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where:
U
= unlevered beta (measure of business risk)
L
= levered beta (standard beta coefficient provided in the above table)
D/E = the companys debt-to-equity ratio
Business risk of BHP Billiton
) / 1 ( E D
L
U
Business risk = 1.80 / (1 + 0.4662)
Business risk = 1.80 / (1 + 0.4662)
Business risk = 1.227
Business risk of Rio Tinto
) / 1 ( E D
L
U
Business risk = 1.59 / (1 + 0.6134)
Business risk = 1.59 / (1.6134)
Business risk = 0.98
Business risk of CSL
) / 1 ( E D
L
U
Business risk = 1.22 / (1 + 0.4660)
Business risk = 1.22 / (1.4662)
Business risk = 1.832
Business risk of Woolworths
) / 1 ( E D
L
U
Business risk = 0.70 / (1 + 0.6944)
Business risk = 0.70 / (1.6944)
Business risk = 0.413
Business risk of Telstra Corp
) / 1 ( E D
L
U
Business risk = 0.61 / (1 + 0.9330)
Business risk = 0.61 / (1.9330)
Business risk = 0.315
Business risk of Qantas Airways
) / 1 ( E D
L
U
Business risk = 0.76 / (1 + 1.024)
Business risk = 0.76 / (2.024)
Business risk = 0.37
Business risk of BHP Billiton
) / 1 ( E D
L
U
Business risk = 0.74 / (1 + 1.145)
Business risk = 1.80 / (2.145)
Business risk = 0.839
The calculated business profile of the companies is as under.
Company Business risk profile
BHP Billiton 1.22
Rio Tinto 0.98
CSL 1.83
Woolworths 0.41
Telstra Corp. 0.31
Qantas Airways 0.37
Coca-Cola Amatil 0.84
The share returns of the company appear to be in line with the business risk calculated above.
The business return of CSL is highest and it has provided the highest return. The business risk of
the Telstra is lowest and it has provided the lowest share return. Thus it can be said that the share
returns are correlated to the business risk.
Answer 4
BHP Billiton and Rio Tinto are in materials industry and not in the transport industry as
suggested by the question. There are four figures provided in the table for these two companies.
The first figure is debt to equity ratio. Rio Tinto is having higher debt to equity ratio in
comparison to BHP. This indicates that the financial leverage of Rio Tinto is higher than BHP.
The second ratio is return on equity. The BHP has provided higher return on equity in
comparison of Rio Tinto. The beta of BHP is higher than Rio, which indicates that the BHP is
riskier than Rio. The fourth ratio is share return. The in past years BHP has provided higher
return than Rio.
Appendix
Company information averaged over the 5-year period from 2003 to 2007
Company
Industry sector
Debt to
equity*
Return on
equity*
Beta
coefficient
Share
return*^
BHP Billiton Materials 0.4662 0.3179 1.80 3.08
Rio Tinto Materials 0.6134 0.2689 1.59 2.60
CSL Biotechnology 0.4660 0.1282 1.22 6.364
Woolworths Food and staples 0.6944 0.3067 0.70 1.157
Telstra Corp. Telecommunications 0.9330 0.2746 0.61 0.0431
Qantas Airways Transportation 1.024 0.1067 0.76 0.5237
Coca-Cola Amatil Food, beverages 1.145 0.1728 0.74 0.65
Bibliography
Andrew, J 2007, Financial Management; Principles and Practice, Freeload Press, USA.
Brigham, EF & Ehhardt, MC 2010, Financial Management Theory and Practice, Cengage
Learning, NY.
CCA 2012, Coca Cola Amatil Limited, viewed 11 August 2012,
<http://ccamatil.com/AboutCCA/Pages/ContactUs.aspx>.
Qantas 2011, 'Annual Report', Annual Report, Accounts, Qantas, Qantas, Australia.
Woolsworth 2011, 'Annual Report 2011', Annual Report, Financial Reorting, Woolsworth, 2011,
Woolsworth, Australia.