CORPORATE BUSINESS AND FINANCE

8/12/2019 CORPORATE BUSINESS AND FINANCE

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BUSINESS CORPORATE AND FINANCE

An analysis of relative capital structures of major Australian companies


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Contents

Answer 1 ....................................................................................................................................................... 3

BHP Billiton.............................................................................................................................................. 3

Rio Tinto ................................................................................................................................................... 3

CSL ........................................................................................................................................................... 3

Woolworths ............................................................................................................................................... 4

Telstra ....................................................................................................................................................... 4

Qantas ....................................................................................................................................................... 4

Coca-cola Amatil ...................................................................................................................................... 4

Answer 2 ....................................................................................................................................................... 6

Answer 3 ....................................................................................................................................................... 7

Business risk of BHP Billiton ............................................................................................................... 7

Business risk of Rio Tinto ..................................................................................................................... 7

Business risk of CSL ............................................................................................................................. 8

Business risk of Woolworths ................................................................................................................ 8

Business risk of Telstra Corp ................................................................................................................ 8

Business risk of Qantas Airways .......................................................................................................... 8

Business risk of BHP Billiton ............................................................................................................... 9

Answer 4 ....................................................................................................................................................... 9

Appendix ..................................................................................................................................................... 10

Bibliography ............................................................................................................................................... 11


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countries. CSL is among the top companies of the group, and in fact it is the industry leader.

However the future aspect of the business is not defined and there is a lot of development in the

industry. Thus the risk profile of company can be considered moderately risky.

Woolworths

The company deals in FMCG and hospitality industry (Woolsworth 2011). These industries are

ever green and the requirements of these products are certain. The company deals in five

segments. These five segments are food and liquor, supermarkets, petrol, big w and hotels. The

business of company is well diversified. The company is among the top companies of the

industry. The risk of the company business is on the lower side. The risk of industry is also less.

Thus the company can be put in the category of low risk companies.

Telstra

The company is a leader in the telecommunications sector in the country. The company has nine

business segments. In the recent past the company has gone through a series of merger and

acquisitions. The health of telecom sector is average. However the company is the market leader

hence the risk profile of the company is moderate.

Qantas

The company is engaged in the operations of international and domestic flights and air

transportation services. Company is having four brandings for aviation business (Qantas 2011).

These brandings are Qantas, Jet star, Qantas Frequent Flyer and Qantas Freight. The condition of

aviation sector worldwide is not satisfactory. This sector is under performing worldwide. Though

the sector is underperforming worldwide, Qantas is the market leader. Thus the profile of the

company can be considered moderately risky.

Coca-cola Amatil

The company is a well know brand of soft drink and beverages (CCA 2012). The company is

engaged in manufacturing, distribution and marketing of soft drinks. Besides that the company

also deals in business of mineral water, fruit juice, coffee and other beverages. The company is

having a global presence. The beverages industry is working fine. Though at times there are

some voices against the utility of soft drinks, yet the future of beverages industry is bright. Thus

the company can be put in a low risk profile.


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The risk profile of the companies on the basis of nature of industry and common sense are as

under, with the reasons.

Company Industry Risk

Profile

Reason

BHP Billiton Materials Low The BHP Billiton is the market

leader. As the materials industry is

the core industry, its risk profile is

lower. The company BHP itself is

the market leader, thus the risk

profile of the company is also on

the lower side. Thus the company

is having low risk.

Rio Tinto Materials Low As the materials industry is the

core industry, its risk profile is

lower. The company itself is

among the top companies, thus the

risk profile of the company is also

on the lower side. Thus the

company is having low risk.

CSL Biotechnology Moderate The future aspect of the business is

not defined and there is a lot of

development in the industry. Thus

the risk profile of company can be

considered moderately risky.

Woolworths Food and staples Moderate The risk of the company business

is on the lower side. The risk of

industry is also less. Thus the

company can be put in the category

of low risk companies.

Telstra Telecommunications Moderate The health of telecom sector is


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leverage, but its return is not the highest. In the same way the CSL is having the lowest financial

leverage, however its return is not the lowest. Thus there seems to be no correlation between the

return and financial leverage in real world.

There are a lot of factors in real world and a single theory is not capable to predict the results.

The capital structure theory is having significance in academic world, but in real world it does

not find place. Actually in real world nothing can be predicted accurately, there is a lot of

randomness in real world.

Answer 3

The first step is to calculate the business risk for each of the share. The formula of business risk

is as under.

)/1( EDL

U

where:

U= unlevered beta (measure of business risk)

L= levered beta (standard beta coefficient provided in the above table)

D/E= the companys debt-to-equity ratio

Business risk of BHP Billiton

)/1( EDL

U

Business risk = 1.80 / (1 + 0.4662)

Business risk = 1.80 / (1 + 0.4662)

Business risk = 1.227

Business risk of Rio Tinto

)/1( EDL

U


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Business risk = 1.59 / (1 + 0.6134)

Business risk = 1.59 / (1.6134)


Business risk of CSL

)/1( EDL

U

Business risk = 1.22 / (1 + 0.4660)

Business risk = 1.22 / (1.4662)


Business risk of Woolworths

)/1( EDL

U

Business risk = 0.70 / (1 + 0.6944)

Business risk = 0.70 / (1.6944)


Business risk of Telstra Corp

)/1( EDL

U

Business risk = 0.61 / (1 + 0.9330)

Business risk = 0.61 / (1.9330)


Business risk of Qantas Airways

)/1( EDL

U


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Business risk = 0.76 / (1 + 1.024)

Business risk = 0.76 / (2.024)


Business risk of BHP Billiton

)/1( EDL

U

Business risk = 0.74 / (1 + 1.145)

Business risk = 1.80 / (2.145)


The calculated business profile of the companies is as under.

Company Business risk profile

BHP Billiton 1.22

Rio Tinto 0.98

CSL 1.83

Woolworths 0.41

Telstra Corp. 0.31

Qantas Airways 0.37

Coca-Cola Amatil 0.84

The share returns of the company appear to be in line with the business risk calculated above.

The business return of CSL is highest and it has provided the highest return. The business risk of

the Telstra is lowest and it has provided the lowest share return. Thus it can be said that the share

returns are correlated to the business risk.

Answer 4

BHP Billiton and Rio Tinto are in materials industry and not in the transport industry as

suggested by the question. There are four figures provided in the table for these two companies.


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The first figure is debt to equity ratio. Rio Tinto is having higher debt to equity ratio in

comparison to BHP. This indicates that the financial leverage of Rio Tinto is higher than BHP.

The second ratio is return on equity. The BHP has provided higher return on equity in

comparison of Rio Tinto. The beta of BHP is higher than Rio, which indicates that the BHP is

riskier than Rio. The fourth ratio is share return. The in past years BHP has provided higher

return than Rio.

Appendix

Company information averaged over the 5-year period from 2003 to 2007

Company Industry sector

Debt to

equity*

Return on

equity*

Beta

coefficient

Share

return*^

BHP Billiton Materials 0.4662 0.3179 1.80 3.08

Rio Tinto Materials 0.6134 0.2689 1.59 2.60

CSL Biotechnology 0.4660 0.1282 1.22 6.364

Woolworths Food and staples 0.6944 0.3067 0.70 1.157

Telstra Corp. Telecommunications 0.9330 0.2746 0.61 0.0431

Qantas Airways Transportation 1.024 0.1067 0.76 0.5237

Coca-Cola Amatil Food, beverages 1.145 0.1728 0.74 0.65


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