The Financials of Various Australian Companies - Essay Example

The company is in the business of transportation. Due to recessionary conditions and the downside of the 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.

2. Level of business risks (unleveled Beta) is calculated based on the given formula for all the companies and tabulated as under:
The above table suggests that business risks associated are lowest with Telstra Corp. and Coca-Cola companies for having the lowest beta of 0.16 and 0.15 respectively. The highest business risks are associated with BHP Billiton and Rio Tinto with a beta of 0.52 and 0.43 respectively. As the table indicates for the companies where finance risks are low (like CSL and BHP Billiton), business risk is high and for the companies with high finance risks (like Coca-Cola and Telstra), business risk is low. Thus when we compare business risk with financial risk, we find that both are not consistent.

Further, comparing the figures of shareholder returns of BHP Billiton and Coca-Cola, we find that both have given almost the same returns; however, there is a vast difference between their business risks and financial risk profiles. They are following Modigliani and Miller's theorem that the value of the companies is independent of their 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 highly 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 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 return too in the case of Rio Tinto is only slightly less compared to that of BHP Billiton’s shareholder return. Despite a large percentage difference in return on equity, there is not a proportionate difference in the value of total shareholders' returns.
In short, the above set of Australian companies does not seem to follow the traditional model of capital structuring. This essentially suggests that the capital structure of the company has not much of a bearing when eyes are on the shareholder's return.