finance case studies

Question 1

company taxation

Answer 1

Apple
● Apple uses transfer pricing to shift its taxable profits from Australia to Ireland. As a result, Apple was taxed less than 2% of its revenue in Australia in 2018
● The ATO audited Apple and added them to a ‘name and shame register’, but found that they hadn’t actually broken any tax laws
● In 2021, Australia and more than 130 other countries agreed to introduce a minimum tax rate of 15% for large businesses regardless of profit shifting (so if they shift their profit to a country with a 5% tax rate, Australia will still collect the remaining 10%)

Question 2

asic

Answer 2

Commonwealth Bank
* The Royal Commission in 2018 found that banks guilty of serious and systemic wrongdoing, and that ASIC was too weak in enforcing regulations on banks such as Commonwealth Bank, who had:
- paid commission to staff for forging paperwork to provide loans to people who would be unable to repay them
- paid commission to ‘independent’ financial advisers who recommended their mortgages
- misled customers about their life insurance conditions

As a result;
- Some families had to forcibly sell their properties to banks

• Inappropriate and unlawful advice was given to some customers
• The Government increased ASIC’s powers to issue 15 year prison sentences and up to $525 million penalties for businesses that breach regulations

Question 3

note to financial statement

Answer 3

Qantas’ financial statements are 5 pages long
… With 55 pages of fine-print explaining them!

Question 4

cash flow management

Answer 4

Cash Flow Management

● Woolworths;
-Since 2016, Woolworths requires their suppliers such as Sanitarium, Rivalea Australia, Hanes, and Henkel to offer 60 day periods on their accounts payable, triple the average period that Coles requests
- This has also allowed woolworths to have a higher cash flow then competitors coles who only have a 10-30 day payback period to their suppliers thus being able to meet unexpected costs and further gain a competitive advantage

● GIO;
-GIO sells insurance, including for businesses to insure against damage to property and vehicles
-GIO typically offers discounts of 6-8% for customers who pay their premium up-front annually rather than distributing payments monthly

Question 5

working capital management

Answer 5

Working Capital Management - Qantas
● In recent years, Qantas have needed to free up cash to reduce its need for debt
● One of the only airlines to own their own terminals
● In 2019, Qantas did sale and lease-back of their Melbourne terminal for $385 million
- As a result, their liquidity increased by 28% which further enhanced their financial performance during the COVID-19 pandemic as their revenue suffered a $16 billion decrease in that year due to international border closures
- Ultimately, qantas’ large cash injection improved their working capital which decreased their need for external finances especially during the global recession during the pandemic

Question 6

profitability management

Answer 6

Profitability Management - Qantas

Due to Covid-19, Qantas made 6000 staff redundant and stood down most remaining staff on leave without pay to reduce fixed costs
It also outsourced ground staff (e.g. baggage handlers) and is trialling reduced cabin crews on domestic flights to minimise expenses

Question 7

exchange rates and hedging

Answer 7

Qantas - Exchange Rates and Hedging

• Qantas receives around 40% of its revenue in foreign currency
• They borrow in the foreign currencies that they receive from foreign sales (such as US$), as a natural hedge that avoids the risk of exchange rate fluctuation
• Qantas also uses derivatives such as forward exchange and options contracts to lock in future costs, including foreign currencies and 95% of its fuel
• Their use of hedging and derivatives has allowed Qantas to attain a market share of 31% overall improving their financial performance by improving their financial activities in global markets

Question 8

global influences on financial management

Answer 8

Virgin airlines
The covid-19 pandemic and recession caused a dramatic reduction in demand for flights. Virgin did not have the cash flow to pay for its wages, leased planes and repayments of existing debts. Its losses increased from $315 million in 2019 to $3.1 billion in 2020.

There was a low availability of funds during the pandemic, as banks were not willing to lend to businesses like Virgin that had a high probability of default.

During the pandemic, the Reserve Bank cut the main interest rate in Australia to 0.1%. This partially improved Virgin’s ability to pay its debt.

Due to the poor economic outlook, Virgin filed for bankruptcy and was purchased by the investment bank Bain Capital. The new owners made 3,000 people redundant, shut down the Tigerair brand, and conducted sale and leaseback on two Boeing 787s to raise $230 million.

Virgin is now planning an IPO (new issue) in 2024 to raise funds to expand into more flight routes again.