(Doc) Finance for Business : Assignment

Running Head: Finance for business
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Finance for business

Finance for business
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Contents
Introduction.......................................................................................................................3
1. Company description....................................................................................................3
2. Ownership governance structure..................................................................................3
3. Fundamental ratios........................................................................................................5
4. Share evaluation............................................................................................................9
5. Factors which affect the share price...........................................................................10
6. Beta and equity return calculations.............................................................................10
7. WACC........................................................................................................................11
8. Debt ratio....................................................................................................................12
9. Dividend policy..........................................................................................................12
10. Recommendation......................................................................................................13
11. References.................................................................................................................14

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Introduction:
Financial analysis on the stock price and the financial statement of an organization is
one of the important aspects on an organization and the stockholders’ of the organization.
This study explains about the current worth of the organization in the market and the future
trend of the business. Financial analysis study is conducted by the companies and the
investors to measure the performance of the company so that they could reach over a
conclusion about the company (Hogarth and Makridakis, 2011).
In the report, the financial statement and the stock price of Qantas limited has been
calculated to measure the performance of the company. The report has been prepared to offer
a recommendation to the investors of the company about the investment into the company.
For identifying the position of the company, annual report of the company has been studied
and the governance structure, interest rate, tax rate etc has been evaluated. Further, various
articles and analysis websites have been identified and the worth of the company has been
evaluated.
1. Company description:
Qantas limited is an aviation firm which is situated in the Australia. The company runs
its activities and operations at domestic level as well as international level. The company is
offering its services through various segments. The mains segment of the company are
Jetstar, Qantas international, Qantas loyalty, Qantas freight etc. All of this segment offers the
different services and offers to the customers of the company (Reuters, 2018). Bloomberg
(2018) explains that the corporate strategies of the company have been changed from earlier
and the current strategies have helped the company to change the operations and the
performance of the company at a great level.
The company has been founded in 1920 and from that time, it is serving the best
aviation services in the Australian market as well as at international market. The fleet size of
the company is 124 and it is oldest Australian aviation firm. The current annual report (2017)
of the company briefs that various changes have occurred into the financial position of the
company in last few years. However, the current performance of the company is quite
competitive.
2. Ownership governance structure:

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i) Main shareholders of the company:
Ownership governance structure is a policy which explains about the stock of the
company and the stockholders of the company. It explains that whether the company is
following a proper structure of ownership into the company or not. On the basis of the annual
report (2017), it has been found that the only one stockholder of the company i.e. HSBC
Custody Nominees (Australia) Limited has more than 20% ownership in the company. The
company has around 40.21% of total stock of the company. HSBC Custody Nominees
(Australia) Limited is a company and it is not connected with main people and directors of
the company in any way (Annual report, 2018).
Further, it has been found that there are only 3 companies who are having more than
5% holdings in the share of the company. On the basis of the evaluation on the company, it
has been found that the ownership governance structure of Qantas airways limited is quite
better.
Figure 1: Shareholder information
(Annual report, 2017)
ii) Main people of the company:
The main people of the company are Leigh Clifford AO, who is chairman of the
company, Alan Jayce who is chief executive officer (CEO) of Qantas limited, Tino La Spina,

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Andrew David, Gareth Evans, Lasley Grant and Jayce Hardicka are the main board of the
directors of Qantas limited.
The study on governance structure of Qantas explains that the shareholders who are
having more than 20% stock in the company do not have any connection with the directors of
the company. There is no surname matching. Further, none of the shareholders own more
than 5% stock in the company. It explains that the no directors and their family are involving
in the governance of the company.
3. Fundamental ratios:
Fundamental ratios are the key financial analysis tool which evaluates the financial
statement of an organization to measure the performance of the company. Fundamental ratios
evaluate the main item from income statement, cash flows statement and balance sheet of an
organization to measure the internal and market performance of the company (Hillier,
Grinblatt and Titman, 2011).
In the report, fundamental ratios of Qantas limited have been evaluated to measure the
performance of the company and the changes into the organization from last year. The
liquidity ratio, profitability ratio, efficiency ratio, market ratio, long term solvency ratio etc
has been calculated to measure the performance of the company. Following is the study of
fundamental ratios of the company:
i) Short term solvency position:
Short term solvency ratios are calculated to measure the ability of a business to meet all
the obligations of short term of the company. Short term solvency ratios seek to measure the
ability of a business to avoid all the financial risk in short term (Jiashu, 2009). The short term
solvency position of a business could be evaluated on the basis of current ratio and quick
ratio of an organization.
Current ratio is a short term solvency ratio which is calculated on the basis of current
assets and liabilities of a business. In case of Qantas limited, it has been found that the current
ratio of the company has been lowered from 2016 in 2017. It explains that the risk position of
the company has been higher and it briefs that the company is required to enhance the level
of current assets to manage the performance.
Current Ratio 2,016 2,017
Current Assets / 3,458 3,119

