its debt. The calculation shows that the interest coverage of Macquarie reduced from 1.51 to 1.32, which definitely is not good news. Because normally investors are not suggested to hold the companys stock whose interest coverage ratio is below 1.5. As long as the ratio went down to 1, this company will be regarded as having difficulties to generating cash to pay its interest. As a result, for Macquarie, similar problems may exist.
7.3 Cash sufficiency
Cs S a h ufficiency Cash Flow Adequacy Repayment of LongTerm Borrowings Dividend Payment Reinvestment Debt Coverage
20 07 1.06 1.43 -0.48 -1.77 -43.2
20 08 20.84 0.01 0.04 0.39 2.76
20 09 4.82 0.05 0.16 1.41 8.69
21 00 -8.12 -0.07 -0.06 -1.03 -7.6
21 01 -7.12 -0.39 0.25 3.57 19.91
Cash Flow Adequacy Ratio increased significantly from 1.06 in 2007 to 20.84 in 2008. In 2009, due to financial crisis effect of the tightened cash flow in the global market, the ratio declining sharply to 4.82 and even lower with -8.12 in 2010 and -7.12 in 2011. This ratio is expected to growth in the following year since the company is expanding its business in the global market (more investment opportunities in accessing global financial market).
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Cs F a h lowE fficiency Cash Flow to Revenues Operations Index Cash Flow Return On Asset
20 07 20 08 20 09 21 00 21 01 -8.80% 131.72% 46.56% -58.72% -20.38% -0.63 9.86 5.26 -5.45 2.41 2.87% 16.31% 6.92% -1.35% 4.38%
The Cash Flow to Revenues increased sharply from -8.80% in 2007 to 131.72% in 2008 as reflected in the increase of cash flow adequacy as mentioned before. The the same correlation existed in the following years since the cash flow from operating fluctuations are the main driver of these movement. Operations Index had the same trend correlation with cash flow to revenues mainly due to same reason.
7.4 Net loan losses
R tio a Net loan losses as %of loan assets
20 07 0.10%
AsAt 3 Ma 1 rch 20 08 20 09 21 00 0.30% 1.90% 0.80%
21 01 0.40%
Net loan losses is an important ratio to be analysed since a slight increase in net loan losses will have a significant adverse effect in financial companies profit. Since Macquaries business is operated globally, this ratio increased from 0.30% in 2008 to 1.90% in 2009 due to the global business breakdown. With the recovery of the global economic condition, Macquarie started to recover as well from this situation by decreasing the ratio to 0.80% in 2010 and further to 0.40% in 2011.
80 INDEPENDENT VALUATION
In order to determine whether investors should invest in Macquarie, it is significant to forecast the future economic value of Macquarie by applying different valuation models. Therefore, dividends discount model, discount future cash flow approach and industry multiple model are used in this valuation. 8.1 Cost of capital
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Weighted average cost of capital (WACC) is applied in the valuation to defined the weighted average of the expected after-tax rates of return of the firms various sources of capital, including equity and debt (Cost of preference shares is ignored in this report) . The formula is applied by WACC=DVrd1-c+EVre . The financial data from the financial statement of Macquarie 2011 is applied to conduct the calculation. The tax rate is assumed to be 30%. Cost of debt Cost of debt is derived from interest paid and total debits. Therefore, by dividing total debits issued from the interest paid, the cost of debt of 8.36% is obtained.
Cost of equity from Capital Asset Pricing Model (CAPM) The CAPM is applied to conduct the firms cost of equity Formula: ke=krf+ e(krm-krf).

