Corporate Finance - Risk Factors That Are Facing the Companies - Coursework Example

Comparative Report Introduction The report consists of the comparisons of various factors of the five different companies that are operating in the same industry sector that is airline industry. The selected companies are British Airways, Easyjet, Ryanair, Emirates and Jet Airways. All the companies are operational in the airline industry but in different locations. The information about the companies is gathered from news and annual reports so as to analyze them. The companies are analyzed from different aspects where the risk factors that are facing the companies are analyzed. The comparison of the risk factors that are facing the companies is done so as to determine the intensity of the risk for each of the company. The companies are then analyzed for the management of the risks. The companies’ policies regarding the management of the risk is analyzed individually and in comparison so as to determine the most efficient way. Along with the factors affecting the risks management of the company the corporate governance of the companies are analyzed as well. The structure of the board of directors is analyzed separately and in comparison. The management of the company and their responsibility towards shareholders are analyzed. The conflicts between the lenders and shareholders of each of the companies are compared along with their management regarding resolving the conflict. The management policies regarding the transfer of information in the market is analyzed for each of the companies so as to determine that how the companies that are operating in similar industry manage the information transfer in the industry in different economies. The information transfer when analyzed reflects the share prices and investors’ interest in the companies that shall be leading to more investment in the company. The capital structure of the companies is compared so as to determine the running of the companies. The sources through which the companies are financing their operations and how they managed to effectively utilize the sources are measured in comparison. The companies are analyzed for the suited capital structure, which is determined from the cost of capital and cost of debt of each of the company. Corporate Governance Structure The corporate governance structure is the structure of the boards as provided by the corporate governance where the board of directors controls the operations of the company. Each of the five companies is analyzed for their corporate governance policies and how they manage to effectively maintain the credibility of the board towards the shareholders of the companies. The board Structure of each of the company is elaborated and compared (Kashif & Sardar, 2013). The corporate governance structure of Ryanair is as per the guidance provided by standards. The company is operated by the directors, which are not majority shareholders of the company. Thus the management of the company is separate from the shareholders of the company. The board of the company consists of executive and non-executive directors. The non-executive directors protect the interest of the shareholders and thus the board designs the strategies that are in consistence with the interest of the shareholders (Kevin & Robert, 2002). The management of Easyjet is different as from the shareholders of the company. The management of the company works as the agents of the shareholders so as to provide benefits to the shareholders (Andrew, Keith, Nada, & Cliff, 2001). The board of directors consists of executive and non-executives as executive directors are the prime decision makers and non-executives overlook the board so as to determine that the interest of the shareholders are protected. The board structure of British Airways is similar with the guidance provided by the corporate governance where the management of the company is different from the owners of the company. The board of the company operates in two sections where there are executive directors that controls the execution of the company and make sure that the company follows the strategies. The non-executive directors of the company overlooks the strategic decision making where the interest of the shareholders are protected and the board of the company tends to make such decisions that are for the benefits of the shareholders of the company. Emirates is operational in airline industry and according to the guidance of best corporate governance practices the company follows the board structure that consist of executive and non-executive directors. The company tends to protect the rights and interest of the shareholders where the NEDs overlook the board’s decisions and tend to focus upon the protection of the rights of the shareholders. The company is much concerned about the interest of their shareholders and tends make policies that does not give rise to the conflict on interest between the shareholders and lenders of the company. Jet Airways is operational rom India and it follows the guidance provided by the corporate governance practice where there are number of non-executive directors to overlook the board and decisions are such made to protect the rights and interest of the shareholders. The company operates in such manner that the strategic decision making is such in which the rights of the shareholders are protected and decisions are such made so as to protect the shareholders’ interest in the company. The strategic policies are such design that does not conflict with the interest of the shareholders and the non-executive directors protect their rights. All five companies are operational in different sectors of economies and yet they follow the corporate governance guidance for best practices. The management of the company is responsible for running of the company and to provide return to the shareholders of the company and thus the ownership and the management of the companies are different. The management of the company works as the agents of the shareholders where the management is responsible for effective