Questions-
Part 1: Company financials
Through 2014.2016 financial performance of Qantas has seen a major turnaround (refer to Source 1, 2 and 3).
a) On Page 24 of the 2016 Preliminary Final Report shows a Return on Invested Capital (ROIC) of 16.2% in FY15 and 22.7% for FY16 (calculations showing how these figures have been derived is detailed in subsequent pages). What are the main contributing factors to this improved operating result? Explain in detail. You may want to do some research of your own, present and cite your own findings where applicable.
b) Based on the 2016 Preliminary Final Report (Source 2) consolidated financial statements, calculate average Interest bearing debt levels, average total equity and cost of debt for the financial year 2015-2016. Clearly state any assumptions.
c) Use Yahoo Finance and other sources, find beta and market premium. Based on your knowledge of the Capital Asset Pricing Model (CAPM) and derive an appropriate cost of equity. Clearly state any assumptions.
d) Calculate the weighted average cost of capital (WACC) for Qantas.
e) For the year ended June 2016 Qantas paid more than $500m to buy bad/4 shares. Explain possible reasons for Qantas to follow such a course of action?
Part 2: Raising capitals
Assume that Qantas is evaluating financing options for the investment in aircraft cabins and Wi-Fi through the Issue of corporate bonds. Qantas is exploring issuing 6100m bonds of face value $1000, a coupon rate of 5.5% paid semi-annually, with a maturity period of 10 years. If yield to maturity is 6%:
a) Calculate the value of the bond
b) Assume that the cost of existing debt and equity from part 1 b) and c) are unchanged, calculate the new WACC
c) If Qantas issues convertible bonds instead, how would the yield change from the current 6%? Why?
Part 3: Capital budgeting
Qantas's wishes to further develop their frequent flyer loyalty program by introducing a range of leisure facilities to their members. It is considering investing in one of two projects, developing a golf course on the Gold Coast or purchasing a casino in Perth.
The golf course on the Gold Coast requires an initial Investment now of 1.8m and further investments at the end of years 1, 3 and S of $ 1.1 m each. In addition, it will also incur working capital expenses at the beginning of the project of $0.4 m and recover these at the end of year B. The Golf course will generate cash inflows of $ 0.8 m starting the end of year 1, $1.6m each in years 2, 3 and 4 and 1.8m each through years 5 to 8. At the end of year 8 the course will be sold for 0.6m. Qantas Is able to claim an annual depreciation of $0.15m from years 1 to 5 and pays tax at 30%.
The casino In Perth requires one-off Initial Investment of 5m now and will generate cash Inflows of $0.6m starting end of year 1, $1.8m each in years 2, 3 and 4 increasing to $ 2m every year for the next 4 years. The Casino will be sold at the end of this for $0.4; Qantas will not qualify for any depreciation on this project and will pay tax at 30%.
a) Calculate the Net Present Value INPY) for each of the two Investment options, assume that the WACC for Qantas is 10%.
b) Which Investment will you recommend for Qantas?
c) Qantas is also considering investing in the Venezuelan oil industry as an alternative. Given the recent economic hardships in Venezuela (See Source 5), Venezuelan government is looking to privatise portions of the country's oil industry. Venezuelan government offered to sell one oil field to Qantas. Assume that the NPV for the oil field project Is higher than that of the gold course and the casino under the same WACC of 10%. Should Qantas invest in the oil field instead of the gold course and the casino? What could be the potential dangers? What adjustments in terms of discount rate would you recommend?
Part 4: Market perspectives
a) Qantas announced the full year result 2016 (See Source 1) at 8A1am on 240August 2016. Considering the share price movements from 234-25'h August 2016, what would be the implications to the efficient market hypothesis? Which version of the efficient market hypothesis does this event imply?
Attachment:- Assignment.rar