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BUSINESS
CORPORATE AND FINANCE
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An
analysis of relative capital structures of major Australian companies
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Ozhelpassignment@gmail.com
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Contents
Answer
1
BHP
Billiton
The
company is in materials industry, especially in the mining industry. The
company does the procurement of the materials and sells it to the customers.
The main customers are government and other big infrastructure players. There
is no scarcity of customers. The number of customers is not a problem. There
are only few big players in the industry. Mining industry in Australia is well
established. It is the primary industry. This industry has a huge turnover and
contributes well in the Australian industry. Thus the risk factor of this
industry is less. BHP Billiton is one of the top mining companies of the
Australia. The company deals in several segments, which are basically related
to the material industry. The BHP Billiton is the market leader. As the materials
industry is the core industry, its risk profile is lower. The company BHP
itself is the market leader, thus the risk profile of the company is also on
the lower side. Thus the company is having low risk.
Rio
Tinto
Rio
Tinto is also in material industry. The company is basically in mining
industry. This is the core industry and Rio Tinto is a big player. There is no
big threat to the industry. Though the mining industry is little over burdened
by the taxes, such as mineral resources tax, yet the overall risk of the mining
industry is lower. The risk profile of the Rio Tinto is itself on the lower
side. The Rio Tinto is next to BHP Billiton in the materials industry, i.e. it
is one of the top companies in the mining industry. As the materials industry
is the core industry, its risk profile is lower. The company itself is among
the top companies, thus the risk profile of the company is also on the lower
side. Thus the company is having low risk.
CSL
The
company is in research based industry. The major industry is biotechnology. The
industry is growth oriented. The company does all the work related to
development of making and marketing of biopharmaceuticals and allied products.
There are three parts of operations for the company. These parts are CSL Behring,
licensing of intellectual property and other human health. The development of
bio-pharmacy products is done by CSL Behring. The intellectual branch of CSL
rents the licenses of the intellectual patents to third parties. The third
division of CSL deals with the bio-plasma and bio-therapies. The business of
CSL is spread in many countries. CSL is among the top companies of the group,
and in fact it is the industry leader. However the future aspect of the
business is not defined and there is a lot of development in the industry. Thus
the risk profile of company can be considered moderately risky.
Woolworths
The
company deals in FMCG and hospitality industry (Woolsworth 2011) . These industries
are ever green and the requirements of these products are certain. The company
deals in five segments. These five segments are food and liquor, supermarkets,
petrol, big w and hotels. The business of company is well diversified. The
company is among the top companies of the industry. The risk of the company business
is on the lower side. The risk of industry is also less. Thus the company can
be put in the category of low risk companies.
Telstra
The
company is a leader in the telecommunications sector in the country. The
company has nine business segments. In the recent past the company has gone
through a series of merger and acquisitions. The health of telecom sector is
average. However the company is the market leader hence the risk profile of the
company is moderate.
Qantas
The
company is engaged in the operations of international and domestic flights and
air transportation services. Company is having four brandings for aviation
business (Qantas 2011) . These brandings are
Qantas, Jet star, Qantas Frequent Flyer and Qantas Freight. The condition of
aviation sector worldwide is not satisfactory. This sector is under performing
worldwide. Though the sector is underperforming worldwide, Qantas is the market
leader. Thus the profile of the company can be considered moderately risky.
Coca-cola
Amatil
The
company is a well know brand of soft drink and beverages (CCA 2012) . The company is
engaged in manufacturing, distribution and marketing of soft drinks. Besides
that the company also deals in business of mineral water, fruit juice, coffee
and other beverages. The company is having a global presence. The beverages
industry is working fine. Though at times there are some voices against the
utility of soft drinks, yet the future of beverages industry is bright. Thus
the company can be put in a low risk profile.
The
risk profile of the companies on the basis of nature of industry and common
sense are as under, with the reasons.
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Company
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Industry
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Risk Profile
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Reason
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BHP Billiton
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Materials
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Low
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The BHP Billiton is the market leader.
As the materials industry is the core industry, its risk profile is lower.
The company BHP itself is the market leader, thus the risk profile of the
company is also on the lower side. Thus the company is having low risk.
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Rio Tinto
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Materials
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Low
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As the materials industry is the core
industry, its risk profile is lower. The company itself is among the top
companies, thus the risk profile of the company is also on the lower side.
Thus the company is having low risk.
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CSL
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Biotechnology
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Moderate
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The future aspect of the business is
not defined and there is a lot of development in the industry. Thus the risk
profile of company can be considered moderately risky.
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Woolworths
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Food and staples
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Moderate
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The risk of the company business is on
the lower side. The risk of industry is also less. Thus the company can be
put in the category of low risk companies.
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Telstra
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Telecommunications
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Moderate
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The health of telecom sector is
average. However the company is the market leader hence the risk profile of
the company is moderate.
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Qantas Airways
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Transportation
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Moderate
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The condition of aviation sector
worldwide is not satisfactory. This sector is under performing worldwide.
Though the sector is underperforming worldwide, Qantas is the market leader.
Thus the profile of the company can be considered moderately risky.
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Coca Cola Amatil
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Beverages
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Low
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The beverages industry is working
fine. Though at times there are some voices against the utility of soft
drinks, yet the future of beverages industry is bright. Thus the company can
be put in a low risk profile.