15 years Australian Treasury bill is defined as the risk-free rate (Bloomberg 2011). The year to date years average return of 7.11% of S&P/ASX 200 is applied for market return (Standard&Poor 2011). According to FinAnlysis 2011, of the diversified industry is 0.89.
Therefore, the cost of equity of 6.96% is obtained.
WACC
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Therefore,
WACC=DVrd1-c+EVre=92.43% 8.36%(1-30%)+7.57%6.96%=5.93%
8.2 Discount Future Cash Flows Model (DCF) 3 DCF is a valuation model by taking all estimated future cash flow into consideration and discounted back to present value. The Formula is
In order to determine the price of the stock, it is important to forecast future net cash flows. According to the past financial performance, different assumptions are made according to the nature of each account. For example, by adjusting the impact of financial crisis, interest received is assumed to growth by 3.1 %(Details in Appendix 14). In addition, the total future weighted average number of ordinary shares and potential ordinary shares are expected to be increased in future by using the past average growth rate.
21 01 21 02 21 03 21 04 28 04 C shF a low 550 704 871 1,052 61,973 Num of S re ber ha 359,248,731 391,502,031 426,651,029 464,955,698 191,040,730,703 C shF a lowper S re ha 1.53 1.80 2.04 2.26 0.32 R equiredR te Of R a eturn 5.93% 5.93% 5.93% 5.93% P ent Va res lue 1.53 1.70 1.82 1.90 0.00 S re Price ha 4 .3 5 3
Once the assumptions are made, the cash flow is obtained. The present value in 2011 is simply the cash flow per share in 2011 and net present value is calculated from the sum of all
3 Since the company is a diversified financial service, it will be too complicated to forecast its cash flow
through the balance sheet. Therefore, the cash flow forecast is directly from prediction of Macquarie cash flow statement.
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present value from 2011 to 2084 (as the Present Value in 2084 is close to zero, it is assumed that the remaining present value beyond 2084 is irrelevant). By discounting the future cash flow back by applying the WACC and summing it up, the total net present value will be achieved. The calculation process will result in current theoretical share price of $45.33.
8.3 Dividend Discount Model (DDM)
DDM is a valuation method by using forecast dividends and discounting them back to present value. Therefore, it is crucial to project the firms dividend payment by dividing the projected number of shares from the forecasted profit (Details in Appendix 12 and 13) Therefore, the theoretical share price is calculated by dividing the number of shares from the sum of the net present value of all future dividends.
21 01 21 02 21 03 21 04 26 05 D ividendsa D nd istributionPa id 643 722 811 914 55,318 Num of S re ber ha 359,248,731 391,502,031 426,651,029 464,955,698 37,298,314,429 D ividendsPer S hare 1.79 1.84 1.90 1.97 1.48 R equiredR Of R ate eturn 5.93% 5.93% 5.93% 5.93% Present Value 1.79 1.74 1.69 1.65 0.07 S re P ha rice 6 .4 9 1
The Present Value in 2011 is the dividends per share in 2011and Net Present Value is calculated from the sum of all Present Value from 2011 up to 2065 (same as the previous DCF assumption). Therefore, by applying the WACC and the forecast number of shares, the theoretical share price of $69.41 is obtained. 8.4 Industry Multiple Approach P/E multiple is another way of valuation the stock of Macquarie by focusing on analysing Macquaries shares relative to its annual profit generated by the firm. The current industry P/E multiple of 14.03 is applied is the valuation (Finanalysis2011).Therefore, the share price of $39.64 is conducted by the P/E multiple multiplied by Macquarie Earnings/Share in 2011.
IndustryP/E Ma cqua E rning /S re (inc rie a s ha ents) S re Price (inAUD ha )
21 01 14.03 282.50 39.64
To conclude, the expected share price of Macquarie of $45.33, $65.41 and $39.64 is obtained from different three valuation model. By comparing with the Macquaries closing share price
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of $ 34.72 on the 13th May 2011 (ASX 2011), the three different approaches illustrate a market signal for investors to take the long position because the market price of Macquarie is currently underpriced. 9.0 RECOMMEDNDATION According to the previous comprehensive analysis of the external environment, there is enough evidence to illustrate that the Macquarie group has stepped into a firm growth stage. First, the recent favourable macroeconomic environment conditions for Macquarie, equipped with Macquarie sophisticated risk management, have provided a safe backup and opportunities for the firm to recovery from the financial crisis and are ready for future expansion. Second, Solid business strategy, especially the recent advantage of global growth has strengthened the diversity of the companys operation. Third, the improved historical financial performance is recorded. Although some of the Macquaries past financial ratios did not outperform its major competitors, it is believed that the company has the potential to have a promising performance in the future. Last but not least, all the favourable conditions have shown that the asking price (10% of the firms equity) for investors is currently undervalued because the current market value of Macquarie is $34.72 per share whereas the valuation models presents the value of share is $45.33, $65.41 and $39.64 respectively. Therefore, it is the right time for the investors to go long positions in Macquarie Group on the 13th of May. In addition, it is vital for the investors to regularly analysis and keeps attention on firms new announcements and external market information (such as interest rate, inflation and dividend policy) during the investment period to make further investment decisions.
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APPENDIX Appendix 1 Internal structure of Macquarie Group Limited
Source: Macquarie Annual Report
Appendix 2 Analyses of economic conditions in Australia While uncertainties remain from the financial crisis, the Australian is well placed in economic recovery (RBA 2011). With strong resource boom and demand from the emerging Asia region, Real GDP is expected to rise by 3.5% in 2010 with stronger rates of growth over the medium(RBA 2011). Because of the healthy political and economic position, Australia now has become more attractive investment destination for both domestic and international investors. S&P ASX200 has performed strongly since the S&P ASX200 accumulate index keep climbing up and reached 35,395 in January in 2011. Consequently, NAB business Survey (2011) in Appendix 2 illustrates that the general movement of business confidence has gone up. Although there is a fluctuation occurs currently, which is mainly contributed by the Queensland floods, the two indictors are expected to increase over the medium run. \
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Appendix 3 Household Wealth and Liabilities
Appendix 4 NAB Business Survey Business conditions and confidence level
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Appendix 5 Macquaries competitive position in the industry There is an increasing tendency in the growing development of banking industry in Australia in last decade. Currently, four major banks dominate Australians banking sectors (control around 87 percent of Australia's $1.1 trillion (695.6 billion pounds) home loan market) (Banks 2011). Macquarie Group Ltd, as a number of financial institutions, is facing a fierce and dynamic competing environment as well. To illustrate, Porters five forces will be introduced in the following table. THE FIVE FORCES The threat of the entry of new competitors ANALYSIS The threat is considered low, mainly driven by : (i) The existence of barriers to entry is high due to highly regulated nature of financial industry (ii) Capital requirements is high due to highly required capital to establish financial firms
The threat of substitute products or services
The threat is considered high, mainly driven by : (i) Relative price performance of substitute financial services is highly competitive in financial sector (ii) Number of substitute products available in the market is high since there are many other similar financial services in financial industry
The bargaining power of customers (buyers) The bargaining power of suppliers
This threat is considered high, mainly because large amount of financial services company in Australia. This threat is considered low, mainly because supplier volume is high, since there are many investors of financial services in one single financial firm, thus the bargaining power of suppliers is low The threat is considered high, mainly due to many rivals can offer financial services with competitive price and quality in financial industry
The intensity of competitive rivalry
Appendix 6 Risk analysis
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RISK Equity Risk Risk of loss arising from banking book equity-type exposures
MITIGATION Equity Risk Limit All of the risk exposures is subject to aggregate Equity Risk Limit (the limit is reviewed on a semiannual basis) Transaction Review and Approval Process The business unit executing the transaction is responsible for due diligence and risk analysis of each equity investment
Credit Risk
Analysis and Approval of Exposures
Risk of financial loss as a result of failure by Macquarie enforces a strict no limit, no dealing a client or counterparty to meet its rule; all proposed transactions are analysed and contractual obligations approved by designated individuals before they can proceed. Independent Analysis The RMG credit team provides independent analysis of credit risk exposures Macquarie Group ratings Macquarie has established a proprietary internal credit rating framework to assess counterparty credit risk. Measuring and monitoring exposures All credit exposures are monitored regularly against limits. Loan impairment review All loan assets are subject to recurring review and assessment for possible impairment. Country Risk Policy Countries are grouped into categories based on the countrys risk profile. Operational Risk Operational Risk Management Framework
Macquarie defines operational risk as the Macquaries Operational Risk Management risk of loss resulting from inadequate or Framework (ORMF) is designed to identify, assess failed internal processes, people and systems and manage operational risks within the
20
or from external events.
organisation. Macquaries operational risk capital framework Macquaries framework for operational risk capital has two main elements: (i) An annual scenario approach for modelling operational risk losses and to determine operational risk capital (ii) A quarterly scorecard analysis which is used to update operational risk capital between scenario analyses and as a basis for updating the allocation of capital to businesses.
Market Risk Market risk is the exposure to adverse changes in the value of Macquaries trading portfolios as a result of changes in market prices or volatility.
Trading market risk RMG monitors positions within Macquarie according to a limit structure which sets limits for all exposures in all markets. Aggregate measures of market risk Aggregate market risk is constrained by two risk Measures : (i) The VaR model, which predicts the maximum likely loss in Macquaries trading portfolio due to adverse movements in global markets over holding periods of one and ten days. (ii) The MEL scenario, which utilises the contingent loss approach to capture simultaneous, worst case movements across all major markets. Trading revenue The effectiveness of Macquaries risk management methodology can be measured by Macquaries daily trading results. Capital adequacy assessment Macquarie assesses capital adequacy for both Macquarie Group and Macquarie Bank. Risk appetite setting Risk appetite is the nature and amount of risk that
21
the Group is willing to accept. The Risk Appetite Test This is a Macquarie-wide stress test in which a severe economic downturn scenario is considered. Risk-adjusted performance measurement Risk-adjusted performance metrics for each business unit are prepared on a regular basis and distributed to Operations Review Committee and the Board as well as to business units. Liquidity Risk Liquidity management Macquaries liquidity risk management framework ensures that both Macquarie Group Limited (MGL) and Macquarie Bank Limited (MBL) are able to meet their funding requirements as they fall due under a range of market conditions. Liquidity policy and principles The liquidity management principles apply to both MGL and MBL and include the following: (i) Liquidity and funding management (ii) Liquidity limits Scenario analysis The objective is to ensure MGL and MBLs ability to meet all repayment obligations under each scenario and determine the capacity for asset growth. Liquid asset holdings Group Treasury maintains a portfolio of highly liquid unencumbered assets in both MGL and MBL to ensure adequate liquidity is available in all funding environments, including worst case conditions. Liquidity contingency plan The liquidity contingency plan applies to the entire Macquarie Group and defines roles and responsibilities and actions to be taken in a liquidity
22
event. Funding transfer pricing An internal funding transfer pricing system is in place which aims to align businesses with the overall funding strategy of Macquarie. Legal and Compliance Risk Legal and compliance risks include the risk of breaches of applicable laws and regulatory requirements, actual or perceived breaches of obligations to clients and counterparties, unenforceability of counterparty obligations and the inappropriate documentation of contractual relationships. Reputation Risk RMG assesses compliance risk from a Macquariewide perspective and works closely with legal, compliance and prudential teams throughout Macquarie to ensure compliance risks are identified and appropriate standards are applied consistently to manage these compliance risks.
Macquarie seeks to manage and minimise reputation risk through its corporate governance structure and risk management framework.
Source: Macquarie Group risk management report Appendix 7 SWOT Analysis By applying the SWOT model, Macquarie business strategy analysis is tabulated below : IDENTIFICATION Strengths Characteristics of the business that give it an advantage over others in the industry ANALYSIS (source : Macquarie Group 2010 Annual Report) Macquarie have several strengths such as : (i) Diversity of operation (ii) Unique structure and management style which enables businesses to exercise significant operating freedom balanced by limits on risk and the adherence to professional standards (iii) Strong financial position Weaknesses Characteristics that place the firm at a disadvantage relative to others Macquarie have several weaknesses such as : (i) Lower values, write-downs and disposals of offshore assets that largely due to strengthening of Australian dollar against major global currencies
23
(ii) At 31 March 2010, over half of Macquaries income and approximately half of Macquaries staff were offshore which is also affected by strengthening of Australian dollar against major global currencies Opportunities External chances to make greater sales or profits in the environment Macquarie have several opportunities such as : (i) Advantage of global growth and transaction opportunities arising from generally improved market conditions. (ii) Range of credit opportunities (iii) Opportunities arising as a result of market disruptions like acquisitions of businesses, teams and individuals (iv) The dislocation of global credit markets, together with the scale back of lending activities by financial institutions, provided opportunities for corporate and asset financing businesses (v) Working with governments and strong local partners to deliver infrastructure opportunities. Threats External elements in the environment that could cause trouble for the business Several threats to Macquarie are : (i) Market downturn, that affect volume of financial services to customers (ii)Strong competitor that might enter the market
The business strategy of Macquarie is unique, very entrepreneurial (Pollenmarking 2010). They intend to concentrate only on the offering that they had a leadership position in or that they can develop one in. They concentrated on sectors they have the deepest knowledge only, such as resources and energy, infrastructure, real estate and financial institutions. Hence in all their six operating businesses the same core of business strategy: operating and managing the businesses provides the client with highly specialized insights (Macquarie 2011). Although analysts point out that the revenues of Macquarie are very low compared to other competitors who have larger size of operation and reputation, the fact turns out to be it seems like such a good player in their definite area and markets. The strengths of diverse operation,
24
unique management and strong financial position et cetera will make Macquarie well adapt to various environments they operate in. The head of Macquaries investment banking group pointed out that rather than flight a battle in the areas where competitors are big and strong, Macquarie focus on the areas where others are not strong (Pollenmarking 2010).
Minimizing the weakness. A conservative approach to risk management is suitable strategy to minimize : (i) Lower values, write-downs and disposals of offshore assets that largely due to strengthening of Australian dollar against major global currencies (ii) At 31 March 2010, over half of Macquaries income and approximately half of Macquaries staff were offshore which is also affected by strengthening of Australian dollar against major global currencies Overcome the threats. Incremental growth and evolution and an ability to adapt to change are suitable strategies to overcome : (i) Market downturn, that affect volume of financial services to customers (ii)Strong competitor that might enter the market Maximize the strengths. Maintaining operations that are diversified by business is suitable strategy to maximize : (i) Diversity of operation (ii) Unique structure and management style which enables businesses to exercise significant operating freedom balanced by limits on risk and the adherence to professional standards (iii) Strong financial position Grasp the opportunities effectively and efficiently. The provision of services to our clients and the alignment of interests with shareholders, investors and staff are suitable strategies to effectively and efficiently grasp : (i) Advantage of global growth and transaction opportunities arising from generally improved market conditions. (ii) Range of credit opportunities (iii) Opportunities arising as a result of market disruptions like acquisitions of businesses, teams and individuals (iv) The dislocation of global credit markets, together with the scale back of lending activities by financial institutions, provided opportunities for corporate and asset financing businesses (v) Working with governments and strong local partners to deliver infrastructure opportunities. Appendix 8 Macquarie financial performance
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Source: Macquarie annual report 2011
Appendix 9 Ratio calculations
Calcula Ratios Profitability ratio Net interest margin Formula 2007 2008 2009
Net interestincome Interestearningasset
728 = 0.69% 1062256
817 = 0.64% 127322
938 = 103675
26
Return on total asset Return on ordinary equity Earnings per share Priceearnings ratio Earnings yield Dividend yield Dividend payout
Profit beforeincometax + financecosts Averagetotal assets Profit - preference dividends Averageordinaryequity Profit (afterincometax) - preference dividends Weightedaveragenumberof ordinarysharesissued Market price per ordinaryshare Earningsper ordinaryshare Earningsper ordinaryshare Market price per ordinaryshare
5832 = 4.27% 136389 1463 = 21.96% 6662 1463 = 592.30% 247
8086 = 4.83% 167250 1803 = 20.73% 8829 1803 = 760.26% 269 52.83 = 8.09% 653 653 = 1236% 52.83 3.45 = 6.53% 52.83
6471 = 149144
871 =1 8664
871 = 30 281
48.81 = 14.51% 569.8 569.8 = 1167.3% 48.81

