Financial Analysis of Qantas: WACC, Dividend Policy, and Share Trends

This report provides a financial analysis of Qantas, examining its Weighted Average Cost of Capital (WACC), dividend policy, and share performance. The WACC calculation reveals the company's cost of capital, indicating that Qantas generates greater returns on investment from capital and debt compared to the cost of raising capital. The report analyzes Qantas's profit-based dividend policy and suggests the adoption of the Walter model for an optimal dividend strategy. Furthermore, the report analyzes Qantas's share performance over the last decade, identifying factors influencing share price fluctuations, such as oil prices. The analysis highlights the company's strong market position and positive share price gains, particularly for investors who purchased shares in 2014. Overall, the report provides a comprehensive overview of Qantas's financial health and strategic decisions.

FINANCE

Contents
Answer-1...............................................................................................................................................2
Answer-2...............................................................................................................................................3
Answer-3...............................................................................................................................................4
References.............................................................................................................................................7

Answer-1
WACC
Market capitalisation- $5908.696 million
Market value of debt is the summation of current portion of long-term debt and capital lease
and the long-term debts. Until 2018, the company has current portion of long-term debt was
nearly $315.191 million and long term debt and capital lease obligation of $3294.22 million.
Therefore, the total valuation of debt is $3609.413 million (Qantas, 2018).
Weight of equity= market capitalisation/ (value of debt+ market capitalisation)
=5908.4/ (5908.4+3609.4) = .62
Weight of debt= 3609.4/ (5908.6+3609.4) = .37
Interest expense= $172.413 million
Cost of debt= 172.413/3609.41= 4.77%
Cost of equity= risk free rate+ b*market premium
= 1.9600%+ 0.29*6 percent
= 3.7 percent
WACC (Weighted cost of capital) = value of equity/ (value of equity + book value of debt)*
cost of equity + book value of debt/ (market value of equity + book value of debt)*cost of
debt* (1-tax rate)
= .62*3.7 percent + 0.3792* 4.776 percent* (1-28.6)
= 3.59 percent
It is quite visible that if the organisation`s profitability is more than the organisation should
employ more debt. On the other hand, if the organisation’s profitability is less than it should

engage more equity (Qantas, 2018). In case of Qantas, it is seen from the above calculation
that the company generates greater returns on the investment made from capital and debt as
compared what it costs to generate the capital raised for the investment. The company earns
excess returns. Therefore, the company expects to generate extreme positive greater return on
new investment in future where the value also increases as the growth increases (Qantas,
2018). It is important to note that the valuation of stock is proportional to the WACC. If the
WACC increases then the valuation decreases. From the determined WACC, it is seen that
financial leverage increase will lead to increase in the risk of the equity shareholders, which
will lessen the profitability as the taxes will be imposed on more profits. Whereas, the
recommended capital structure policy, the company should employ more debt to increase the
profitability (Cummins, and Weiss, 2016).
Answer-2
Dividend policy
Qantas has been following profit based dividend policy. In this policy, the organisation offers
dividends to its equity shareholders on the basis of profits earned by it. As it is quite visible
that the profitability has been improving so as the dividends at the same rate. Further, the
company has been offering high dividends so that they can attract more investors. In this
regards, Return on equity is nearly 24 percent (Odimayo, 2019). Return on capital employed
is nearly 17 percent. Apart from this, it has been observed that the payout ratio for the shares
is nearly 42 percent. This form of dividend policy is quite stable as the percentage of
dividend is fixed. For instance- the company set a payout ratio at the rate of 12 percent,
which means it is the percentage of profits that will be paid regardless of amount being
earned by the organisation where Qantas does not follow this policy as its tries to offer
maximum when its profitability has been increasing (Floyd, Li, and Skinner, 2015). The
organisation should opt for dividend theories, which are significant to the perfect dividend

