British Airways Management of Company Finance

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Ahoussou kouadio
Jean Christian
Student number: 2522706
Management of company finance

Analysis of the financial structure of

British Airways

Name of professor: Tony Kilmister
British airways is one of the most valuable company in the world that is why I choose her.

With the aim to evaluate the proportion of debt in British airways, we will study his financial gearing: income gearing and capital gearing. In order to calculate the company’s capital gearing according to the book value, we need especially the value of the long-term and short-term borrowings and the value of shareholders’ funds.

But, there is several different formulas which arises some issues: the fact that the book value is lower than the market value (the first formula) and provisions can be considered either as liabilities or assets (the second formula), depending on firm.

Then I will calculate the Weighted Average Cost of Capital.

In 2004, the way of doing the balance sheets changed that’s why there are some differences between two reports.

Part ------------------------------------------------------------------------------------------1 Measure of the gearing and income ratio

Part ------------------------------------------------------------------------------------------2 Measure of the debt and equity based upon the market value

Part ------------------------------------------------------------------------------------------3 Estimation of the WACC.

I) Measure of gearing and income ratios

We will take those expressions:
1. Debt to equity ratio=Long term Liabilities/Shareholders’funds 2. Debt to debt plus equity ratio=LTL/(LTL+ Shareholders’funds) 3. Long Term Borrowings/Shareholders’ funds

a) Gearing Ratio

Capital Gearing = LTL / Shareholders' Funds

|  |2006 |2005 |2004 | |Capital Gearing |259.75% |437.6% |590.7% |

To set an upper ratio; we can incorporate the LTL at the shareholder value.

Capital Gearing = LTL / (LTL + Shareholders' Funds)

|  |2006 |2005 |2004 | |Capital Gearing |72.2% |81.4% |85.5% |

The provision are incorporates in those 2 formulas.
We can consider that the provision can be take as liabilities (highly certain) or as equity (ultra-prudence).

Capital Gearing = Long Term Borrowing (LTL - provisions) / Shareholders' Funds

|  |2006 |2005 |2004 | |Capital Gearing |193.5% |341.4 % |475,40% |

Net Debt:
Net debt = (Finance debt – cash and liquid resources)/ Equity

For British Airways,

Net debt = (loans, finance leases and hire purchase arrangements + Convertible Capital Bonds, net of other current interest bearing deposits and cash and cash equivalents – overdrafts)

(British Airways' definition from the annual report 2006)

|£ million |2006 |2005 |2004 | |Capital Gearing |1641 |2922 |4158 |

The figures of long term liabilities are higher than the net debt that explain the fact that the ratios are different;

The company health seem less vital, because of the cash and those equivalent, and deposits.

Overdrafts are not representing a big amount, we include them.

Since 2004 a policy of high liquidity is developed in order to reduce the debt, they tried to repay the debt earlier. The debt are reduced by the conversion of the 112 millions of convertible bonds.

"The £320 million 9 3/4 per cent Convertible Capital Bonds 2005 issued in 1989 matured on June 15, 2005. On that date 47,979,486 ordinary shares were issued in exchange for 112,317,274 Convertible Capital Bonds on the basis of one...
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