Corporate Finance - Admission/Application Essay Example

CORPORATE FINANCE CORPORATE FINANCE The current paper provides calculations of cost of equity and costof debt for the selected company Qantas Airlines that is an Australian based airliner. Two different methods of calculating the cost of equity are used including Capital Assets Pricing Model (CAPM) and Dividend Growth Model (DGM). Based on the collected data, the company’s cost of capital is calculated and a discussion is made regarding decisions that companies make when deciding their capital structure.

Cost of EquityCAPM ModelKe = Rf + Beta * (Rm – Rf)Calculations / (Sources)Beta 1.48 (Qantas Airways Ltd (QAN.AX) 2014)Rf3.46%10-Year Australian Government Bond (Australia 10-Year Bond Yield 2014) Rm16.20%One Year Change: (4802.6-4133)/4133 (S&P/ASX 200 (^AXJO) 2013)Ke 22.32%Ke = 3.46% + 1.48 * (16.20% - 3.46%) Dividend Growth Modelke =D1/P + gCalculations / (Sources)Dividend Paid0.00Payout Ratio0.00%Dividends per Share (DPS) / Earnings per Share (EPS)RR100.00%(1-Payout Ratio)ROICNet Income - Dividends / Total CapitalTotal Capital $9,938,000,000 Dividends $0 Net Income $6,000,000ROIC0.06%g0.06%(100% * 0.06%) RR x ROICD0$0.00D1$0.00 0 * (1+0.06%) (D1 = D0(1+g))P$1.

35(Qantas Airways Ltd (QAN.AX) 2013)Ke0.06%(0/1.35)+0.06%Cost of DebtTotal Debt$6,220,000,000 835,000,000+86,000,000+52,45,000,000+54,000,000 (Interest Bearing Liabilities (Short + Long Term) + Other Finance Liabilities (Short + Long Term)Interest Expense$296,000,000(Income Statement) (Qantas Annual Report 2013 2013)Kd4.76%$296,000,000/$6,220,000,000 Cost of CapitalWACC = (D/D+E)*Kd*(1-T)+(E/D+E)*KeUsing CAPMT30%D 6,220,000,000 E 3,036,150,000 Ke (Using CAPM)22.32%Kd4.76%D+E 9,256,150,000 6,220,000,000 + 3,036,150,000 WACC9.

56%(6,220,000,000/ 9,256,150,000)*4.76%*(1-30%) + (3,036,150,000/9,256,150,000) * 22.32%Using DGMT30%D 6,220,000,000 E 3,036,150,000 Ke (Using CAPM)0.06%Kd4.76%D+E 9,256,150,000 6,220,000,000 + 3,036,150,000WACC2.26%(6,220,000,000/ 9,256,150,000)*4.76%*(1-30%) + (3,036,150,000/9,256,150,000) * 0.06%Based on the above calculations, it could be suggested that the cost of equity based on CAPM is more appropriate for the selected company. The reason is that the company is not able to generate sufficient profits in the recent years and it adopted a zero divided policy for its shareholders.

It would be incorrect to suggest that the company incurred cost of equity that is almost 0%. CAPM allows taking into factors that are external to the company and have a direct influence on the decisions of the company in relation to its capital structure. Many theories and models have been proposed to determine the optimal capital structure for a business. However, till now there is no single theory that explains why a particular company acquires more of debt or equity while operating in the same industry as other companies.

The underlying objective of managers is to maximize returns on investment of shareholders and therefore, they make decisions related to capital structure to achieve this. The other factors which effect the cost of finance including accessibility to the market, finance providers, business reputation, capital market performance, etc. that managers must take into consideration for making their capital structure decisions. Managers aim to reduce the cost of capital so that higher returns on investment can be achieved which investors will perceive positively.

BIBLIOGRAPHYAustralia 10-Year Bond Yield . 2014. http://www.investing.com/rates-bonds/australia-10-year-bond-yield-historical-data (accessed September 6, 2014).Qantas Airways Ltd (QAN.AX) . 2014. http://www.reuters.com/finance/stocks/overview?symbol=QAN.AX (accessed September 6, 2014).Qantas Airways Ltd (QAN.AX). 2013. https://au.finance.yahoo.com/q/hp?s=QAN.AX&a=05&b=29&c=2013&d=05&e=30&f=2013&g=d (accessed September 6, 2014).Qantas Annual Report 2013. Financial, Sydney: Qatar Airways Limited, 2013.

S&P/ASX 200 (^AXJO). 2013. https://au.finance.yahoo.com/q/hp?s=%5EAXJO&a=06&b=1&c=2012&d=05&e=30&f=2013&g=d&z=66&y=198 (accessed September 6, 2014).