International Airline Group (IAG) is a British-Spanish based multinational airline holding company with its headquartering located in London, United Kingdom (Menter, 2009). In terms of size and financial competitiveness, IAG is known as the seventh largest company of the world. The shares of the company are actively trading in the London Stock Exchange (LSE) and it is a major constitute of Financial Times Stock Exchange (FTSE-100) Index. The company earned net revenue amounting to €18,675 million in the year 2013 with net profit amounting to €147 million in the same year. The main perspective of this assignment is to analyze the position of the selected company. There are number of questions that needed to be answered in this particular analysis. All of the answers would be covered in the analytical review section of the report.
- Investment is one of the largest fields that come under the ambit of financial management and there are number of concepts that come under the umbrella of financial based management in particular. In the field of investment, the name of risk is quite important which could be analyzed with different provisions and among them; the name of Beta is one of them. Theoretically, Beta is a measure of volatility or systematic based risk of a security or a portfolio in comparison to the market as a whole in which the shares of the company are actively trading. It is one of the most important measures of risk management. The computation of beta varies from industry to industry and for an Airline industry, it is totally different and important. Airline companies also have some sort of beta but most of the times, the beta associated with the airline companies are lower. According to the information provided in the assignment, the beta of IAG is 0.85 against the market, in which the level of Beta is 1. This particular measure is showing that the stocks of IAG are less volatile and risky as compared to the FTSE market. This particular aspect could be extremely important for an investor from different viewpoints and it will certainly attract lots of investors towards this particular investment. The sensitivity or fluctuation of the stocks of IAG is less risky and volatile as compared to the market; it is trading, like the FTSE. Therefore, it could be said that the stocks of the company are attractive.
- There are number of theories and models are there that come under the ambit of financial management, as this field is totally based on practicality and other important stances and measures. Among number of models, that could be used for the same purpose, the name of Capital Asset Pricing Model (CAPM) is one of them, which used to assess the discount rate of a company, which then be used in different measures, including project and investment evaluation as well. The capital asset pricing model that is expected to yield a security or a portfolio is equal to the interest rate on a risk-free security plus a risk premium. If the expected rate of return does not meet or exceed the required return, then the investment should not be held, It is one of the most important measures used to assess the discount rate in particular, and it is required to compute the same in this particular analysis. The information associated with this particular part of the analysis are mentioned below. The discounting factor of IAG is 8.65%, and this particular rate would be used in the upcoming analysis of the questions as some of the questions require using the same amount.
- Organizations are made to earn economic profit and go effective in the market. This particular aspect is possible, if the company is able to mitigate and manage their operational cost, otherwise, it would not be effective for them. Cost is a rival of profitability and organizations have to decrease the same in order to become economically prosper and active. In this particular part, it is required to choose, one option from the three options which affect the financial position of the chosen organization (IAG). Though all of the options mentioned in the case study are effective and vital, but the 3rd option is the most effective one from the standpoint of IAG. This particular option would save the cost of the company by GBP 5 million and annual growth of around 2% in particular. Cost is an effective measure for an organization, which would be effective for the company from a long span of time. If IAG would use the same option, then they will certainly become able to save much of their cost as much as 5 million GBP, that could be used somewhere else for the investment purpose and it would certainly be effective for the company for their future needs and use. Therefore, in order to become competitive and effective, the company should choose this particular option as it will be effective for their future.
- There are three different investment appraisal tools that could be used in this particular analysis and the names of the project evaluation based tools are Net Present Value (NPV), Internal Rate of Return (IRR) and Payback analysis.
Net Present Value
Net Present Value (NPV) is one of the most important measures of project based evaluation used to assess the present value of steam of cash flow arises in future. It is the most important method that could be used for the same purpose (Rodgers, 2010). The biggest advantage of NPV is that it takes all the cash inflow into consideration, while the biggest advantage lies in its complexity. The NPV of all of the three projects are mentioned below
Internal rate of Return Analysis
Internal rate of return (IRR) is one of the most important tools used specifically for the purpose of project based evaluation. It is a method in which, the rate at which the net present value of the company would become Zero, would have been analyzed. Most of the companies throughout the world are using the same analytical tool to assess the feasibility of a certain project in particular (Rodgers, 2010). The biggest advantage of IRR is that it is quite easy to use and apply, however it doesn’t apprise the management regarding the monetary effect of a project on the productivity of an organization, which is its biggest disadvantage.
Payback analysis is an important measure used to assess the analytical review of an organization in terms of paying back the money at a standard time. The biggest advantage of this particular analysis is that the analysis would cover that in how much the company could finance its financials but the biggest disadvantage is that this tool could not be used for analyzing the monetary effects,
Recommendation about Project
- It is required to make a portfolio in this particular analysis. Correlation coefficient is used to assess the level of relationship found between two different variables. Like if security A and Security B has a positive correlation, and then it means that if security would increase, then in consequences security B would increase. Diversification is the most important strategy used by the analyst to diversify the risk, in which they would allocate certain amount of money on different stocks rather than emphasizing on a single one. Markowitz portfolio analyzes the same thing. The portfolio is mentioned below 50% allocation in each stock, would yield the maximum amount of return for the investor, hence it should be selected
The main perspective of this assignment is to analyze the position of the selected company IAG. All of the questions have been defined and answered in a prescribed and effective manner which is good sign
Marrelli, M. and Pignataro, G. 2001. Financial Management information. Boston: Kluwer Academic Publishers.
Menter, J. M. 2009. Financial Management and decision making process (MDMP) guide. Bloomington, IN: AuthorHouse
Rodgers, W. 2010. Financial management. New York: Nova Science Publishers