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Report on Analysis of Financial Management

   

Added on  2020-05-04

13 Pages2503 Words174 Views
Running Head: FINANCIAL MANAGEMENT ANALYSIS 1Financial Management Analysis [Name of Writer][Name of Institution]

FINANCIAL MANAGEMENT ANALYSIS2Financial Management Analysis Executive SummaryThis report is analysis of financial management and strength of Alliance Aviation Services whichis listed on Australian Stock Exchange under the code of AQZ. Alliance Aviation Servicesoperate in airline industry and hold major portion of charter market. This report is divided intofour major sections which are Debt Valuation, Share Valuation, Cost of Capital and MarketAnalysis. Debt valuation section will include short and long term debt analysis and cost ofcapital. Share valuation will contain analysis of stock of Alliance Aviation through comparativetechnique and dividend discount model. Cost of capital section will include discussion ofimportant and calculation of WACC. Market analysis section will include the opinion offinancial analysts about performance of Alliance Aviation Services. Debt Valuation.I.1:Alliance Aviation Services use debt finances for expansion and growth purposes. Debt used by Alliance Aviation Services can be divided into short and long term debt. Short term debt of Alliance Aviation Services includes bank loans and long term debt is also acquired from banks. The primary reason of using bank loan is secure and low cost of financing as compared tothe acquiring finance from public through bonds. Debt Valuation.I.2:Airline industry is pursuing very aggressive growth strategy that increase ratio of debt to total assets. Industry leaders in airline industry borrow as much as 80% of total assets while average debt to equity ratio in airline industry is less than 50%. Qantas and Virgin Airlines are

FINANCIAL MANAGEMENT ANALYSIS3largest airlines in Australia and their debt to equity ratio is significantly higher than industry benchmark. Debt structure of Alliance Aviation Services is very consistent with industry benchmark. Debt ration of Alliance Aviation Services was 53% in 2013, 54% in 2014, 71% in 2015 and 54% in 2016. Debt Valuation.I.3: Airline industry in Australia is very competitive and growing that gives birth to higher debt financing. Although debt finances increase risk of bankruptcy but airline industry is highly leveraged. Airline industry significantly influences Alliance Aviation Services to acquire more debt to financing expansion projects. Higher earnings in this industry forces banks to lend moneyto airline industry and banks perceive lending as safe lending. Technically speaking, short term debt is raised to support day to day operations and acquisition of short term assets while long term borrowing is associated with long life projects. Therefore, airline industry influence Alliance Aviation services to borrow long term basis. Debt Valuation.I.4:Cost of debt is cost of borrowing and mainly it is interest rate that is payable each year. Interest rate on borrowing mainly depends on maturity of borrowing and macroeconomic factors in the economy. Alliance Aviation Services borrowings in 2016 are given in table below with interest paid in that is considered as cost of borrowing (Morningstar, 2016). The cost of debt of Alliance Aviation Services is 6.231%. Short Term Borrowing11,500,000Long Term Borrowing68,750,000Interest Expense5000000Cost of Debt6.231%

FINANCIAL MANAGEMENT ANALYSIS4Share Valuation.II.1:Cost of equity is cost for raising finance through equity and Capital Asset Pricing Model is used to calculate cost of equity. CAPM approach of calculating cost of equity (Ce or rs) is nearly accurate as compared to other models. In order to calculate Cost of Equity through CAPM, beta (β), Market return (rm) and Risk Free Rate (rf) are required. Beta Coefficient of airline industry is risk of investing in airline industry (Morrell, 2013). Beta (β) of Alliance Aviation Services is risk of investing in its stock which is 0.27 (Reuters, 2017). Yield on 10 year government bonds is usually treated as risk free rate which is 2.78% (Bloomberg, 2017). Market return is same as annualized return on S&P 300 index which is 8.34% (S&P Dow Jones, 2017). Cost of equity of Alliance Aviation Services is calculated below. Re = rf +β (rm - rf) =2.78% + 0.27 (8.34% - 2.78%)=2.78% + 0.27 (5.56%)=2.78% + 1.50% Re=4.28%Share Valuation.II.2:

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