1.86 = 3.81% 48.81 315 = 21.53% 1463
27.04 = 308.6
308.6 =1 27.04 1.85 = 27.04
Total dividendsto ordinaryshareholde rs Profit - preference dividends

Liquidity ratios Current ratio
345 = 19.13% 1803
185 = 21 871
Annualdividendper ordinaryshare Market price per ordinaryshare

Current assets Current liabilitie s
106256 = 122.55% 86704
12 73 22 = 12 028% . 10 58 51
103675 = 95070
Quick ratio
Cash assets + receivable s Current liabilitie s
Since Macquarie Group is a financial serv calculate these four ratios due to the lack
Receivable s turnover
Net sales revenue Averagereceivable balance s
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Average collection period Inventory turnover
Averagereceivable balance* 365 s Net sales revenue
Cost of sales Averageinventorybalance
Financial stability ratios Debt ratio

Total liabilitie s Total asset
128870 = 94.48% 136389
157189 = 93.98% 167250
139584 149144
Equity ratio Capitalisati on ratio Times interest earned Asset turnover ratio Cash sufficiency ratios Cash flow adequacy Repaymen t of longterm borrowings Dividend payment
Total equity Total asset
7519 = 5.51% 136389 136389 = 18.14% 7519 5832 = 1.88 3094 11085 = 8.13% 136389
10061 = 6.01% 167250 167250 = 16.62% 10061 8086 = 1.37 5881 14129 = 8.45% 167250
9560 149144
Total asset Total equity Profit beforeincometax + financecostsexpensed Financecosts (expensedand capitalise d) Revenues Averagetotal assets
149144 9560
6471 = 5482
11008 149144
C a s fhl o wf sr o m p e r a t iancgt i v i t i e s o R e p a y moefn ot n -gt e r m o r r o w i +n A s s e at s q u i r+eddi v i d e n d s d l b g c pai Repaymentof long - term borrowings Cash flows from operatingactivities
-975-922=1.06
18611893=20 .84 22518611=1. 12%
5125106 2
-1394975=142.97%
2355125 %
Dividendspaid Cash flows from operatingactivities
472-975=-48.41%
66818611=3. 59%
8295125 8%
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Reinvestm ent Debt coverage
Purchaseof property,plant and equipment Cash flows from operatingactivities Non - currentliabilitie s Cash flows from operatingactivities
1724-975=176.82% 42116-975=43.20
719518611=3 8.66% 5133818611= 2.76
7249512 .44%
4451451 69
Cash flow efficiency ratios Cash flow to revenues Operations index Cash flow return on assets
Cash flows from operatingactivities Revenues Cash flows from operatingactivities Profit
-97511085=8.80% 1861114129= 131.72%
5125110 .56%
-9751551=-0.63
186111888=9 .86 24764151819 =16.31%
5125974
C a sf hl o w rso m p e r a a icnt g v i+t i n sc o ma ep a i+di n t e r p a ti(df i n a n o e t s ) f o t i e t x es ccs 7% A v e r at o tea sl s e t s g

Source: Macquarie annual report 2006-2011
3479121300=2.8
1094815 6.92%
Appendix 10 Additional Ratio analysis Net interest margin Net interest margin is the dominant ratio of measuring the profitability of the Macquarie group since interest earning is the main revenue of financial institutions. Similar to the gross margin of non-financial companies, net interest margin measures the companys real return on its investment relative to its interest earning assets. A positive value indicates that a firm makes successful investment decisions because the return excess the amount of interest is paid Net interest margin 2006-2011
Interest income and interest expenses

29
2006 Interest and similar income Interest income growth rate Interest expense Interest expense growth rate expense/income Net interest income/(expense) -81.12% 592.00 2,544.00 3,136.00
2007 4,632.00 47.70% 3,904.00 53.46% -84.28% 728.00
2008 6,698.00 44.60% 5,881.00 50.64% -87.80% 817.00
2009 6,420.00 -4.15% 5,482.00 -6.78% -85.39% 938.00
2010 4,591.00 -28.49% 3,511.00 -35.95% -76.48% 1,080.00
2011 5,304.00 15.53% 4,029.00 14.75% -75.96% 1,275.00
Macquarie groups had continuously generating positive net interest margin over the past five years. It indicates that the overall investments made by Macquarie group did success because the interest revenue excesses the expenses which paid for interest generating. In details, how the growth of the expense relative to the growth of the interest income made the real change in the net interest margin ratio. Except year 2011, the growth rates of interest rate for last five years are all excess the growth rate of interest income. For instance, while the interest income grew 44.60% to $A 6698milliomn in 2008, the interest expense grew 50.64%. A approximately 6% higher in expense growth made the major contribution of the relative lower net interest margin of 0.69% in 2008, by comparing with 0.77 in 2007. In 2011, the net interest margin reached 1.15% with a lower expense growth of 14.75, comparing with 15.53% increase in interest income. Return on equity Return on equity measure the ability of a firm to generate return with the shareholders investments. A high return on equity shows a firm is effectively using shareholders investment in profit generating. Return on ordinary equity 2006-2011
Net income after tax Growth rate Average ordinary equity Growth rate
945
1,494 58.10%
1,830 22.49% 8,829 32.53%
871 -52.40% 8,664 -1.87%
1,050 20.55% 11,232 29.64%
956 -8.95% 11,404 1.53%
4,489
6,662 48.41%
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In 2006-2008, before the financial crisis, Macquarie group reported a stable return on equity of 21.05%, 22.42% and 20.73% respectively. By comparing with Westpac (average of 21.41%), the figure is reasonable within the industry. Because of the financial crisis and the unfavourable market condition, the return on equity dropped significantly. In 2009, while the average ordinary equity declined by 1.87%, the net income after tax dropped 52.40%. As a result, the return on equity was recorded at only 10.05%. In year 2010 and 2011, while the return of equity of the Macquaries competitors, ANZ and Westpac, increased back to around 15%, Macquaries data fall to 8.38%. The main reason of the declined figure is that a large portion of expenses had used for global business construction. Macquarie group has entered into a growth stage, especially in global business. Therefore, it is reasonably that the return on the ordinary equity was recorded lower than other major banks. The figure is expected to grow over the medium-term.
Debt- to- equity ratio Debt to-equity ratio of MQG from 2006 to 2011
As we could see in the Graph, although the debt-to equity ratios decreased during years period, they are also quite high from FY06 to 11, far from the normally acceptable level of 40%. It may implies that there is too much debt has been put into the business at risk and may lead to difficulty in meeting interest and principal repayments. But the indications of this ratio also depend on the type of business and industry circumstances. Compared with its competitors like other major banks, i.e. Commonwealth Bank, the debt-to-equity ratio of Macquarie can be considered as a low one, especially in recent years.
Total debt ratio Ratios of cost-to-income, total debt ratio and interact coverage of MQG from 2006 to 2011
This ratio is used to measure the safety of creditors equity in liquidation circumstance. Generally speaking, the lower the ratio, the better off the company will be. But as we mentioned above in debt-to equity ratio, the assessment is up to the industry. Individually, total debt ratio declined from 0.95 at FY06 to 0.92 at FY11, as we can see in the graph , but by contrast, this ratio of Commonwealth was maintained around 0.94 in this period. Hence, it implies that the Macquaries performance is not abnormal in this industry.
Interest coverage
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In order to less the misleading might be caused by tax and interest expenses when deciding the financial health of a business in short term, the interest coverage ratio has been considered by investors as one of the most important ratios. It offers a clear picture of a companys capacity to pay interests charges on its debt. The calculation shows that the interest coverage of Macquarie reduced from 1.51 to 1.32, which definitely is not good news. Because normally investors are not suggested to hold the companys stock whose interest coverage ratio is below 1.5. As long as the ratio went down to 1, this company will be regarded as having difficulties to generating cash to pay its interest. As a result, for Macquarie, similar problems may exist.
Cost-to-income Cost/Income ratio is used to measure a companys efficiency in minimizing costs while increasing interest, usually in financial sectors. The lower the ratio is, indicating that the company may generate higher profit with more efficient. Unfortunately, as it shows in the above graph, the cost-to-income ratios of Macquarie are higher than those of Commonwealth Bank, and from newest annual report, we could figure out that the ratio increased by approximately 4%. That implies that Macquarie should make move to improve their ability of making profit and cutting cost at the same time.
Appendix 11 Additional Trend analysis Cash flow trend analysis
TABLE:10 As the bar graph shows, the proportion of the cash flow differs greatly among operating activity, financing activity and investment activity. Generally speaking, the company obtains most of its cash from operating activities from 2007 to 2010, which gives a signal of a healthy and stable operation of MQG. What is noticeable in this graph is that there is an abnormal cash flow in 2010-- both the net operating cash flow and the net investment cash flow presented a negative figure. More specifically, the operating cash flow in 2009 is 216.27% lower than 2010 and the investment cash flow had a fall of 859.84% as well. Inevitably this resulted in a decline of 445.7% in net cash flow, which is dropped from $A3680millions in 1999 to -$A12722million in 2000. According to the 2010s financial report, there are two reasons for this change: first, after the economic crisis, the relevant market in 2010 is not regarded as active enough, which lead to a valuation techniques being applied to the fair value and thus discounted the cash flow. Second, the company spent more on money on investing activities that year for the preparation of recovering from the economic crisis, the investing capital consumed from
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$A740mil in 2009 to $A7103mil in 2010. However, nearly all the banks in Australia had taken the similar strategy, and as we have seen in the second graph, the company achieves great success as well. The increasing amount cash flow in operating activity in 2011 demonstrates a healthy financial situation. After tax profit attributable to ordinary equity Graph 1: Profit from ordinary activities after income tax attributable to ordinary equity 2006-2011
The after-tax profit of Macquarie Group bank over past five years experienced some fluctuation, which is mainly contributed to the highly disrupted market conditions. The operating group performed strongly in year 2007 and 2008 with the growth rate of 59.72% and 23.24% respectively and achieved $A1803million at of the end of the financial year 2008. Although unfavourable conditions like the closure of global mortgage securitisation markets and weakness in the global listed real estate investment trust market, the successful transition to an global corporation has provide a strong potential market for the Macquarie group. The unprecedented market downturn in 2009 resulted in a decline in the overall operation. The after-tax profit was decrease 51.69 % to $A871million. By comparing with the major competitors, NAB and ANZ were in the similar situation of 42.9% and 11% decrease in their after-tax profit (Finanalysis 2011). In 2010, the improved market condition has brought the profit back to $A1050million. In 2011, although the net operating income was increased by 15 percent, the increased operating expenses which related to global platform expansion, ongoing uncertainty and the strong Australia dollars had negatively affected the final profit. The after-tax profit was declined to $A956million, decreased by 8.95% from previous year.
Interest income FY(annual report isuued at) Interest Income Growth 2007 4632 47.70% 2008 6698 44.60% 2009 6420 -4.15% 2010 4591 -28.49% 2011 5304 15.53%
Sometimes companies keep their cash in short term deposit investment or deposit which will mature in twelve months. Interest earrings from these are recorded as interest income. The table above shows the change of interest income from 2006 to 2010 and its growth trend. There was a shape decline in 2008; in 2009 the growth rate was 28.49% negative. However in 2010, the growth rate raised to 15.53%, which is still fewer than the figures before 2008.
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The fluctuation of interest income not only is effected by the interest rate of Federal Reserve, but also results from the interest method the company took. Macquarie declared in their annual reports that, the interest income is brought to account using the effective interest method which has considered fees, transaction cost and financial lease and so forth. And as we stated at the first part, the economy both in global and local will become better, especially in the financial area. As a result, we believe that the interest income will be increase in the next few years, and the growth rate will rise as well. Operating expense trend analysis
As the graph shows, the total operating expense of MQG in these five years generally kept a growing tendency. In 2007, the figure was $A5253mil and with a 15% increasing, it reached to $A6034mil in 2008. Then after a reverse situation occurred next year (the data drop nearly 25%). the operating expense jumped to $A5344mil in 2010 again and kept a 19.26% growth rate in the next year. When compared this data with Australias four major banks, we find the amount of operating expense of these four banks are a little higher than MQG. To illustrate, we choose a year randomly (2010) to compare MQGs operating expense with these four banks. According to their annual report, the operating expense of Australia and New Zealand Banking Group (ANZ) is $A6971mil, the Commonwealth Bank of AustraliaI ($A7765mil), National Australia Bank ($A8541mil ) and Westpac Banking Corporation is ($A7416mil ). The relatively higher operating expense, to some extent, reflect a better business circumstances, these numbers mentioned above provides a general idea of the companys operating situation. Although there is still a little disparity with the four major banks, the fact that the operating expense of MQG keeps a growing tendency in the last few years should not be ignored. Therefore it is reasonable to believe that the MQG has the potential capability to catch up with these four banks.
Dividend trend analysis
As the graph shows, the dividend in 2007 and 2008 is obviously higher than in the following three years. From 2009 to 2010, the dividend is basically remained balance approximately at $A 165mil. According to the annual report in 2009, the reason why the dividend decreased by 46.48% is that under the influence of global financial crisis, Macquarie group shareholders have to subject to suffer as well. However The Board believes that although the economic climate has result in the overall performance declining, Macquaries remuneration approach has conduced to essential relative outperformance. In2010Macquarie establish a new equity plan, which will benefit for the shareholders in the long term.
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Assets/ liability/equity trend analysis
According to these two graphs, the assets are always higher than the liabilities which give a signal of better performance. In addition we can find that there is no significant reduction in assets and liabilities even in the financial crises year and in 2011 both assets and liabilities has increased by 7.97 and 8.55 respectively. When turning the eyes to the equity graph, we can find that except the 2009(the global financial crisis) Macquaries equity presents an increasing tendency. It jumps from $6662 mil in 2007 to $11404 mil in 2011, which raises nearly 71.18%. The balance sheet is remains solid and conservative. The strength of our balance sheet, integrated with their pursuit of opportunities for continued growth, resulted in a range of successful initiatives. According to the 2011 annual report, the balance sheet in 2011 is tended to be characterized by high cash balances because of the CMT/CMA initiative, which is expected to be continue to deploy in the next following years. All the message mentioned above, it is not difficult to find that even though there was adverse remuneration in 2009, the balance sheet still maintains a conservative trend, which has demonstrate powerful potential development strength.
35
Appendix 12 Projection of Income statement Macquaries Income Statement from 2007 to 2011 is shown below:
36