running of the company. The management of the companies should take decisions that are in the best interest of the shareholders prior to their personal interest. The management when working, as the agents of the shareholders should take decisions that is for the best interest of the shareholders. The interest of the shareholders are to be put first by the management of the company but there are instances where the personal interest of the management comes in the way and management is not able to take the interest of the shareholders in account when decision making. The board of directors of all the companies is oversight by the non-executive directors where the company protects the interest of the shareholders. The non-executive directors does not manage the activities and operations of the companies but they vote in the decision making of the companies. The non-executive directors are the directors hired by the shareholders so to implement their say in the management of the company decision-making. The shareholders’ interest is protected by the non-executive directors where they oppose the decisions that are not in the best interest of the shareholders and favor those decisions that are in the best interest of the shareholders. The companies are operating in different economies, which cover United Kingdom, Europe and India. The corporate structure of all the companies is similar where the management of the companies is different from the owners of the companies. The issues that they face regarding corporate governance are similar. The companies tend to protect the rights and interest of their shareholders with the existence of non-executive directors in the company. The management of the companies are different from the shareholders of all the companies. Emirates, British Airways, Easyjet, Ryanair and Jet Airways all have seriously considered their corporate social responsibilities with serious concerns. The companies focus upon the interest of their shareholders and have constructed the board in such a manner that the interest and rights of their shareholders are protected and the companies are able to make decisions upon the strategies that are best suited for their shareholders. Goal congruence is considered with much importance by each of the company and thus the provision of maximum return to the shareholders is considered as most. The power of the companies operation and management lies with the managements of companies. The management is responsible for the effective running of the companies and the shareholders of all the companies have invested in the stocks of the companies. Shareholders are the owners of the companies and they hire executive directors so as to provide the responsibilities of running of the companies to the directors of the companies. All of the five companies have executive directors on board so as to determine the running and operation of the companies. In order to protect the rights of the shareholders non-executive directors are appointed by voting from the shareholders so as to assure the protection of rights and interest of the shareholders in the companies. The non-executive directors exist in each of the five companies. non-executive directors does not take part in everyday running of the companies but they have their say in the strategic decision making of the companies. Non-executive directors are not the highest paid officials they are just the representations of the shareholders of the companies where when strategic decision are taken the shareholders’ interest is protected. The power of the companies to strategic decision-making lies with the board of directors of the companies. Risk Profiles The risk profiles of all of the five companies are determined with the factors that are contributing towards the risk of the companies. All the five companies are in the airline industry and the risk facing the companies are somewhat similar. British Airways is exposed to a variety of financial risks, including market risk, credit risk, capital risk and liquidity risk. The overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on financial performance (Daniel & MaryAnne, 2005). The company Board approves prudent treasury policies and delegates certain responsibilities to senior management, who directly control day-to-day treasury operations and operate within clearly defined parameters. Ryanair is exposed to a variety of financial risks, including market risk, credit risk, capital risk and liquidity risk. The overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on financial performance (Daniel & MaryAnne, 2005). The company Board gives approval on prudent treasury policies and delegates certain responsibilities to senior management, who directly control day-to-day treasury operations and operate within clearly defined parameters. Easyjet faces the similar risk of intense competition in the market where different factors contribute to the risk parameters for the company. Emirates face intense competition from the market where small airline companies contribute towards the risk profile of the company. Jet Airways is not much different from the other companies. The company faces the increase in the competition in the market as well. The companies are facing the risk of intense competition in the market where it impacts the risk profile of each of the companies separately. The companies tend to focus upon the factors that determine and contribute towards the risk. One of the major costs of the airline industry is the cost of fuel that is continuously fluctuating. The fluctuations in the cost of fuel are a major risk factor for all of the companies as all the companies are operating in the airline industry. The companies focus upon minimization of the risk of fluctuation in the fuel prices. As it is the risk that the companies have to consider, the companies develop techniques so as to determine that its impact is minimum. Ryanair is determined towards minimizing the risk of fluctuation in the fuel prices and thus make future contracts so as to hedge the risk. The fuel for the airline industry is the