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Current liabilities 7,028 7,095
Answer: 0.49 0.44
(Mornngstar, 2018)
Further, quick ratio is a short term solvency ratio which is calculated on the basis of
quick assets and liabilities of a business. In case of Qantas limited, it has been found that the
quick ratio of the company has been lowered from 2016 in 2017. It explains that the risk
position of the company has been higher and it briefs that the company is required to enhance
the level of current assets which could be liquidate at any time to manage the performance
Acid test ratio 2,016 2,017
Current Assets - Inventory
/ 3,122 2,768
Current Liabilities 7,028 7,095
Answer: 0.44 0.39
ii) Long term solvency position:
Long term solvency ratios are calculated to measure the ability of a business to meet all
the obligations of long term debt of the company. Long term solvency ratios seek to measure
the ability of a business to avoid all the financial risk in long term. The long term solvency
position of a business could be evaluated on the basis of total liabilities, debt and equity of an
organization.
Gearing ratio is a long term solvency ratio which is calculated on the basis of long
term liabilities and capital employed of a business. In case of Qantas limited, it has been
found that the gearing ratio of the company has been enhanced from 2016 in 2017. It explains
that the risk position of the company has been higher and it briefs that the company should
reduce the level of long term liabilities.
Gearing ratio 2,016 2,017
Long term
liabilities / 6,422 6,589
Capital employed 9,677 10,126
Answer: % 0.664 0.651
(Morningstar, 2018)
Further, debt ratio is a long term solvency ratio which is calculated on the basis of total
liabilities and total assets of a business. In case of Qantas limited, it has been found that the
debt ratio of the company has been lowered from 2016 in 2017. It explains that the risk

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position of the company has been lower and it briefs that the company is still required to
reduce the level of total liabilities to manage the performance.
Debt ratio 2,016 2,017
Total liabilities / 13,450 13,684
Total Assets 16,705 17,221
Answer: 0.81 0.79
iii) Asset utilization:
Long term solvency ratios are calculated to measure the ability of a business to meet all
the obligations of long term debt of the company. Long term solvency ratios seek to measure
the ability of a business to avoid all the financial risk in long term. The long term solvency
position of a business could be evaluated on the basis of total liabilities, debt and equity of an
organization.
Gearing ratio is a long term solvency ratio which is calculated on the basis of long term
liabilities and capital employed of a business. In case of Qantas limited, it has been found that
the gearing ratio of the company has been enhanced from 2016 in 2017. It explains that the
risk position of the company has been higher and it briefs that the company should reduce the
level of long term liabilities.
Gearing ratio 2,016 2,017
Long term
liabilities / 6,422 6,589
Capital employed 9,677 10,126
Answer: % 0.664
0.651
Further, debt ratio is a long term solvency ratio which is calculated on the basis of
total liabilities and total assets of a business. In case of Qantas limited, it has been found that
the debt ratio of the company has been lowered from 2016 in 2017. It explains that the risk
position of the company has been lower and it briefs that the company is still required to
reduce the level of total liabilities to manage the performance.
Debt ratio 2,016 2,017
Total liabilities / 13,450 13,684
Total Assets 16,705 17,221
Answer: 0.81 0.79