for year ended3 March 1 (in m illionAUD ) Interest and similar income Interest expense and similar charges Net interest incom e/(expense) Fee and commission income Net tradingincome Share of net (losses)/profits of associates and joint ventures accounted for using the equity method Other operating income and charges Net opera tinginc e/(expense) om Employment expenses Brokerage and commission expenses Occupancy expenses Nonsalary technology expenses Other operating expenses T l opera ota tingexpenses
200 7
4,632 -3,904 728 3,540 1,047 242 1,624 7,181 -3,733 -421 -226 -163 -710 -5,253
2 08 0
6,698 -5,881 87 1 4,645 1,835 156 795 8 4 ,2 8 -4,177 -702 -264 -214 -686 -6 4 ,0 3
20 09 2 010 2 011
6,420 4,591 5,304 -5,482 -3,511 -4,029 98 1 8 3 ,0 0 1 7 ,2 5 4,045 3,721 1,157 1,299 74 -230 -688 768 5 2 6 3 ,5 6 ,6 8 3,891 1,368 179 931 7 4 ,6 4
-2,359 -3,101 -3,890 -685 -645 -785 -393 -482 -483 -263 -283 -316 -837 -833 -899 -4 3 -5 4 -6 7 ,5 7 ,3 4 ,3 3
Profit/(loss) fromordina a ry ctivitiesbefore incom ta e x Income tax (expense)/benefit Profit/(loss) fromordina a ry ctivitiesa fter incom ta e x Distributions paid or provided on Macquarie Income Preferred Securities Macquarie Income Securities Other minority interests Profit a ttributa to m ble inorityinterests Profit/(loss) a ttributa to ordina equityholdersof ble ry Mac rie GroupL ited qua im D ividendsa distributionsP nd aid
1,928 -377 1,551
2 0 ,2 5 -317 1 8 ,8 8
99 1 9 8 ,2 4 -15 -201 94 1 9 7 ,0 3
1 7 ,2 1 -282 99 8
-54 -31 -3 -88
-50 -34 -1 -8 5
-45 -33 -25 -1 3 0
-8 -21 -14 -4 3
-4 -26 -3 -3 3
1,463 602
1 0 ,8 3 80 8
81 1 5 7 ,0 0 92 6 49 0
96 5 63 4
In projecting Macquaries Income Statement, we are using assumption as follows :
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Growth Averag Assumption e
2008
Interest and similar income Interest expense and similar charges 44.60% -50.64%
2009
2010
2011Growth Used
6.87% -5.66% 3.71% 13.97% 0.00% 21.22% -6.32% -21.71% -0.21% -11.66% -7.92%
-4.15% -28.49% 15.53% 6.87% 6.78% 35.95% -14.75% -5.66% -12.92% -8.01% -36.95% 12.27% 4.57% 3.71% 5.31% 13.97%
Fee and commission income 31.21% Net trading income 75.26% Share of net (losses)/profits of associates and joint ventures accounted for using the equity method -35.54% Other operating income and charges -51.05% Employment expenses Brokerage and commission expenses Occupancy expenses Nonsalary technology expenses Other operating expenses -11.89% -66.75% -16.81% -31.29% 3.38%
-52.56% -410.81% 177.83% -80.27% -186.54% 211.63% 21.22% -1.18% 43.52% -31.45% -25.44% -6.32% 2.42% 5.84% -21.71% -20.05% -48.86% -22.65% -0.21% -22.13% -22.90% -7.60% -11.66% -18.36% -22.01% 0.48% -7.92% -6.52% %Tax 2% Averag e 22% 14.63%
Income tax (expense)/benefit Distributions paid or provided on Macquarie Income Preferred Securities Macquarie Income Securities Other minority interests Dividends and distributions Paid
14%
16%
14.63%
7.41% 10.00% 82.22% 50.00% 37.41% -9.68% 2.94% 36.36% -23.81% 1.45% 66.67% -2400.00% 44.00% 78.57% -552.69% Dividend Payout Ratio in % Averag e 48.81% 110.45% 38.95% 67.26% 61.32%
7.41% 1.45% 44.00% 61.32%
For interest and similar income, interest expense and similar charges, fee and commission income, net trading income, employment expenses and distributions paid on income securities; we are using average growth from 2007 to 2008 since we expect these variables will move in these reasonable growth as the business is expanding. However, share of net (losses)/profits of associates and joint ventures is assumed constant since there are extreme fluctuations throughout the years. Other operating income and charges is assumed at 2011 growth since it is the only reasonable value among others. Whereas brokerage commission expenses, occupancy expenses, non-salary technology expenses and other operating expenses assumed at 2011 growth as it is still reasonable growth we predict in future. Distributions paid on Income Preferred Securities and other minority interests is assumed at the least extreme growth available at 7.41% and 44.00% respectively. Also, future Tax rate and Dividends and distributions paid is assumed at the average rate throughout 2007 to 2011. The above assumption will result in figures from 2012 to 2016 is shown below:
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Projectionfor yea ended3 Ma r 1 rch (inm illionAUD ) Interest and similar income Interest expense and similar charges Net interes incom t e/(expens e) Fee and commission income Net trading income Share of net (losses)/profits of associates and joint ventures accounted for usingthe equity method Other operating income and charges Net opera tingincom e/(expense) Employment expenses Brokerage and commission expenses Occupancy expenses Nonsalary technology expenses Other operating expenses T l opera ota tingexpens es
2012
5,669 -4,257 1 1 ,4 1 4,036 1,559 179 1,129 8 1 ,3 4 -4,136 -955 -484 -353 -970 -6 9 ,8 8
2013
6,058 -4,498 1 6 ,5 0 4,185 1,777 179 1,368 9 6 ,0 9 -4,397 -1,163 -485 -394 -1,047 -7 8 ,4 6
2014
2015
2016
6,475 6,920 7,395 -4,753 -5,022 -5,307 1 2 ,7 1 1 9 ,8 7 2 8 ,0 8 4,341 2,025 4,502 2,308 4,669 2,631
179 179 179 1,658 2,010 2,437 9 2 1 ,8 7 1 ,0 5 ,9 5 0 9 2 0 -4,675 -1,415 -486 -440 -1,130 -8 4 ,1 6 -4,970 -1,722 -487 -491 -1,220 -8 9 ,8 0 -5,284 -2,096 -488 -549 -1,316 -9 3 ,7 3
Profit/(loss fromordina a ) ry ctivitiesbefore incom ta e x Income tax (expense)/benefit Profit/(loss fromordina a ) ry ctivitiesa fterincom ta e x Distributions paid or provided on Macquarie Income Preferred Securities Macquarie Income Securities Other minority interests Profit a ttributa to m ble inorityinterests Profit/(loss a ) ttributa to ordina equityholdersof ble ry Ma cqua GroupL ited rie im D ividendsa dis nd tributionsP id a
1 1 ,4 5 -207 1 0 ,2 8
1 8 ,5 4 -232 1 5 ,3 2
1 7 ,7 9 -260 1 1 ,5 9
2 0 ,0 7 -294 1 1 ,7 3
2 7 ,2 2 -332 1 4 ,9 0
-4 -26 -2 -3 1
-3 -25 -1 -3 0
-3 -25 -1 -2 9
-3 -25 0 -2 8
-3 -24 0 -2 7
1 7 ,1 7 72 2
1 2 ,3 2 81 1
1 9 ,4 0 94 1
1 8 ,6 6 1 3 ,0 4
1 1 ,9 3 1 7 ,1 3
39
Appendix 13 Projection of Statement of Financial Position Macquaries Statement of Financial Position from 2007 to 2011 is shown below:
40

