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

British Airways - Case Study ExampleBusiness risks It is seen that the higher the risks of the demarcation, 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 bundle 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). superstar 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 carry profits and reserves during the years, all this despite high rises in fuel, employee and other operating costs.It is also seen that scorn increases in the UK and US floating rates, our interest payable on bank and other loans reduced, mainly as a give of lower debt levels. (Chief monetary officers report continued p.4). Further, it is seen that due to growth in well-kept profits, the debt paleness 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 officers report continued p.5).Market value of a firm is determined by its earning ... They areissuing shares or adoption from banks. Debt equity ratioIt is the ratio of debt to the equity. A companys financial leverage can be calculated by dividingits total liabilitiesbystockholders equity. It indicates the proportion of equity and debt the company is apply to finance its assets.It is also known as the person-to-person 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 pay its growth or equity with debt. This can result in high net income as a result of the additional expense. If a company is using lot ofdebtfinance in its operations (high debt to equity), it can gen erate 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 continuously be higher than the interest rate on debt, there is a hidden cost multiform in the cost of equity. And the cost of equity rises when we utilize more debt financing. This is one reason for using the just cost of capital in valuing a project or company which is more appropriate, even if we believe to borrow all the money to finance it. While we may use cheap debt to finance a project, the