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iv) Profitability ratios:
Profitability ratios are calculated to measure the ability of a business to generate the
case on the basis of sales and the available resources. Profitability ratios seek to measure the
ability of a business to generate the cash in a particular period (Jiashu, 2009). The
profitability position of a business could be evaluated on the basis of gross profit, operating
profit and net profit margin.
Net profit, gross profit and operating profit margin is a profitability ratio which is
calculated on the basis of total generated operating profit, net profit and gross profit of the
organization. In case of Qantas limited, it has been found that the gross profit ratio of the
company has been enhanced from 2016 in 2017. However, the net profit and the operating
profit rate of the company have been lowered. It explains that profitability level of the
company has been lower and it briefs that the company should focus on the operating
expenses due to which the profitability level of the company has been lowered.
Net profit 2,016 2,017
Net profit / 1029 852
Sales revenue
15,78
4 15,680
Answer: % 6.52% 5.43%
Gross Profit Margin 2,016 2,017
Gross profit / 9,172 9,205
Sales Revenue (note used
operating revenue) 15,784 15,680
Answer: 58.1% 58.7%
Operating profit margin 2,016 2,017
Operating profit / 1,029 852
Sales Revenue % 15,784 15,680
Answer: 6.52% 5.43%
v) Market value ratios:
Market value ratios are calculated to measure the ability of a business to manage its
place in the market and manage the stock price in the security market. Market value ratios
seek to measure the performance of the company in the market. The market value position of
a business could be evaluated on the basis of dividend coverage ratio and earnings per ratio
(Gapenski, 2008).

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Earnings per share of the company measure the net income on the basis of total stock of
the company. According to the calculations, it has been found that the earning per share of
the company has been lowered from 0.49 to 0.46 in 2017due to lower net income. Further, it
has been found that the dividend coverage ratio of the company has been higher from last
year. It explains that however the earnings of the company have been reduced but still the
company has higher the dividend coverage ratio to offer good returns to the stockholder of
the company.
Earnings per share 2,016 2,017
Net income 1,029 852
Weighted average shares
outstanding 2,083 1,853
Answer: 0.494 0.460
Dividend coverage ratio 2,016 2,017
Net income / 1,029 852
Dividend paid to
shareholders 350 264
Answer: 2.94 3.23
4. Share evaluation:
Share price movement:
Figure 2: Stock price
(Yahoo Finance, 2018)
Business report:

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The above graph explains that with the stock price of AORD and QAN both are
volatile. The stock price f QAN has been volatile more than the AORD prices. The average
return of QAN is higher than the AORD and it briefs that the changes into QAN stock is
higher. Further, the correlation function explains that the QAN stock and AORD stock are
facing a correlation of -0.11 (Yahoo Finance, 2018). It explains that the changes into the
QAN price do not affect the index price (Higgins, 2012). Further, it explains that the stock
price of both the stock are average volatile and it briefs that changes into QAN price does not
affect the AORD prices more. On the basis of investigation, it has been found that the QAN
does not lead to AORD stock.
5. Factors which affect the share price:
Yahoo finance (2018) briefs that various changes have been faced by the company in
last 2 years. The changes have occurred due to various internal and external alterations into
the activities and market performance of the company. On the basis of AFR (2018), it has
been found that the stock price on 31-8-2016 has been lowered due to changes in the industry
factors (4 traders, 2018). Further, on 31-1-2017, stock price has been enhanced due to
announcement from the company (The wall street Journal, 2018). It further explains that on
30-11-2017, the significant news about the company has been leaked and it has directly
impacted on the stock price of the company (Financial Times, 2018). Further, it has been
found that the operations and the performance of the company are quite competitive in last 2
years and due to which the stock performance of the company is quite impressive.
6. Beta and equity return calculations:
Beta calculations:
ANOVA
df SS MS F Significan
ce F
Regressi
on
1 0.001401 0.0014
01
0.2583
23
0.616572
Residual 21 0.113889 0.0054
23
Total 22 0.11529
Coefficie
nts
Standard
Error
t Stat P-
value
Lower
95%
Upper
95%
Lower
95.0%
Upper
95.0%
Intercep
t
0.03808
4
0.01564 2.4350
51
0.0238
93
0.005559 0.0706
09
0.005559 0.070609

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X
Variable
1
-
0.37796
0.743651 -
0.5082
6
0.6165
72
-1.92447 1.1685
42
-1.92447 1.168542
CAPM:
Calculation of cost of equity
Risk free rate 4.00%
RM 6.00%
Beta -0.378
Required rate of return 3.24%
(Gapenski, 2008)
Conservative company:
Conservative company is the one where the risk of the company is lower and the
return of the company is higher (Gibson, 2011). In case of Qantas limited, it has been
found that the beta of the company is -0.378 which explains about the total risk of the
company and the return of the company is 3.24%. It briefs that the risk and return
position are according to the conservative definition and thus the project should be
accepted by the company.
7. WACC:
WACC calculations:
Calculation of WACC
Price Cost Weight WACC
Debt 3,386 4.55% 49.59% 0.02256
Equity 3,442 3.24% 50.41% 0.01635
6,828 Kd 3.89%
Calculation of cost of debt
Outstanding debt 3,386
interest rate 6.50%
Tax rate 30.0%
Kd 4.55%