Htr a isoic l
( m nA D in illio U )
As t s es C s a db la c sw c n l b n s a h n a n e ith e tra a k D efro b n s u m ak C s c lla ra o s c ritie b rro e a d a h o te l n e u s o w d n re e ere u h s a re m n v rs p rc a e g e e ts T d gp rtfo a s ts ra in o lio s e L a a s tsh lda a o e c s o n s e e t m rtis d o t O e fin n ia a s tsa fa v lu th u h th r a c l s e t ir a e ro g p fit o lo s ro r s D riv tiv fin n ia in tru e tsp s e e a e a c l s mn o itiv v lu s a e O e a s ts th r s e In e tm n s c ritie a a b fo s le v s e t e u s v ila le r a In n ib a s ts ta g le s e L in e tm n c n c a do e ife v s e t o tra ts n th r u ith ld rin e tm n a s ts n o e v s e t se In re tsina s c te a djo t v n re te s s o ia s n in e tu s a c u te fo u in th e u m th d c o n d r s g e q ity e o P p rty p n a de u m n ro e , la t n q ip e t D fe din o eta a s ts e rre c m x s e N n u n a s tsa da s tso d p s l o c rre t s e n s e f is o a g u sc s ifie a h ldfo s le ro p la s d s e r a T t l as t oa s es L b ie ia ilit s D etob n s u ak C s c lla ra o s c ritie le t a d a h o te l n e u s n n re u h s a re m n p rc a e g e e ts T d gp rtfo lia ilitie ra in o lio b s D riv tiv fin n ia in tru e tsn g tiv e a e a c l s mn ea e v lu s a e Dp s e o its D b is u da a o e c s e t s e t m rtis d o t O e fin n ia lia ilitie a fa v lu th r a c l b s t ir a e th u hp fit o lo s ro g ro r s O e lia ilitie th r b s C rre t ta lia ilitie u n x b s L in e tm n c n c a do e ife v s e t o tra ts n th r u ith ld rlia ilitie n o e b s P v io s ro is n D fe din o eta lia ilitie e rre c m x b s L b ia ilitie o d p s l g u sc s ifie a s f is o a ro p la s d s h ldfo s le e r a T t llia ilit se c d g a c p a oa b ie x lu in lo n a it l La cp a o n a it l M c u rieC n e leP fe n eS c ritie aq a o v rtib re re c e u s S b rd a dd b a a o e c s u o in te e t t m rtis d o t S b rd a dd b a fa v lu th u h u o in te e t t ir a e ro g p fit o lo s ro r s T t llo nc p a oa a a it l T t llia ilit s oa b ie
20 07
3 62 ,1 0 2 ,9 9 5 0 1 ,5 8 5 1 4 ,7 6 5 9 27 ,7 9 1 ,9 3 1 1 1 ,4 4 0 4 66 ,0 0 10 0 54 ,8 7 47 ,0 1 38 7 47 5 94 9 1 63 9 3, 8
20 08
7 1 ,1 0 01 2 ,9 6 20 1 ,8 7 50 5 ,4 7 20 43 ,1 1 2 ,1 6 13 1 ,5 9 03 1 ,4 4 65 44 9 59 ,6 9 50 ,5 0 35 7 78 1 97 6 1 72 0 6, 5
20 09
11 4 1 ,2 1 2 7 59 ,0 6 96 ,2 0 4 ,7 1 4 5 71 ,9 0 2 ,4 8 7 2 1 ,6 0 0 4 1 ,1 3 8 2 79 5 41 ,3 4 62 ,1 3 65 0 18 ,1 6 57 3 1 91 4 4, 4
21 00
0 8 5 ,2 1 7 4 ,1 9 1 ,1 8 23 4 ,2 7 46 9 7 ,1 2 2 ,5 1 16 1 ,0 6 39 1 ,2 1 82 1 5 ,4 6 4 4 ,8 6 3 2 ,9 7 65 0 1 2 ,1 4 17 2 1 59 0 4, 4
21 01
0 91 ,8 7 89 ,7 0 1 ,8 8 49 4 ,0 6 61 1 ,6 8 16 2 ,1 5 18 1 ,6 6 24 1 ,0 1 75 11 ,3 7 55 ,0 9 29 ,7 0 50 ,0 7 14 ,2 5 7 9 1 75 8 5, 6
42 ,1 7 78 ,4 9 1 ,9 2 5 2 1 ,0 9 1 6 1 ,4 3 2 0 5 ,3 5 1 6 55 ,5 2 1 ,9 8 1 5 12 3 58 ,7 1 13 5 7 8 10 7 1 61 9 2, 9
1 ,0 1 04 1 ,7 1 38 1 ,8 5 12 2 ,3 9 19 1 ,7 3 58 5 ,1 5 71 68 ,2 8 1 ,2 0 21 13 9 58 ,6 9 19 7 11 2 25 1 1 48 9 5, 3
1 ,8 8 1 5 35 ,9 3 26 ,1 1 2 ,3 1 7 7 2 ,8 8 1 6 4 ,2 0 8 7 60 ,2 3 1 ,3 2 0 4 17 8 41 ,3 2 19 8 4 38 2 1 70 6 3, 4
9 2 ,9 7 7 9 ,4 0 5 3 ,4 2 2 ,7 6 10 2 ,4 4 28 4 ,6 4 21 4 1 ,4 3 1 ,6 9 27 19 1 4 6 ,8 4 11 9 25 3 9 1 21 3 3, 6
71 ,8 0 61 ,6 7 50 ,8 8 2 ,5 2 17 3 ,3 8 53 4 ,1 7 17 43 ,3 9 1 ,3 7 42 17 9 55 ,0 5 25 1 27 8 0 1 27 2 4, 4
0 18 ,7 3 88 8 26 1 ,7 1 88 0 2, 7
0 10 ,7 4 66 4 23 0 ,5 1 71 9 5, 8
51 9 19 ,4 6 41 5 25 8 ,3 1 95 4 3, 8
53 9 96 1 49 9 20 8 ,0 1 41 1 3, 7
55 9 13 ,8 2 47 6 28 4 ,9 1 56 6 4, 3
41

