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Corporate Finance - Essay Example

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Looking at the given table of the financials of various Australian companies, we notice that Qantas Airways and Telstra Corp. are operating under high leverage. Both of these companies have high debt ratio of 2:1 or more. High-beta stocks are supposed to be riskier but…
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Corporate Finance
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Corporate Finance

Download file to see previous pages... Due to recessionary conditions and down side of economy, there is no immediate chance of recovery. Accordingly, Qantas Airways, which has leveraged beta of 1.25 is certainly a more risky company compared to any other company in the table.
Above table suggests that business risks associated are lowest with Telstra Corp. and Coca Cola companies for having lowest beta of 0.16 and 0.15 respectively. Highest business risks are associated with BHP Billiton and Rio Tinto with beta of 0.52 and 0.43 respectively. As table indicates for the companies where finance risks are low (like CSL and BHP Billiton), business risk is high and the companies with high finance risk (like Coca-Cola and Telstra), business risk is low. Thus when we compare business risk with finance risk, we find that both are not consistent.
Further, comparing the figures of shareholder’s return of BHP Billiton and Coca Cola, we find that both have given almost same returns; however, there is a vast difference between their business risks and financial risks profiles. Obviously, they are following Modigliani and Miller theorem that value of the companies are independent of its capital structure.
3. BHP Billiton and Rio Tinto though belong to the same industry sector; they have vastly different debt-equity ratios. Rio Tinto is a high leveraged company and its return on equity in percentage terms is less than that of BHP Billiton, which indicates that servicing cost of debt lowers down the percentage return on equity. In other words we can say that higher leveraging does not bring any additional return to the equity holders.
Total shareholder’s return too in case of Rio Tinto is only slightly less compared to that of BHP Billiton’s shareholder’s return. Despite large percentage difference in return on equity, there is not a proportionate difference on the value of total shareholders return.
In short, above set of Australian companies do not seem to ...Download file to see next pagesRead More
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