Company financials Essay Example

Question A; main contributing factors to this improved operating result

Cost reduction

The Qantas airline embarks on cutting on cost worth of $2 billion of annual cost for the last three years. Qantas airline has proved very triumphant in attaining main cost cutting up to $374 million in the first half, up from approximated $350 million. For the whole year, it must attain $675 million in cost saving. Qantas airline furthermore, move to fatly cut on job with 5000 budgeted redundancy to be finished by June which implies a drastic save in salary and wages expense[ CITATION KAr06 l 1033 ].

Lower oil price and the end of the carbon tax

The halving of price for oil in June lead to $33 million advantage in the first half of the financial period, as a result of the timing of the decline as well as the fact that the airline had hedge many of its risk to fuel. With Qantas saving its fuel cost with less than $ billion, in relation to $4.5 billion in the [past period. The implication is that the company saves more than $450 million in the second half. Furthermore, Qantas airline will realize $120 million full year benefits for removing the carbon tax[ CITATION Asw10 l 1033 ].

Question B

Average interest bearing debt levels

We will calculate the interest charge for a specified year for every group of liabilities then add these charges together and divide the sum by the number of liabilities as follows

Interest bearing liabilities

Current liabilities

Average interest bearing debt levels

Average total equity and cost of debt for the financial year 2015-2016

This is worked out by taking the average shareholder equity from two successive financial periods and taking the average

Average total equity

Total equity


Cost of debt (KD)

KD=Interest (1-tax/Value of debt)

KD=441(0.7)/6417) = 5%


  • The value of debt will not change during the period

  • The tax rate will remain fixed during the financial period

  • The interest rate will remain constant

Question C

Beta and market premium


Where; RF f is the risk free rate of return and RM is the market rate of return; (RM-RF) is the premium

Cost of equity (Ke)

Ke=Divided paid/Market value of stock} +Grow

We use 10-Year Treasury Constant Maturity Rate as the risk-free rate which is 2.48% currently

Beta 1.07 (Source yahoo finance)

Market premium=7.5%

CAPM=2.48+7.5 %( 1.07) =10.5%.

CAPM is always same as the cost of equity (Ke)


•The Value of equity and the value of debt for the company will remain fixed during the financial period

• There is no effect of inflation

• The growth rate will remain steady

• The tax rate will remain fixed at 30%

Question D

Weighted average cost of equity (WACC)

WACC=Ke (E/V) +KD (D/V) (Net of tax)

  • Ke is cost of equity and Kd is cost of debt

  • D is value of debt

  • E is the value of equity

  • V is equity plus debt

WACC=10.51 %( 3260/16705) +5 %( 13445/16705)*0.7=4.87%

Question E

The verdict of buy back shares is deem as the most efficient approach of returning the capital to the shareholders unlike the sign of company’s view on the future share price.. Qantas opted for buy back shares since, is employed as a means of consolidating the ownership. Where every share of stock depicts the small possession share in the company. The lesser outstanding shares, the lesser individual the business will have to answer to. With less outstanding shares, simple approach to inflating the many significant financial metrics employed by investors to examine the business denominator is minimized which makes the profit steady since, the return on equity also will get leg up where the shareholder’s equity is reduced[ CITATION Ümi13 l 1033 ].


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