cost that cannot be minimized but with effective planning the cost can be controlled. Ryanair effectively measures the hedging of the fuel prices where the company is able to control the cost of fuel. Other companies have developed techniques to reduce the cost of fuel. Companies tend to focus upon carrying that much fuel in the aircraft, which is necessary to complete the journey so, the airplane is not overloaded with fuel. this strategy provides reduction in the fuel consumption and ultimately saves the cost of fuel for the companies. Companies also focus upon minimization of the cost of fuel where the baggage allowed by the passengers is minimized in weight. This reduces the weight that the aircraft shall be carrying and thus the companies manage to reduce the cost of the fuel. Low price companies such as Ryanair and Easyjet focuses upon hedging of the fuel rates and effectively manage the risks that affect the companies (Kevin, Söhnke, & Gunter, 2007). The management of risk is done by effectively measuring the factors contributing the increase in the cost of the fuel for the company and minimizing it. Restriction upon weight of the baggage is applied so as to minimize the load on aircraft and the policy to carry enough fuel for the trip and no extra fuel have contributed much towards the reduction of the cost of fuels for the companies. Emirates and British Airways determine the technique of reducing the cost of fuel by acquiring the latest models of aircrafts that are much fuel efficient (Sameer, Kevin, & Steven, 2009). Along with the cost of fuel the other fluctuations that contribute towards the risks of the companies are the changes in the interest rates in the economies. The companies are operating in different economies and the conditions prevailing in those economies are to be considered when determining the risk parameters for the companies. The risk profile of the companies is ascertained by determining various risk factors that the company faces. The industry in which the company operates provides intense competition where collaboration with different companies is determined so as to accommodate the competition. The alliances with different companies so as to maintain rigorous cost control and targeted product investment to remain competitive in the market. The companies are facing the risk of government regulations, which are to be followed in order to be operational in the market. The analysis of the IT system revealed the dependency of the companies upon information technology, which creates a risk if the system fails. The economic conditions and the brand image is concerned about the company as a single event or a series of events may cause erosion in the brand reputation of the company and thus decreasing customer trust in the company. The consideration of the risk parameters lead to the cost of equity for the companies where the companies shall be determining their cost of equity which is affected by the intensity of the risk on the company. The earnings per share and the beta of each of the five companies are elaborated in the table below: 2013 2012 2011 Beta Easyjet 101.3 62.5 62.08 0.94 Ryanair 39.45 38.03 25.21 0.62 Jet Airways -56.23 -143.18 -90.32 2.11 Emirates 0.5859 0.41 0.41 0.87 British Airways 2.87 -1.93 2.32 1.17 The earning per share of the companies are determined by dividing the earnings of each of the company that is attributable to the shareholders of the company. The earning per share determines that how much earning that the common shareholder of the company is able to earn upon a single share. The earnings contribute the risk and the risk profile is determined by beta. Beta of the companies less than one is of Easyjet, Ryanair and of Emirates. These companies are less responsive to the market fluctuations in the risk. The earnings per share of these companies determine the similar impact as the earnings per share are increasing of the companies whose beta is less than one. The market conditions that affect the risk profile of the company is determined by beta. The beta of the companies less than one that indicates the response of the company towards the volatility of the market and how the return in the stocks of the company shall be determined by reaction to the market. The indication of the beta determines the risks that the company faces. The beta of the company indicates the risk that the company shall be facing and its response accordingly. Beta of British Airways and Jet Airways is more than one which indicates that these two companies shall be determining the risk in response to the volatility of the market. The companies shall be much responsive to the fluctuations in the market and thus shall be determined in the risk profile of the companies. with the calculations of beta of each of the company the cost of debt for every company can be ascertained by using the following formula: Cost of capital = risk free rate + beta x market risk premium Risk Free Rate Beta Market Risk Premium Cost of Equity Easyjet 2.4 0.94 5.5 7.57 Ryanair 2.4 0.62 5.5 5.81 Jet Airways 2.4 2.11 5.5 14.005 Emirates 2.4 0.87 5.5 7.185 British Airways 2.4 1.17 5.5 8.835 The cost of equity for the companies with high beta is more than that of the companies with low beta. As beta determines the risk that is associated with the investment in the company thus the return upon the investment shall be refelected accordingly. the indication of risk is determined by high beta as the company becomes much more responsive to the risks and fluctuations in the market and thus the provision of return to the investors shall be more as the investor is taking more risk. The increased risk associated with the investment determines the increased return. The cost of debt for the companies where beta is less is low as the companies are not much responsive to the market fluctuations and provide return to their investors. The decrease in the risk is reflected by decreases return as shown in the table. The cost of equity decreases as the companies with low risk can gather investment much quickly as compared with the companies with high