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Calculation of cost of equity
(CAPM)
RF 4.00%
RM 6.00%
Beta -0.3780
Required rate of
return 3.24%
(Dixon and Monk, 2009)
Implication of WACC:
The above calculations explain that the total cost of capital of the company is 3.89%.
It assists an organization to evaluate the various investments proposals. It explains that if the
internal rate of return of a project is higher than its WACC of the company than only the
company should accept the proposal as if the WACC is higher than the company would have
to face more loss than the profit. In case of Qantas, the company should only accept the
proposal which would offer more than 3.89% IRR to company.
8. Debt ratio:
Debt ratio:
Debt ratio of the company explains that the debt of the company has been lower than
the total assets of the company from last year. It briefs that the debt ratio of the company is
not stable. Company is making few changes into the capital structure to make it optimal. The
liability and assets must be in a proportion that the company could manage the long term
solvency position.
Debt ratio 2,016 2,017
Total liabilities / 13,450 13,684
Total Assets 16,705 17,221
Answer: 0.81 0.79
(Annual report, 2017)
Gearing ratio:
Further, the gearing ratio of the company has been calculated to measure the long
term liabilities in context with the total capital of the company. On the basis of the below
table, it has been found that the company has enhanced the borrowings as well as shares have
also been issued by the company to manage the performance of the company.

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Gearing ratio 2,016 2,017
Long term liabilities / 6,422 6,589
Capital employed 9,677 10,126
Answer: % 0.664 0.651
9. Dividend policy:
Dividend policies are of two types: relevant dividend policy and irrelevant dividend
policy. Relevant dividend policy express that the company should offer good dividend
amount to the investors whereas irrelevant dividend policy express that the company should
retain the entire profit for future investments. On the basis of annual report (2017) of the
company, it has been found that the company has paid good dividend amount to the
stockholders which briefs that the dividend policy of the company is quite attractive,
company is following relaxant dividend policy. This policy attracts the customers more
towards the company.
10. Recommendation:
To,
Investors
Subject: portfolio investigations
Dear Client,
According to your choice, we have evaluated Qantas limited to add this company into your
portfolio. Investigation over Qantas limited briefs that the governance structure of the
company is quite better and the directors are not involving into the governance. Further, the
ratio analysis explains that the performance of the company is quite competitive in the
market.
The strategies and the policies of the company are quite strong that it is helping the company
to manage the position in the market. The stock evaluation of the company also explains
about better market position of the company. Lastly, the WACC, debt structure and dividend
policy of the company are also better on the basis of the investment into the company.
Thus, it is recommended to you to add Qantas airway limited into your portfolio for better
returns.

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Regards,
Financial analyst
Company name.

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11. References:
4 traders, viewed May 20 2018, http://www.4-traders.com/QANTAS-AIRWAYS-LIMITED-
6491449/consensus/
Annual report, viewed May 20 2018,
http://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpgyw/
file/annual-reports/2017AnnualReport.pdf
Bloomberg, viewed May 20 2018,
https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapid=224857084
Dixon, A.D. and Monk, A.H., 2009. The power of finance: accounting harmonization's effect
on pension provision. Journal of Economic Geography, 9(5), pp.619-639.
FT, viewed May 20 2018, https://markets.ft.com/data/equities/tearsheet/summary?
s=QAN:ASX
Gapenski, L.C., 2008. Healthcare finance: an introduction to accounting and financial
management. Health Administration Press.
Gibson, C.H., 2011. Financial reporting and analysis. South-Western Cengage Learning.
Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Hillier, D., Grinblatt, M. and Titman, S., 2011. Financial markets and corporate strategy.
McGraw Hill.
Hogarth, R.M. and Makridakis, S., 2011. Forecasting and planning: An
evaluation. Management science, 27(2), pp.115-138.
Jiashu, G., 2009. Study on Fair Value Accounting——on the essential characteristics of
financial accounting [J]. Accounting Research, 5, p.003.
Morningstar, viewed May 20 2018,
http://www.morningstar.com/stocks/XASX/QAN/quote.html
Reuters, viewed May 20 2018,
https://www.reuters.com/finance/stocks/company-profile/QAN.AX
The wall street journal, viewed May 20 2018,
https://quotes.wsj.com/AU/XASX/QAN/research-ratings