Analysis of Ferrovial Conquering BAA Harvard Case Solution & Analysis

Analysis of Ferrovial Conquering BAA Case Solution

Is the structure of BAA’s debt reasonable, i.e., the mix of loans and corporate bonds, the mix of fixed vs. floating securities?

The cost of debt is similarly the expected return required by the providers of debt to the regulated businesses.
It could be said that regardless of its negative side-effects, the aggressive use of financial leverage pays off in more company’s values. In order to analyze the BAA’s debt structure, the following results are revealed,
2005 2006 change change %
total debt 5956 4100 1856 45%
total equity 5992 5632 360 6%
debt to equity ratio 0.994 0.728 0.2660 37%

The Problems with Debt

These aggregate findings seem to be in contrast to the company for raising its level of debt as much as possible. According to Modigliani and Miller, the existence of a tax advantage for debt financing does not necessarily mean that companies should at all times seek to use the maximum possible amount of debt in their capital structures.
Flexibility is important as a defense against financial distress and its attendant costs, which include, but are not limited to, the costs of potential bankruptcy. However, in most cases, bankruptcy costs are rather small;for example, out-of-pocket bankruptcy costs for railroads amounted to only 3% to 5% of their past market value. The factor that is more significant is the likelihood that aggressive use of debt will make it difficult to raise necessary funds quickly on acceptable terms. As a result, liquidity constraints will lead to altered operating and product-market strategies that, in turn, may reduce the company’s market value.

Analysis

In analyzing the BAA’s debt structure, it can be seen that the management of BAA has created an alarming situation for the shareholders by taking high debt with respect to equity in the 2006 as compared to 2005.
The debt structure of 2006 is absolutely not reasonable for BAA, which is a highly profitable company in the eyes of many investors, and as a result Ferrovial conquered it as there are no potential shareholders in the company.

What is BAA’s optimal capital structure? In particular, given the characteristics of the firm’s assets, which financial structure would you recommend to Margaret Ewing?

ESTIMATING THE OPTIMAL CAPITAL STRUCTURE

There are several ways in to estimate a company’s optimal capital structure. One way is to assume that other companies in the industry are operating at or near their optimal capital structures and in order to obtain the published industry statistics from sources such as Ibbotson Associates’ Cost of Capital. While this could be use ful in some cases, these industry statistics are conglomerates of data and these often include companies that are not sufficiently similar to the subject company. Also, the time frame in which the data was collected may be unclear or may not be in reasonable proximity to the date of valuation.(Jules H. van Binsbergen, 2011).............

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