risks. Financing Choices According to the current market situation and the analysis of each of the company there are two major sources of finance categorized as internal and external. The internal sources of finance include the utilization of the resources that are used for financing the operations of the company and to satisfy other financial needs of the company. The external sources of finance includes raising of monetary assets by using external sources which can thus be utilized for the satisfaction of the financial needs of Apple Inc. With the main categorization of the sources of finance for the company there are subcategories; equity finance and debt finance. The company should decide in accordance with the usage of the funds so as to opt for the source of finance. Along with the usage of the funds the company should consider the flexibility in the decision-making by the management, which include consideration of the change in the option of raising finance by the management of the company. The following table shows the debt equity ratio of each of the companies which provides a better medium so as to determine the gearing of the companies. Equity Debt Debt Equity Ratio Easyjet 2017 1016 0.50 Ryanair 3272.6 3758.7 1.15 Jet Airways 182771 738455 4.04 Emirates 23032 40452 1.76 British Airways 2255 4839 2.15 Jet Airways is highly finances from debt as it is using 4.04 times of equity as debt so as to finance its operations. The companies that are financed from debt are considering the debt finaning as a better option. Financing of the operations that are available to the companies are of two types which are debt fiancne and equity fiannce. The cost of equity determines the return that is to be provided to the shareholders which is also refleced by the risks associated with the investments. The debt finance on other hand is the financing option available to the companies so as to raise fianance in terms of long term debt which the company has to pay interest upon. Debt financing provides tax benefits to the companies as well as the company shall be subtracting the interest expense so as to determine the net income upon which the income tax rate is provided. High debt finance is indicated by most of the companies as Easyjet is the only company that is operating upon equity fianance and is financing its operations from equity. The equity finance is not much easy to raise as it depends upon the image and brand of the company along with the shareholders’ interst in the company. whereas debt fiancne can be raised easily as when the company possesses the collateral to the debt and the ability of the company to pay interest and pay off its liabilities are considered by the lenders to advance loan to the company. The recommendation to the optimal mix of financing shall be where the equity fiancne is more than debt finance. As all the companies are operating in the airline industry but in different sectors. The companies sure has brand worth and market image. The companies should go for the option of equity fiannce so as to raise monetary value, which can be utilized for the operations of the companies. The external sources of finance are the sources that are utilized by the companies outside of the companies so as to raise funds and finance. The external sources of finance will be concluding in mandatory payments such as interests and thus shall be affecting the financial performance of the company. The availability of the external sources of finance is dependent upon the reputation and the market position of the company. Along with the availability the external sources of finance are much riskier than that of the internal sources of finance and should be considered by the management in making decision (Attril & McLaney, 2006). For the external financing the management of the company should be much considerate regarding the duration of the finance. All five of the companies are much geared thus they are providing mandatory payments to the lenders in form of interests. The equity finance does not acquire any mandatory payment as it is up to the discretion of the management of the company to determine the payment or not. With the equity finance the company shall not be liable towards any mandatory payment. The companies should focus upon raising finance from equity rather than debt as this is reducing the amount of mandatory payment in shall increase the performance of the company as the company shall be able to make more profits when the interest expenses are decreased. The increased equity finance shall be lowering the weighted average cost of capital for the company too. Conclusion The analysis of the five different companies British Airways, Easyjet, Ryanair, Jet Airways and Emirates is done in comparison and separately. Various factors determining the risks that are affecting the industry as a whole and to the separate companies are determined. Effective risk management policies of the companies are evaluated so as to determine how different companies in the same industry and operating from different locations mange the risk that they face. The companies are compared with each other in terms of risk and the risk management policies of the companies are analyzed so as to determine the effective risk management policy. The inclusion of the risk that is reflected in the cost of equity of the company is determined and the beta of all five companies is ascertained. The response to the market of all of the five companies is determined so as to ascertain the responsiveness along with its reflection in the risk of the investments. The finance structure of each of the companies is analyzed and it is found that most of the companies are geared. The gearing of the companies are suggested to be lowered so as to raise finance from equity sources which shall be helpful in appreciating the performance of the companies. The increased equity finance shall be determining the trust of the shareholders in the company and shall reduce the amount of mandatory payment by the companies in form of interests. 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