British Airways Management of Company Finance

Ahoussou kouadio Jean Christian schoolchild number 2522706 Management of association pay Analysis of the mo give the sackary structure of British Airways Name of professor Tony Kilmister British airways is one(a) of the most valuable company in the world that is why I waste on her. With the aim to evaluate the proportion of debt in British airways, we forget study his financial gear mechanism income gearing and capital gearing. In order to calculate the companys capital gearing according to the view as time grade, we need especi eithery the take account of the coarse- termination and short-term seize onings and the range of stockholders funds.But, there is any(prenominal)(prenominal) different statutes which arises about issues the feature that the track record order is depress than the grocery store value (the first formula) and readinesss trick be considered either as liabilities or assets (the blink of an eye formula), depending on firm. Then I go o ut calculate the Weighted Average approach of dandy. In 2004, the way of doing the repose sheets changed thats why there be some residues between twain reports. trip &8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&82121 Measure of the gearing and income proportionalityPart &8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212 &8212&8212&8212&8212-2 Measure of the debt and equity base upon the commercialise value Part &8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&82123 tenderness of the WACC. I) Measure of gearing and income symmetrys We will take those expressions 1. Debt to equity ratio= wide term Liabilities/Shareholdersfunds 2. Debt to debt plus equity ratio=LTL/(LTL+ Shareholdersfunds) 3. Long Term Bo rrowings/Shareholders funds a) gear wheel Ratio large(p) adapt = LTL / Shareholders money 2006 2005 2004 expectant cogwheel 259. 75% 437. 6% 590. 7% To set an upper ratio we can incorporate the LTL at the componentholder value. expectant geared wheel = LTL / (LTL + Shareholders capital) 2006 2005 2004 jacket crown Gearing 72. 2% 81. 4% 85. 5% The provision are incorporates in those 2 formulas.We can consider that the provision can be take as liabilities ( exaltedly certain) or as equity (ultra-prudence). Capital Gearing = Long Term Borrowing (LTL provisions) / Shareholders Funds 2006 2005 2004 Capital Gearing 193. 5% 341. 4 % 475,40% lettuce Debt Net debt = (Finance debt currency and liquid resources)/ truth For British Airways, Net debt = (loans, pay leases and mesh purchase arrangements + transformable Capital Bonds, net of other current interest heading deposits and property and cash equivalents overdrafts) British Airways commentary from the annua l report 2006) ? one billion jillion million 2006 2005 2004 Capital Gearing 1641 2922 4158 The figures of long term liabilities are taller than the net debt that explain the fact that the ratios are different The company health seem slight vital, beca habituate of the cash and those equivalent, and deposits. Overdrafts are not representing a big tote up, we take on them. Since 2004 a policy of high liquid state is developed in order to curb the debt, they tried to repay the debt earlier.The debt are trim down by the conversion of the 112 millions of convertible bonds. The ? 320 million 9 3/4 per penny Convertible Capital Bonds 2005 issued in 1989 fledged on June 15, 2005. On that date 47,979,486 median(a) shares were issued in exchange for 112,317,274 Convertible Capital Bonds on the basis of one average share for every 2. 34 Bonds held (British Airways notify 2006). The capital gearing of the company is just about 65% in almost all gearing indicators and more in s om of them, as a cultivation we can suppose that the financial statement of the company is furious and more the company is weak receivable to the compensation on the debt.We can withal highlight the fact that British Airways is finance by debt. Its has a important inwardness of lease and purchase arrangement, which exceeds the bank loans. b) Income Gearing This ratios show us the security of reference workors fund and the debt exposure. While using Income put we highlight the relation of the companys income and its interest commitments. Income Ratio = Interest collectible / Profit Before Interest and revenue % 2006 2005 2004 Income Gearing 0,17 0,26 0,87 Interest are taking a get off place in the profit (strategy decline of debt). In fact, we phthisis the Interest rachis to see if the company can meet its interest. Interest cover = Profit before interest and revenue / Interest charges Times 2006 2005 2004 Interest dissemble 5,79 3,80 1,15 The company can afford her interest. 1) Becaexercising of the abate of the amount of debt, 2) The profit before impose and interest plusd by 269%, the danger is less important.We can also use another formula, which gives a better shape of the finance. It establish on the fact that cash has not been received. As a conclusion we can hypothesizes that British Airways reduced its long term debt by 28. 5%, and substantiate their interest payment low and increase the PBIT strongly. From the shareholder transport of view, the company takes high hazards so they study a genuine counter on investment although reduction of the debt of the company progresss the rate of return lower and lower. II) Measure of the debt and equity found on the commercialise value a) determine of bonny play Share Price*Number of Shares* 2004 ? 2,181 083 845 000 2005 ? ,941 082 903 000 2006 ? 2,791 one hundred thirty 882 000 *I took those which were in the report. *The difference in the number of shares between 2005 and 2006 is the conversion of the 112 millions of Convertible Bonds into 47,979,486 shares. The value of equity is now ? 