policy. Most of the dividend models include M-M theory, Walter Model, and Gordon model.
The recent dividend policy says that the cash dividends are more attractive in case of small
companies. M-M model claimed that investors do not choose between future gains or the fix
dividend paid. This theory could not get success in the eyes of the shareholders (DeMarzo,
and Sannikov, 2016).
As a recommendation, Qantas should opt for Walter model, which is a relevant theory for the
dividends. A common understanding as per this theory reveals that there is strong connection
between share market price and number of dividends. If the organisation does not pay a
certain percentage of revenue as a return on investment (DeAngelo, and Stulz, 2015). As per
the Walter model, the WACC in this model remains same where the company retains the
money and invest in new investment projects (Dhankar, 2019). Return on investment and cost
of capital remains same. In this model, new investment decision has been undertaken, as the
risk of the business does not change and it does not satisfy the investors in short term. Qantas
should focus on such dividend policy where an appropriate amount is distributed among the
shareholders and remained will obtain in the retain earnings (Dhankar, 2019).
Answer-3
(Source: ShareDividends.com, 2019)

Share performance of Qantas over the last 10 years
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96 101 106 111 116
-40%
-30%
-20%
-10%
0%
10%
20%
30%
share price over last 10 years
(Source: Yahoo Finance, 2018)
From the above graph, it can be seen that may of the times, Qantas suffered from such
consequences that lead to negative price of the share. There are many possible reasons that
lead to negative reflection in the share price. With a lean business structure and with tight
cost of capital, the company has proved that the company attains great strength to market for
the last eight years. The main factor affecting the share price of the Qantas is the oil price,
which is the biggest fixed cost such as jet fuel (Bartholomeusz, 2018). This would be
hazardous and reflect that the price of the crude oil has increased to 46 percent (DeAngelo,
and Stulz, 2015). Moreover, Qantas is a well-known company but it is believed that it one of
the most purchased share at significant discount to the intrinsic value that is due to the
exposure to the fluctuations in the prices of the crude oil market. From the annual reports, it
is seen that the share price has risen over the 7 percent for the last month and it is trading at
the price of $5.72 during the time of $5.34 on March, 2019 (Dhankar, 2019). The investors
has revealed that the person who bought shares in 2014 for $1.15 (ShareDividends.com,

2019). the prices have become 400% gain for today`s price. The return on capital rate will be
nearly 24 percent that is an impressive. Qantas have become profitable, as this transition
remains an inflection, which justifies strong price gain. The prices of the shares has increased
to 36 percent in the last three years. In the same time, EPS is nearly 1.7 percent every year.
The price of the EPS is nearly 1.7 percent every year (ShareDividends.com, 2019).

References
Odimayo, K., (2019) Dividend policy: meaning, types, importance. Available on:
https://www.legit.ng/1222204-dividend-policy-meaning-types-importance.html [Accessed
on: 16/05/19]
ShareDividends.com, (2019) Share dividends Australian share dividend information resource.
Available on: http://www.sharedividends.com.au/qan+dividend+history [Accessed on:
16/05/19]
Bartholomeusz, S., (2018) Qantas dividend move shows just how high it's flying. Available
on: https://www.smh.com.au/business/companies/qantas-dividend-move-shows-just-how-
high-it-s-flying-20180823-p4zz8m.html?js-chunk-not-found-refresh=true [Accessed on:
16/05/19]
Qantas, (2018) Annual report, 2018. Available on:
https://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpgyw/
file/annual-reports/2018-Annual-Report-ASX.pdf [Accessed on: 16/05/19]
Floyd, E., Li, N. and Skinner, D.J., 2015. Payout policy through the financial crisis: The
growth of repurchases and the resilience of dividends. Journal of Financial
Economics, 118(2), pp.299-316.
DeMarzo, P.M. and Sannikov, Y., 2016. Learning, termination, and payout policy in dynamic
incentive contracts. The Review of Economic Studies, 84(1), pp.182-236.
DeAngelo, H. and Stulz, R.M., 2015. Liquid-claim production, risk management, and bank
capital structure: Why high leverage is optimal for banks. Journal of Financial
Economics, 116(2), pp.219-236.

Cummins, J.D. and Weiss, M.A., 2016. Equity capital, internal capital markets, and optimal
capital structure in the US property-casualty insurance industry. Annual Review of Financial
Economics, 8, pp.121-153.
Dhankar, R.S., 2019. Optimal Capital Structure and Investment Decisions. In Capital
Markets and Investment Decision Making (pp. 197-210). Springer, New Delhi.