Q1) Qantas (ASX: QAN) is currently working on a 10year upgrade plan with Airbus. The...
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Q1) Qantas (ASX: QAN) is currently working on a 10year upgrade plan with Airbus. The plan is trying to retire 5 existing aircrafts and purchase 10 new aircrafts in 2021. The new planes purchase price is $100 million AUD, and the old planes were purchased at $60 million AUD 15 years ago. Both old and new planes can be used for 20 years. QAN is conducting a primecost depreciation to zero over 20 years life. If you are disposing the old planes now, the salvage value will be $5 million AUD. The management team believes that at the end of the first year of the project they could earn pre-tax revenues of $150 million, $250 million the following year, $350 million in the third year, $250 million from the fourth to the ninth year, and $150 million for the last year. The average corporate tax rate paid by QAN is 26%.
Beta
Risk free rate
Debt
Cost of debt
Equity
Cost of Equity
QAN
1.532
0.870%
54.90%
1.10%
45.10%
11.00%
A) Use Capital Asset Pricing Model to compute the required rate of return for QANs equity.
B) Use the capital structure information you obtain to compute the weighted cost of capital for QAN. Comment on your results in less than 50 words.
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