2006 2005 2004 cling to of truth 3 155 clx 780 2 light speed 831 820 2 362 782 snow b)Rating pass judgment of Debt pic The rating shows that the company take risks for financing because she invest in high return share in the throw out bond or high consecrate market those are really unstable.This kernel that the company is highly financing by debt, investor need an important rate of return regards to the risk of non payment. In spite of that, British Airwayss main source of external funding is less sensitive to attribute rating than the unsecured bond. The impact of the credit ration is not important for some parts of the debt. We will use the faire value of the debt to calculate the market value of debt. Because of the fair values of the Euro-Sterling notes and Euro-Sterling Bond 2016 are based on the quoted market values at March 31, 2006.The fair values of drift rate borrowings are deemed to be make up to their carrying values. British Airways Report Example in March, 31st 2006 pic Market value of the debt is ? million 2006 2005 2004 Market Value of Debt 4 cxxx 4 682 5 954 Book Value of Debt 4 081 4 492 5 716 The difficulty is Those market values are amalgamate the current liabilities.In the purpose to obligingness the ratios make before, I will lift off with percentage the current liabilities. The fresh market value of debt is ? million 2006 2005 2004 Market Value of Debt 3645 4216 5244 Book Value of Debt 3 602 4 045 5 034 There is the a market where Debt are trade daily, that explain the difference between historic full point. ) Measure of gearing based on market values We use here the gearing ratio to examine the withstand value and the market value of the company Capital Gearing = LTL / Shareholders Funds % 2006 2005 2004 Capital Gearing 115,5 200,7 221,9 We can make a second ratio in order to set an upper l imit Capital Gearing = LTL / (LTL + Shareholders Funds) % 2006 2005 2004 Capital Gearing 53,6 66,7 68,9 Figures are lower than the one we made with the book value. The equity are determine in the book value at 25p whereas in the market value at an average outlay of the triplet historic period at 230p This divergence makes the ratios lower, thus with the book values the company seems to be less indebted and also less dangerous to investors.III) Estimation of the Weighted Average make up of Capital (WACC) a) woo of Equity To foretell the monetary value of equity, we can use two ways 1) the single outnd paygrade representative 2) the Capital Asset Price Model (CAPM). In this case, we can not use the dividend valuation model because the company did not carry on dividends since 2001, so the cost of equity will be 0 that would lead to moot results. British Airways has not distributed dividends because -They wants to strengthen the balance sheet by making new investment, the n it invests into the company Quantas and also into the fifth Terminal in Heathrow.British Airways is the thirteenth highest performing company out of the 93 FTSE 100 companies remaining for the performance period April,1st 2003 to March, 31st 2006. The board of director indicated that the payment of dividends will be resumed at an assign time. To calculate the cost of equity, the CAPM is the only model available Ke = Rf + ? (Rm Rf) Rf ( the safe return Rm ( the market risk ? ( decimal measure of the volatility of a stipulation stock, mutual fund, or portfolio, relative to the overall market.A beta above 1 is more volatile than the overall market, plot of land a beta below 1 is less volatile. For British Airways, the Beta is, for the three years, 0,91. The risk-free return can be found in the website of the Bank of England for from each one years and the market risk is the caps of the FTSE 100 of year N less years N-1 divided by the caps year N-1 (Caps N caps N-1) / caps N- 1 The risk-free return rate is 2004 4,75% 2005 5,1% 2006 4,2% The market risk is 31. 03. 2006 31. 03. 2005 31. 03. 004 Caps FTSE 100 5964,6 4894,4 4385,7 year N year N-1 1070,2 508,7 772,4 Market Risk (%) 21,87 11,60 21,38 The exist of Equity using the CAPM is % 2006 2005 2004 Cost of Equity 20,1 10,9 19,7 ) Cost of debt In order to find out the cost of debt, the best ratio is to divide the interest payable by the debt % 2006 2005 2004 Cost Of Debt 2,62 3,01 3,50 They leads to the same conclusion decrease in Debt and interest. We can add that no debt has been interpreted in 2006. All the purchase take up been made by internal cash flow. c) The WACC The Weighted Average Cost of Capital is used to measure the cost of capital.The formula is Ko = Ke (Ve/Vo) + Kd (Vd/Vo) Where Ke (the cost of equity Ve (the value of equity Kd (the cost of debt Vd (the value of debt Vo (the total value of the firm ? million 2006 2005 2004 Vo 7 236 6 593 8 079 The WACC is % 2006 2005 2004 W ACC 10,08 5,41 8,04 The amount of Debt decreased but the WACC stay in the average, that because of the high level of the cost of equity. 2005 is palpable by a share price lower than the two other years. This leads to a lower shareholders funds and also an high influence of the debts drop, therefore the lower WACC. However, the CAPM have some limitations. He is based on several assumptions The investors are sharp-witted and risk-adverse who set a level of risk. The investors have the same single-period planning horizon. The investors have self-colored expectations on the future yield. The investors can borrow and lend unlimited amounts at a risk-free rate. There is neither taxes nor cost of transactions The investors have all an economical portfolio which maximize the yield, for a level of risk given. Whole of efficient portfolio form a curve called the efficiency frontier To conclude, from the point of view of market value, we can say that British airways succeeded to fac e its commitments in term of debt and equity. Indeed, they took advantage of an increase in share price. The repayment of share allowing to reduce the gearing in debt capital.