Net a ssets E quity Contributed equity Ordinary share capital Treasury shares Exchangeable shares Reserves Retained earnings T l ca ota pital andres ervesattributa to ble ordinaryequity holdersof Ma cqua Group rie L ited im Minorityinteres ts Macquarie Income Preferred Securities Macquarie Income Securities Other minority interests T l equity ota 7 1 ,5 9 1 ,0 1 0 6 9 6 ,5 0 1 ,7 9 1 6 1 ,9 2 1 3
3,103 -7 0 380 2,795
4,534 -12 133 456 3,718
4,906 -2 116 17 3,627
6,990 -443 137 280 4,268
7,140 -731 104 310 4,581
6 7 ,2 1
8 2 ,8 9
8 6 ,6 4
1 ,2 2 1 3
1 ,4 4 1 0
841 391 16 7 1 ,5 9
752 391 89 1 ,0 1 0 6
398 391 107 9 6 ,5 0
67 391 79 1 ,7 9 1 6
63 391 74 1 ,9 2 1 3
42
In projecting Macquaries Statement of Financial Position, the following assumptions are made.
Growth Averag e
2008
Assets Cash and balances with central banks Due frombanks Cash collateral on securities borrowed and reverse repurchase agreements Tradingportfolio assets Loan assets held at amortised cost Other financial assets at fair value through profit or loss Derivative financial instruments positive values Other assets Investment securities available for sale Intangible assets Life investment contracts and other unitholder investment assets Interests in associates and joint ventures accounted for usingthe equity method Property, plant and equipment Deferred income tax assets Noncurrent assets and assets of disposal groups classified as held for sale L bilities ia Due to banks Cash collateral on securities lent and repurchase agreements Tradingportfolio liabilities Derivative financial instruments negative values Deposits Debt issued at amortised cost Other financial liabilities at fair value through profit or loss Other liabilities Current tax liabilities Life investment contracts and other unitholder liabilities Provisions Deferred income tax liabilities Liabilities of disposal groups classified as held for sale
2009
2010
-100.00% -32.76%
2011 Growth
0.00% 18.98% 486.90% 18.20%
Assum ption Used 0.00% 18.20%
133.33% 1914.29% 65.20% 21.37%
-11.59% -77.75% 40.29% 22.95% -6.53% -6.53% 1.86% -41.42% 31.08% 22.74% 3.57% 1.86% n/a n/a n/a n/a n/a n/a 48.65% 77.42% 0.91% 171.52% 394.00% 91.48% 29.77% 0.96% 10.14% 53.64% 15.95% -21.39% 23.08% 0.54% 91.83% 12.33% 27.21% -1.74% -3.44% -6.42% -9.55% 4.40% 45.82% 21.01% 5.38% 43.95% 132.48% -2.53% -4.60% 197.04% 31.96% -40.33% 15.95% -1.74% 0.91% 0.54% -9.55% -2.53% -4.60% 0.00% -5.23% -2.72%
-2.53% -24.30% 35.10% -0.79% 57.11% 11.33% 61.33% 65.18%
-35.86% -28.95% 0.00% 727.60% -5.23% 10.77% -76.35% -37.80%
-2.72% -44.47%
143.30%
18.10%
-16.28% -21.33% 89.48% -11.66% 151.37% 6.92% -20.70% 2.82% -11.72% -28.86% 22.60% -36.36% 12.80% 1.06% 5775.00% -0.62% 57.17% -3.37% -1.68% 13.00% 65.55%
30.95% 22.63% 12.71% 24.98% 31.45% -4.85% -4.66% 5.60% 18.07%
-16.28% -11.66% 6.92% -0.62% 2.82% 11.19% -1.35% 2.11% -3.11% -1.59% 1.06% 22.13% 26.47% 0.00% -4.43% -6.41%
84.02% -71.32% -25.73% -81.73% 93.32% 27.91% 27.25% 38.55% 11.19% -15.49% 13.26% -1.35% 2.11% -15.30% 46.21% -3.11% -1.59% -24.20% 16.99% 5.59% 55.13% -96.69% 26.47% 52.56%
3.93% -2.27% 12.57% 9.05% 22.13% 1438.89% -29.56% 25.17% 11.15% -13.30%
-97.26% -100.00% 0.34% 0.34% -38.77% 100.00% 10.64% -6.41%
Macquarie Convertible Preference Securities 0.00% 100.00% Subordinated debt at amortised cost -4.43% -12.21% Subordinated debt at fair value through profit or loss -27.25% -30.19%
43

E quity Contributed equity Ordinary share capital Treasury shares Exchangeable shares Reserves Retained earnings Macquarie Income Preferred Securities Macquarie Income Securities Other minority interests 46.12% 8.20% 42.48% 2.15% 24.74% -71.43% 83.33% -22050.00% -65.01% -5525.78% 100.00% -12.78% 18.10% -24.09% 20.31% 20.00% -96.27% 1547.06% 10.71% 370.38% n/a n/a n/a n/a n/a n/a -10.58% -47.07% -83.17% -5.97% -36.70% 0.00% 0.00% 0.00% 0.00% 0.00% 456.25% 20.22% -26.17% -6.33% 110.99% 2.15% 0.00% -12.78% 10.71% -5.97% 0.00% -6.33%
For the all of the statements of financial position accounts as shown above except Loan assets held at amortised cost and retained earnings, we assume the future growth as the least extreme values among the years and the average growth (as we will predict that the values. Whereas for retained earnings, the future projection will be the previous retained earnings plus current profit less dividends and distributions paid, and for the Loan assets held at amortised cost is the difference that will balance the statement of financial position. The above assumption will result in figures from 2012 to 2016 as shown below :
Projectiona at 3 Ma s 1 rch
(in m illion AUD )

Assets Cash and balances with central banks Due from banks Cash collateral on securities borrowed and reverse repurchase agreements Tradingportfolio assets Loan assets held at amortised cost Other financial assets at fair value through profit or loss Derivative financial instruments positive values Other assets Investment securities available for sale Intangible assets Life investment contracts and other unitholder investment assets Interests in associates and joint ventures accounted for using the equity method Property, plant and equipment Deferred income tax assets Noncurrent assets and assets of disposal groups classified as held for sale T otal a ssets
2012
0 11,603 8,216 15,175 47,838 13,530 20,816 12,761 17,143 1,191 4,931 2,662 5,007 1,180
2013
0 13,715 7,680 15,458 49,925 15,688 20,453 12,877 17,236 1,078 4,807 2,539 5,007 1,118
2014
0 16,211 7,179 15,746 52,204 18,191 20,096 12,994 17,329 975 4,685 2,423 5,007 1,060
2015
0 19,161 6,711 16,039 54,598 21,093 19,745 13,112 17,423 882 4,567 2,311 5,007 1,004
2016
0 22,648 6,273 16,338 57,023 24,459 19,401 13,232 17,517 797 4,451 2,205 5,007 952
77 75 73 71 69 12 3 17 5 14 7 11 2 10 7 6 ,1 0 6 ,6 5 7 ,1 2 8 ,7 4 9 ,3 1
(Note: that the Loan assets held at amortised cost will increase over time in the projection as this is the case where economic conditions improved in future)
44
L b ie ia ilit s D to ba ue nks C shc tera onsec a olla l uritieslent a nd repurc se a reem ha g ents T dingportfolio lia ra bilities D a eriv tive fina ia instrum nc l ents neg tiv a e va lues D eposits D issueda a ortisedc ebt t m ost O ther fina ia lia nc l bilitiesa fa va t ir lue throug profit or loss h O ther lia bilities C urrent ta lia x bilities L inv ife estm c ent ontra tsa other c nd unitholder lia bilities Provisions D eferred inc e ta lia om x bilities L bilitiesof disposa g ia l roupsc ssifieda la s held for sa le T t l lia ilit se c d glo nc p a o a b ie x lu in a a it l La cp l o n a ita Ma qua C c rie onvertible Preferenc S urities e ec S ubordina debt a a ortised c ted t m ost S ubordina debt a fa v lue throug ted t ir a h profit or loss T t l lo nc p l o a a a ita T t l lia ilit s o a b ie N ta s t e ses Eu y q it C ontributed equity O rdina sha c pita ry re a l T surysha rea res E ha ea sha xc ng ble res R eserves R inedea eta rning s T t l c p a a dr s r e a t ib t b t o a a it l n e e v s t r u a le o o d aye u yh ld r o M c u r G o p r in r q it o e s f a q a ie r u L it d im e M o it in e e t in r y t r s s Ma qua Inc e PreferredS urities c rie om ec Ma qua Inc e S urities c rie om ec O ther m inorityinterests T t le u y o a q it
6 3 ,5 8 5 4 ,8 6 6 1 ,2 0 2 ,4 9 1 3 3 ,3 3 6 3 4 ,7 7 5 8 4 8 ,2 0 1 ,6 9 4 2 11 9 4 7 ,9 5 27 1 31 5 0 16 9 4 ,7 5
5 7 ,4 3 5 6 ,1 4 6 4 ,6 0 2 ,3 6 1 0 3 ,3 7 7 5 5 ,9 2 0 1 4 2 ,2 2 1 ,9 7 4 3 15 8 4 9 ,8 5 20 2 48 2 0 11 4 5 ,7 1
4 8 ,5 2 4 6 ,5 2 7 9 ,0 9 2 ,1 5 1 7 3 ,4 9 8 0 5 ,6 1 6 1 4 6 ,1 5 1 ,2 2 5 5 19 7 4 1 ,8 7 22 2 53 2 0 17 9 5 ,5 8
3 3 ,8 6 4 3 ,0 1 7 9 ,5 1 2 ,0 4 1 4 3 ,4 1 9 9 6 ,9 9 2 4 4 0 ,1 9 1 ,5 3 5 7 14 7 4 4 ,7 1 24 2 68 3 0 14 0 6 ,4 1
3 1 ,2 1 3 6 ,5 1 8 1 ,1 6 2 ,9 4 0 1 4 ,6 4 0 0 6 ,9 5 9 9 4 5 ,0 4 1 ,9 2 5 0 18 6 4 6 ,6 5 27 2 70 8 0 12 9 7 ,1 7
55 9 1 5 ,7 1 47 3 2 8 ,7 3 19 7 4 ,5 8 1 ,5 2 2 5
55 9 1 7 ,6 3 49 0 2 7 ,6 7 14 1 5 ,4 8 1 ,2 7 3 3
55 9 1 9 ,5 9 33 8 2 7 ,5 7 10 7 6 ,1 5 1 ,9 7 3 9
55 9 1 2 ,5 8 38 5 2 8 ,4 2 16 8 6 ,8 3 1 ,8 1 4 4
55 9 1 6 ,4 1 35 3 2 9 ,3 1 14 8 7 ,5 8 1 ,7 3 5 8
7 9 ,2 3 -7 1 3 9 1 33 4 5 3 ,0 6
7 5 ,4 0 -7 1 3 7 9 30 8 5 4 ,5 8
7 1 ,6 0 -7 1 3 6 9 41 2 6 2 ,1 4
7 7 ,7 3 -7 1 3 6 0 46 6 6 7 ,7 6
7 4 ,9 0 -7 1 3 5 2 56 1 7 1 ,5 6
1 ,0 2 2 3
1 ,7 6 2 2
1 ,4 3 3 9
1 ,3 4 4 4
1 ,2 3 5 9
5 9 31 9 6 9 1 ,5 2 2 5
5 6 31 9 6 5 1 ,2 7 3 3
5 2 31 9 6 1 1 ,9 7 3 9
4 9 31 9 5 7 1 ,8 1 4 4
4 6 31 9 5 3 1 ,7 3 5 8
45
Appendix 14 Projection of Statement of Cash Flows Macquaries Statement of Cash Flows from 2007 to 2011 is shown below :
H istorica l (inm illionAUD ) C shflowsfromopera a tinga tivities c Interest received Interest and other costs of finance paid Dividends and distributions received Fees and other non-interest income received/(paid) Fees and commissions paid Net receipts fromtradingportfolio assets and other financial assets/liabilities Payments to suppliers Employment expenses paid Income tax paid Life investment contract (expense)/income Life investment contract premiums received and other unitholder contributions Life investment contract payments Non-current assets and disposal groups classified as held for sale net receipts fromoperations Net loan assets repaid Recovery of loans previously written off Net (decrease)/increase in amounts due to other financial institutions, deposits and other borrowings Net c shflows(usedin)/fromopera a tinga ctivities
2007 2008 2009 2010 2011