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Answer
2
A
higher beta represents the higher risk profile (Andrew 2007) . The first premise
of the capital structure theory is that companies with greater risk will be
having a lower debt ratio. This is due to the fact the lenders will be
hesitating in lending the some on money to the companies which are having more
risk. The analysis of the table indicates that the BHP Billiton is having a
high risk profile, because it is having a higher beta coefficient. The debt to
equity ratio is also the lowest. So in this case the capital structure theory
appears to be correct. However if we go through all the cases, it is found that
there no consistency in the results. The debt to equity ratio is not directly
correlated to the beta of the company (Brigham & Ehhardt 2010) . The second premise
of the capital structure theory states that the companies with higher debt to
equity ratio provide higher returns to the shareholders. The Coca Cola Amatil
is having the highest financial leverage, but its return is not the highest. In
the same way the CSL is having the lowest financial leverage, however its
return is not the lowest. Thus there seems to be no correlation between the
return and financial leverage in real world.
There
are a lot of factors in real world and a single theory is not capable to
predict the results. The capital structure theory is having significance in
academic world, but in real world it does not find place. Actually in real
world nothing can be predicted accurately, there is a lot of randomness in real
world.
Answer 3
The first step is to
calculate the business risk for each of the share. The formula of business risk
is as under.
where:
bU = unlevered beta (measure of business risk)
bL = levered beta (standard beta coefficient provided in
the above table)
D/E
= the company’s debt-to-equity ratio
Business risk of BHP Billiton
Business risk = 1.80 / (1 + 0.4662)
Business risk = 1.80 / (1 + 0.4662)
Business risk = 1.227
Business risk of Rio Tinto
Business risk = 1.59 / (1 + 0.6134)
Business risk = 1.59 / (1.6134)
Business risk = 0.98
Business risk of CSL
Business risk = 1.22 / (1 + 0.4660)
Business risk = 1.22 / (1.4662)
Business risk = 1.832
Business risk of Woolworths
Business risk = 0.70 / (1 + 0.6944)
Business risk = 0.70 / (1.6944)
Business risk = 0.413
Business risk of Telstra Corp
Business risk = 0.61 / (1 + 0.9330)
Business risk = 0.61 / (1.9330)
Business risk = 0.315
Business risk of Qantas Airways
Business risk = 0.76 / (1 + 1.024)
Business risk = 0.76 / (2.024)
Business risk = 0.37
Business risk of BHP Billiton
Business risk = 0.74 / (1 + 1.145)
Business risk = 1.80 / (2.145)
Business risk = 0.839
The calculated business profile of the companies is as under.
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Company
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Business risk profile
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BHP Billiton
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1.22
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Rio Tinto
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0.98
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CSL
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1.83
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Woolworths
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0.41
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Telstra Corp.
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0.31
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Qantas Airways
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0.37
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Coca-Cola Amatil
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0.84
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The share returns of the company appear to be in line with the business
risk calculated above. The business return of CSL is highest and it has
provided the highest return. The business risk of the Telstra is lowest and it
has provided the lowest share return. Thus it can be said that the share
returns are correlated to the business risk.
Answer 4
BHP Billiton and Rio
Tinto are in materials industry and not in the transport industry as suggested
by the question. There are four figures provided in the table for these two
companies. The first figure is debt to equity ratio. Rio Tinto is having higher
debt to equity ratio in comparison to BHP. This indicates that the financial
leverage of Rio Tinto is higher than BHP. The second ratio is return on equity.
The BHP has provided higher return on equity in comparison of Rio Tinto. The
beta of BHP is higher than Rio, which indicates that the BHP is riskier than
Rio. The fourth ratio is share return. The in past years BHP has provided
higher return than Rio.
Appendix
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Company information averaged over the 5-year period from 2003 to 2007
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Company
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Industry sector
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Debt to
equity*
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Return on equity*
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Beta
coefficient
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Share return*^
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BHP Billiton
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Materials
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0.4662
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0.3179
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1.80
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3.08
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Rio Tinto
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Materials
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0.6134
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0.2689
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1.59
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2.60
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CSL
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Biotechnology
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0.4660
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0.1282
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1.22
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6.364
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Woolworths
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Food and staples
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0.6944
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0.3067
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0.70
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1.157
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Telstra Corp.
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Telecommunications
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0.9330
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0.2746
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0.61
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0.0431
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Qantas Airways
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Transportation
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1.024
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0.1067
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0.76
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0.5237
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Coca-Cola Amatil
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Food, beverages
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1.145
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0.1728
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0.74
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0.65
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Bibliography
Andrew, J 2007, Financial Management; Principles
and Practice, Freeload Press, USA.
Brigham, EF & Ehhardt, MC 2010, Financial Management Theory and
Practice, Cengage Learning, NY.
CCA 2012, Coca Cola Amatil Limited, viewed 11 August 2012, <http://ccamatil.com/AboutCCA/Pages/ContactUs.aspx>.
Qantas 2011, 'Annual Report', Annual Report, Accounts, Qantas, Qantas,
Australia.
Woolsworth 2011, 'Annual Report 2011', Annual Report, Financial
Reorting, Woolsworth, 2011, Woolsworth, Australia.
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