Billabong International Ltd
BILLABONG INTERNATIONAL LTD
Completed as part of the requirements for ‘Corporate Finance’, 25765
Contents
1.0 Introduction 1
2.0 Executive Summary 1
3.0 Capital Structure 2
3.1 Types of Funding Utilised by Billabong 3
3.2 Recent trend in the level of leverage 3
3.3 Capital expenditure and financing: 5
3.4 Capital Structure of Similar Firms 6
3.5 Company Characteristics and Leverage policy 7
3.5.1 Taxes 8
3.5.2 Trade off Model 8
3.5.3 Pecking Order of Financing Choices 9
3.5.4 Signalling Theory 9
3.6 Optimal Capital Structure 10
4.0 Dividend Policy 10
4.1 Billabong dividend history 11
4.1.1 Lintner’s Stylised Facts & Clientele Effects 12
4.2 Similar firms Dividend Analysis 13
4.3 Relative Comparison of Billabong Dividend Policy to similar firms 14
4.4 Relationship Between the Company’s Characteristics and Dividend Policy 15
4.5 Alternatives to Dividend Payments 16
4.6 Optimal Dividend Policy 16
5.0 Valuation 18
5.1 Weighted Average Cost of Capital (WACC) 20
5.2 Estimation of Share Price 23
5.3 Sensitivity Analysis 25
5.4 Comparison between the calculated and actual share price 28
5.5 Investment Decision 28
6.0 References 29
7.0 Appendix 30
1.0 Introduction
Company Overview
Billabong was formed in Queensland (1973) by a current non executive director Gordon Merchant. After consolidating its operations in Australia in the 1970s, Billabong expanded its distribution overseas to include Japan, the USA and Europe during the 1980s. In 1998, a consortium acquired a 49% interest in Billabong, allowing the firm to convert its licensed US operations to a directly controlled operation. Direct control was similarly established in NZ, Canada and Europe. BBG listed on the Australian Securities Exchange (ASX) in August 2000. The stock code is BBG.ASX and formal name is Billabong International Limited. BBG corporate website is www.billabongcorporate.com, BBG market capitalisation is AUD $2,955 million and its equivalent shares is 252
Completed as part of the requirements for ‘Corporate Finance’, 25765
Contents
1.0 Introduction 1
2.0 Executive Summary 1
3.0 Capital Structure 2
3.1 Types of Funding Utilised by Billabong 3
3.2 Recent trend in the level of leverage 3
3.3 Capital expenditure and financing: 5
3.4 Capital Structure of Similar Firms 6
3.5 Company Characteristics and Leverage policy 7
3.5.1 Taxes 8
3.5.2 Trade off Model 8
3.5.3 Pecking Order of Financing Choices 9
3.5.4 Signalling Theory 9
3.6 Optimal Capital Structure 10
4.0 Dividend Policy 10
4.1 Billabong dividend history 11
4.1.1 Lintner’s Stylised Facts & Clientele Effects 12
4.2 Similar firms Dividend Analysis 13
4.3 Relative Comparison of Billabong Dividend Policy to similar firms 14
4.4 Relationship Between the Company’s Characteristics and Dividend Policy 15
4.5 Alternatives to Dividend Payments 16
4.6 Optimal Dividend Policy 16
5.0 Valuation 18
5.1 Weighted Average Cost of Capital (WACC) 20
5.2 Estimation of Share Price 23
5.3 Sensitivity Analysis 25
5.4 Comparison between the calculated and actual share price 28
5.5 Investment Decision 28
6.0 References 29
7.0 Appendix 30
1.0 Introduction
Company Overview
Billabong was formed in Queensland (1973) by a current non executive director Gordon Merchant. After consolidating its operations in Australia in the 1970s, Billabong expanded its distribution overseas to include Japan, the USA and Europe during the 1980s. In 1998, a consortium acquired a 49% interest in Billabong, allowing the firm to convert its licensed US operations to a directly controlled operation. Direct control was similarly established in NZ, Canada and Europe. BBG listed on the Australian Securities Exchange (ASX) in August 2000. The stock code is BBG.ASX and formal name is Billabong International Limited. BBG corporate website is www.billabongcorporate.com, BBG market capitalisation is AUD $2,955 million and its equivalent shares is 252
References: • Billabong International, Dividend information, Retrieved on 7th Jan 10 http://www.billabongbiz.com/investors-dividend-info.php • Business Finance 2010, Retrieved on Jan 8th, 2010, http://www.businessfinance.com/external-financing.htm • Investopedia, 2010, Retrieved on Jan 9 th, 2010, http://www.investopedia.com/terms/d/debtequityratio.asp • InvestSMART Financial Services Pty Ltd, Retrieved on Jan 12th, 2010, http://www.investsmart.com.au/shares/asx/ • Reilly, F., Brown, K. 2005, Investment Analysis and Portfolio Management, Thomson South Western • Reserve Bank of Australia, http://www.rba.gov.au, viewed 9 January 2010 • Ross, A.S., Westerfield, R.W., Jaffe, J.F., & Jordan, B.D (2008), “Modern Financial Management”, 8th ed. New York , USA: MacGraw Hill/Irwin. • Ross, S., Westerfield, R. & Jaffe, J. 2010, Corporate Finance, 9th ed. New York , USA: MacGraw Hill/Irwin • Yahoo Finance, http://au.finance.yahoo.com/q/apr?s=BBG.AX Re = Rf + ((RM-Rf) Terminal Value equals Unlevered Cash Flow (UCF 2014) times (1 + Growth Rate) divided by WACC minus Growth Rate