4,461 5,894 6,077 4,275 5,097 -3,828 -5,788 -5,490 -3,672 -4,060 460 407 568 572 366 3,572 4,858 4,704 4,470 4,855 -380 -704 -742 -624 -771 -8,281 8,289 4,503 2,626 -3,857 -797 -1,877 -2,089 -1,300 -1,489 -2,377 -3,531 -4,120 -2,862 -3,724 -626 -365 -333 -288 -204 415 497 265 -137 126 2,594 3,225 3,745 2,295 2,575 -2,469 -2,773 -4,201 -3,226 -2,411 173 164 265 -11,621 -6,675 3,553 3 6 10 0 0 336 -1,550 19 12
17,726 16,984 -1,555 -8,443 7,414 -9 5 1 ,6 1 5 6 -5 5 2 7 7 8 1 ,1 0 ,9 9 ,3 9
46

Ca flowsfrominvestinga tivities sh c Net payments for financial assets available for sale and at fair value through profit or loss Payments for interests in associates Proceeds fromthe disposal of associates Payments for the acquisition of assets and disposal groups classified as held for sale, net of cash acquired Proceeds fromthe disposal of non-current assets and disposal groups classified as held for sale, net of cash disposed Net (payments for)/cash inflow from the acquisition of subsidiaries, excludingdisposal groups, net of cash acquired Proceeds fromthe disposal of subsidiaries and businesses excludingdisposal groups, net of cash deconsolidated Payments for life investment contracts and other unitholder investment assets Proceeds fromthe disposal of life investment contracts and other unitholder investment assets Payments for property, plant and equipment, and intangible assets Proceeds fromthe disposal of property, plant and equipment Proceeds fromdisposal of management rights Net c shflowsusedininvestinga tivities a c Ca flowsfromfina inga tivities sh nc c Proceeds fromthe issue of ordinary shares Payments to minority interests Repayment of subordinated debt Issue of Macquarie Convertible Preference Securities Payment of issue costs on Macquarie Convertible Preference Securities Dividends and distributions paid Financingof treasury shares Net c shflowsfrom sedin) fina a /(u ncinga ctivities
-889 -3,254 -3,826 -8,141 -1,525 -2,954 -1,411 -887 1,080 1,008 444 622
-721 -522 246
-721 -474 230
-1,750
-812
-103
-22
-22
2,159 1,562
745
12
-25
-931
65
-309
1378
1,378
107 3,354
437
92
92
-6,083 -7,031 -6,950 -5,717 -6,371 -6,298 5,520 6,037 7,208 -199 -164 -299 6,850 6,145 6,352
-398 -2130 -2,130
7 52 0 0 -1 0 -6 8 ,7 5 ,3 0
33 0 0 0 0 428 14 14 -7 0 -7 0 -1 9 -1 7 4 ,1 3 ,8 1 ,5 8
946 1,089 5 62 0 -225 1,394 0 -472 0 1 7 ,8 3 0 0 -668 0 28 5
81 -348 -235 600 -9 -829 0 -7 0 4
1,312 -238 -406 0 0 -328 0 30 4
1 -4 932 0 0 -598 -269 6 2
1 -4 891 0 0 -598 -269 2 1
Net (decrea se)/increa inca a ca equiv lents se sh nd sh a Cash and cash equivalents at the beginningof the financial year Ca a c shequiva sh nd a lentsa the endof the fina l t ncia yea r
-8 7 1 ,4 9 3 8 -1 ,7 2 0 2 8 ,6 0 2 2
50 5
74 0
9,133 8,326 20,815 24,495 11,773 12,323 8 2 2 ,8 5 2 ,4 5 1 ,7 3 1 ,3 3 1 ,0 7 ,3 6 0 1 4 9 1 7 2 2 3 2
47
In projecting Macquaries Statement of Cash Flows, the following assumptions are made:
Growth Avera e Assum g ption
2008
2009
2010
2011 Growth Used

3.10% 5.15% 0.70% -3.17% -5.40% 0.00% 0.00% 0.00% 8.77% 3.34% 3.48% -3.83% 0.00% 0.00% 0.00% -4.19%
C shflowsfromop tinga a era ctivities Interest received 32.12% 3.10% -29.65% 19.23% 6.20% Interest and other costs of finance paid -51.20% 5.15% 33.11% -10.57% -5.88% Dividends and distributions received -11.52% 39.56% 0.70% -36.01% -1.82% Fees and other non-interest income received/(paid) 36.00% -3.17% -4.97% 8.61% 9.12% Fees and commissions paid -85.26% -5.40% 15.90% -23.56% -24.58% Net receipts fromtrading portfolio assets and other financial assets/liabilities 200.10% -45.67% -41.68% -246.88% -33.53% Payments to suppliers -135.51% -11.29% 37.77% -14.54% -30.89% Employment expenses paid -48.55% -16.68% 30.53% -30.12% -16.20% Income tax paid 41.69% 8.77% 13.51% 29.17% 23.29% Life investment contract (expense)/income 19.76% -46.68% -151.70% 191.97% 3.34% Life investment contract premiums received and other unitholder contributions 24.33% 16.12% -38.72% 12.20% 3.48% Life investment contract payments -12.31% -51.50% 23.21% 25.26% -3.83% Non-current assets and disposal groups classified as held for sale net receipts fromoperations -5.20% 61.59% -100.00% 0.00% -10.90% Net loan assets repaid 42.56% 153.23% -90.54% -561.31% -114.02% Recovery of loans previously written off 100.00% 66.67% 90.00% -36.84% 54.96% Net (decrease)/increase in amounts due to other financial institutions, deposits and other borrowings -4.19% -109.16% -442.96% 187.81% -92.12% C shflowsfrominvestinga a ctivities Net payments for financial assets available for sale and at fair value through profit or loss Payments for interests in associates Proceeds fromthe disposal of associates
-266.03% -17.58% -112.78% 91.14% -76.31% -93.70% 52.23% 37.14% 41.15% 9.20% -6.67% -55.95% 40.09% -60.45% -20.74%
0.00% 9.20% -6.67%
Payments for the acquisition of assets and disposal groups classified as held for sale, net of cash acquired 53.60% 87.32% 100.00% -100.00% 35.23% Proceeds fromthe disposal of non-current assets and disposal groups classified as held for sale, net of cash disposed -27.65% -52.30% -98.39% -100.00% -69.59% Net (payments for)/cash inflow fromthe acquisition of subsidiaries, excluding disposal groups, net of cash acquired -3624.00% 106.98% -575.38% 545.95% -886.61% Proceeds fromthe disposal of subsidiaries and businesses excluding disposal groups, net of cash deconsolidated 100.00% 3034.58% -86.97% -78.95% 742.17% Payments for life investment contracts and other unitholder investment assets -15.58% 1.15% 17.74% -11.44% -2.03% Proceeds fromthe disposal of life investment contracts and other unitholder investment assets 9.37% 19.40% -4.97% -10.29% 3.38% Payments for property, plant and equipment, and intangible assets 17.59% -82.32% -33.11% -435.18% -133.25% Proceeds fromthe disposal of property, plant and equipment 642.86% -36.54% -100.00% 0.00% 126.58% Proceeds fromdisposal of management rights 0.00% 0.00% 100.00% -96.73% 0.82%
0.00%
0.00%
0.00%
0.00% 1.15% 3.38% 0.00% 0.00% 0.00%
48

