Reference no: EM133523454 , Length: word count:1000

Finance

Part 1: Company Perspective

Consider the 2022 Annual Report for Qantas Airways Limited (QAN).

Question 1. Briefly comment on how QAN governance is organized. Do you notice any strategies in place to align manager and shareholder interests at QAN based on the Annual Report? Provide one example.

Question 2. What is the net working capital for QAN in 2021 and 2022? What type of working capital management strategy is QAN probably pursuing? What are the advantages and disadvantages of this strategy?

Question 3. Identify in the annual report two major risks that QAN faces. Are these risks systematic or unsystematic? Explain your answer.

Question 4. Say you are trying to value QAN shares as of 30 December 2022. The closing QAN price for this day was $6.01. Assume that QAN will pay a dividend of $0.27 in 2023. You also estimate that for the next two years (2024 and 2025) dividends will grow at 15% per year. After this (starting in 2026) you estimate dividends will grow at a constant rate of 3% forever. Assume the Australian 10-year government bond has a yield of 3.6%, the market risk premium is 6.5% and the beta of QAN is 1.05. Based on your valuation, should you buy QAN shares? Explain your answer.

Question 5. Calculate the market capitalization of QAN on 30 December 2022. Assume that the total number of shares outstanding on this day is the same as that reported in the annual report.

Question 6. What source of funding (non-current) is QAN primarily using to finance its operations? What are the advantages and disadvantages of this source of financing?

Question 7. Consider a QAN bond issue on 30 December 2022 with a coupon rate of 4.65% and a 10-year maturity. Assume the bonds are semiannual, have a face value of $1,000 and the required rate of return for similar bonds in the market is 5.87%. Calculate the market price of the QAN bonds as of 30 December 2022.

Part 2. Capital Budgeting

Consider the following information.

In order to satisfy a sharp increase in demand because of the end of the pandemic, QAN is evaluating investing in a major upgrade of its airplanes. QAN has already identified two strategies they may follow in doing their upgrades; these strategies will be called Project A and Project B. In order to mitigate risk, QAN has asked Rachel Consulting Limited to conduct some market research. Rachel Consulting is being paid $2m as a fixed fee for its consulting services.

Project A has an initial outlay of $800 million and Project B has an initial outlay of $650 million.

Project A will generate additional revenues of $250 million starting at the end of year 1 until the end of year 10. It will also incur additional working capital expenses of $100 million immediately, this working capital will be recovered at the end of the project.

Project B will generate additional revenues of $200 million starting at the end of year 1 until the end of year 10. It will also incur additional working capital expenses of $120 million immediately, this working capital will be recovered at the end of the project.

The operating costs of both projects will be 35% of the revenue from years 1 to 10. Both projects will be depreciated on a straight-line basis over ten years to zero book value. QAN has estimated that some assets involved in the upgrades can be sold at the end of year 10 respectively for $125 million (Project A) and $100 million (Project B). The tax rate is 30%. All cash flows are annual and are received at the end of the year. The cost of capital for both projects is 7%.

Question 1. Calculate the FCFs for each project.

Question 2. What is the NPV for each project?

Question 3. What is the discounted payback period for each project?

Question 4. What is the IRR for each project?

Question 5. Assume that the risk of investing in these upgrades is higher than the overall risk of QAN. What would happen to the discount rate and consequently NPV of the two projects if this was the case? Why?

Question 6. Suppose that QAN has a payback rule of 8 years. Based on your analysis in 2., 3. and 4. which project should be chosen? Justify your answer with reference to theory. What other factor might affect the final decision?