British Airways Case Study Example | Topics and Well Written Essays - 2500 words

British Airways - Case Study Example Business risks: It is seen that the higher the risks of the business, the lower should be the dependence on debt, or outside funds. In the context of British Airways, it is seen that gearing percentage has come down from 67.7% in 2004-05 to just 28.8% in 2007-08. In other words, it indicates that the dependence for debt capital has come down by nearly 58% in just 3 years, averaging nearly 20% drop each year. (Financial highlights). One of the main reasons for the drop in gearing to 28.8% in 2007-08 could be the better operating performance and the build-up of retained profits and reserves during the years, all this despite high rises in fuel, employee and other operating costs. It is also seen that "Despite increases in the UK and US floating rates, our interest payable on bank and other loans reduced, mainly as a result of lower debt levels." (Chief financial officer's report continued p.4). Further, it is seen that due to growth in retained profits, the debt equity ratio was only 28.8% during 2008, which is lower than last year. Again, considering operating leases, debt/total capital ratio was 38.4%. (Chief financial officer's report continued p.5). Market value of a firm is determined by its earning ... They areissuing shares or borrowing from banks. Debt equity ratio: It is the ratio of debt to the equity. A company's financial leverage can be calculated by dividingits total liabilitiesbystockholders' equity. It indicates the proportion of equity and debt the company is using to finance its assets.It is also known as the Personal Debt/Equity Ratio, thiscan be applied to both personal financial statements and companies' financial statements. A high debt/equity ratio shows that the company has been aggressive in financing its growth or equity with debt. This can result in high earnings as a result of the additional expense. If a company is using lot ofdebtfinance in its operations (high debt to equity), it can generate more earningsthan it would have without thisoutside financing.If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders will get higher amount of earnings as dividend. However, the cost of this debt financing may outweigh the return thatthe companygenerates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing. The main advantage of debt financing is that it is a cheaper source of finance. It means that required rate of return on equity will always be higher than the interest rate on debt, there is a "hidden" cost involved in the cost of equity. And the cost of equity rises when we utilize more debt financing. This is one reason for using the average cost of capital in valuing a project or company which is more appropriat e, even if we intend to borrow all the money to finance it. While we may use cheap debt to finance a project, the