C shflow fromfina a s ncinga ctivities Proceeds fromthe issue of ordinary shares Payments to minority interests Repayment of subordinated debt Issue of Macquarie Convertible Preference Securities Payment of issue costs on Macquarie Convertible Preference Securities Dividends and distributions paid Financingof treasury shares 15.12% -92.56% 1519.75% -99.92% 335.60% 1140.00% -661.29% 31.61% 98.32% 152.16% -100.00% -4.44% -72.77% 329.56% 38.09% -100.00% 100.00% -100.00% 0.00% -25.00% 0.00% 0.00% -4.44% 0.00% 0.00% 0.00% 0.00%
0.00% -100.00% 100.00% 0.00% 0.00% -41.53% -24.10% 60.43% -82.32% -21.88% 0.00% 0.00% 0.00% -100.00% -25.00%
For the all of the Statements of Cash Flows accounts as shown above except net receipts from trading portfolio assets and other financial assets/liabilities, payments to suppliers, employment expenses paid, net loan assets repaid, Recovery of loans previously written off, net payments for financial assets available for sale and at fair value through profit or loss, payments for the acquisition of assets and disposal groups classified as held for sale, proceeds from the disposal of non-current assets and disposal groups classified as held for sale, net (payments for)/cash inflow from the acquisition of subsidiaries, proceeds from the disposal of subsidiaries and businesses excluding disposal groups, payments for property, plant and equipment, and intangible assets, proceeds from the issue of ordinary shares, payments to minority interests, Dividends and distributions paid; we assume the future growth as the least extreme values among the years and the average growth (as we will predict that the values. Whereas for the accounts mentioned above, we use zero growth since among the available values throughout growths from 2008 to 2011 and average growth, there are many extreme fluctuations hence it is very hard to predict in future. The above assumption will result in figures from 2012 to 2016 as shown below :
49

P rojection (inm illionAUD ) Ca hflow fromopera s s tinga ctivities Interest received Interest and other costs of finance paid Dividends and distributions received Fees and other non-interest income received/(paid) Fees and commissions paid Net receipts fromtrading portfolio assets and other financial assets/liabilities Payments to suppliers Employment expenses paid Income tax paid Life investment contract (expense)/income Life investment contract premiums received and other unitholder contributions Life investment contract payments Non-current assets and disposal groups classified as held for sale net receipts fromoperations Net loan assets repaid Recovery of loans previously written off Net (decrease)/increase in amounts due to other financial institutions, deposits and other borrowings Net c s flows(us in)/fromopera ah ed tinga tivities c Ca hflow frominvestinga tivities s s c Net payments for financial assets available for sale and at fair value through profit or loss Payments for interests in associates Proceeds fromthe disposal of associates Payments for the acquisition of assets and disposal groups classified as held for sale, net of cash acquired Proceeds fromthe disposal of non-current assets and disposal groups classified as held for sale, net of cash disposed Net (payments for)/cash inflow fromthe acquisition of subsidiaries, excludingdisposal groups, net of cash acquired Proceeds fromthe disposal of subsidiaries and businesses excludingdisposal groups, net of cash deconsolidated Payments for life investment contracts and other unitholder investment assets Proceeds fromthe disposal of life investment contracts and other unitholder investment assets Payments for property, plant and equipment, and intangible assets Proceeds fromthe disposal of property, plant and equipment Proceeds fromdisposal of management rights Net c s flowsus ininvestinga ities ah ed ctiv
20 2 201 201 2 1 3 4 015 20 16

5,255 5,418 5,587 5,760 5,939 -3,851 -3,653 -3,465 -3,286 -3,117 369 371 374 376 379 4,701 4,552 4,408 4,268 4,133 -813 -856 -903 -951 -1,003 -3,857 -3,857 -3,857 -3,857 -3,857 -1,489 -1,489 -1,489 -1,489 -1,489 -3,724 -3,724 -3,724 -3,724 -3,724 -186 -170 -155 -141 -129 130 135 139 144 148 2,665 2,757 2,854 2,953 3,056 -2,503 -2,599 -2,699 -2,803 -2,910 0 0 0 0 0 -1,550 -1,550 -1,550 -1,550 -1,550 12 12 12 12 12 7,104 6,806 6,521 6,248 5,987 2 6 2 5 2 5 1 6 1 7 ,2 2 ,1 4 ,0 3 ,9 0 ,8 5
-721 -474 230 -22
-721 -430 214 -22
-721 -391 200 -22
-721 -355 187 -22
-721 -322 174 -22
1,378
1,378
1,378
1,378
1,378
92
92
92
92
92
-6,298 -6,225 -6,153 -6,082 -6,012 6,352 6,567 6,789 7,018 7,255
-2,130 -2,130 -2,130 -2,130 -2,130 0 0 14 14 -1 7 -1 6 ,5 8 ,2 3 0 14 -9 4 4 0 14 -6 2 2 0 14 -2 5 9
50

Ca hflowsfromfina s ncinga ctivities Proceeds fromthe issue of ordinary shares Payments to minority interests Repayment of subordinated debt Issue of Macquarie Convertible Preference Securities Payment of issue costs on Macquarie Convertible Preference Securities Dividends and distributions paid Financing of treasury shares Net cas flowsfrom edin) fina h /(us ncinga ctivities 1 -4 891 0 0 -598 -269 2 1 1 -4 851 0 0 -598 -269 -1 9 1 -4 813 0 0 -598 -269 -5 7 1 -4 777 0 0 -598 -269 -9 3 1 -4 742 0 0 -598 -269 -1 8 2
Net (decrea se)/increa inca a ca equiva se sh nd sh lents Cash and cash equivalents at the beginning of the financial year Ca handca hequiva s s lentsa the endof the fina l t ncia yea r
74 0
81 1 5 1 4 1 5 7 ,0 2 ,2 5 ,4 3
12,323 13,027 13,899 14,950 16,196 1 ,0 7 1 ,8 9 1 ,9 0 1 ,1 6 1 ,6 9 3 2 3 9 4 5 6 9 7 4
51
Reference
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FinAnalysis 2011, Macquarie Group Ltd Annual Report 2008, viewed 2 May 2011 http://www.aspectfinancial.com.au.virtual.anu.edu.au/af/company/announ cements? ASXCode=MQG&xtmlicensee=finanalysis&daterange=all&relatedannounc ement=yes&anntypes=0,1,2&subtype=03001&subtype=03017&subtype =03011
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Hoggett, Edwards, Medlin, Tilling, 2009, Financial Accounting, 7th Edition, John Wiley & Sons Australia Ltd, Milton, QLD, Australia.
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Giddings, N 2010, I want to be The Macquarie Group when I grow upPollen Marketing , viewed 12 May 2011 http://pollenmarketing.com.au/2010/10/i-want-to-be-the-macquarie-groupwhen-i-grow-up/
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http://www.macquarie.com.au/dafiles/Internet/mgl/shared/aucom/about/profile/docs/2011_MGL_AnnualReport_RM_Report.pdf
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BUSN 7008 Financial Statements and Reporting Group assignment

BUSN 7008 Financial Statements and Reporting Group assignment

RISK Equity Risk

MITIGATION Equity Risk Limit Transaction Review and Approval Process

Operational Risk Management Framework Macquaries operational risk capital framework

Trading market risk

BUSN 7008 Financial Statements and Reporting Group assignment

60 TREND ANALYSIS (Macquarie Annual Report 2006-2011)

6.1 Historical data analysis

BUSN 7008 Financial Statements and Reporting Group assignment

6.11 Income Statement

BUSN 7008 Financial Statements and Reporting Group assignment

12.22% 1,093 -9.52% 989

6.12 Statement of Financial Position

BUSN 7008 Financial Statements and Reporting Group assignment

for year ended 31 March

(in million AUD)

for year ended 31 March

(in million AUD)

for year ended 31March

(in m illion AUD)

3,103 -7 0 380 2,795 1,248 7 1 ,5 9

BUSN 7008 Financial Statements and Reporting Group assignment

(in m illion AUD)

9,925 10,897 12,005 -8,146 1 7 ,7 9 1 1 ,5 9 -29 -8,890 2 0 ,0 7 1 1 ,7 3 -28 -9,733 2 7 ,2 2 1 4 ,9 0 -27

BUSN 7008 Financial Statements and Reporting Group assignment

70 RATIO ANALYSIS (Macquarie Annual Report 2006-2011)

20 07 0.69% 4.27% 21.96% 592.30 14.51 11.67% 3.81% 21.53%

20 08 0.64% 4.83% 20.73% 760.26 8.09 12.36% 6.53% 19.13%

BUSN 7008 Financial Statements and Reporting Group assignment

BUSN 7008 Financial Statements and Reporting Group assignment

L iquidity Current Ratio

BUSN 7008 Financial Statements and Reporting Group assignment

7.3 Cash sufficiency

20 07 1.06 1.43 -0.48 -1.77 -43.2

20 08 20.84 0.01 0.04 0.39 2.76

20 09 4.82 0.05 0.16 1.41 8.69

21 00 -8.12 -0.07 -0.06 -1.03 -7.6

21 01 -7.12 -0.39 0.25 3.57 19.91

BUSN 7008 Financial Statements and Reporting Group assignment

7.4 Net loan losses

R tio a Net loan losses as %of loan assets

AsAt 3 Ma 1 rch 20 08 20 09 21 00 0.30% 1.90% 0.80%

BUSN 7008 Financial Statements and Reporting Group assignment

Therefore, the cost of equity of 6.96% is obtained.

BUSN 7008 Financial Statements and Reporting Group assignment

BUSN 7008 Financial Statements and Reporting Group assignment

IndustryP/E Ma cqua E rning /S re (inc rie a s ha ents) S re Price (inAUD ha )

21 01 14.03 282.50 39.64

BUSN 7008 Financial Statements and Reporting Group assignment

BUSN 7008 Financial Statements and Reporting Group assignment

APPENDIX Appendix 1 Internal structure of Macquarie Group Limited

Source: Macquarie Annual Report

BUSN 7008 Financial Statements and Reporting Group assignment

Appendix 3 Household Wealth and Liabilities

Appendix 4 NAB Business Survey Business conditions and confidence level

BUSN 7008 Financial Statements and Reporting Group assignment

The threat of substitute products or services

The bargaining power of customers (buyers) The bargaining power of suppliers

The intensity of competitive rivalry

Appendix 6 Risk analysis

BUSN 7008 Financial Statements and Reporting Group assignment