Questions After many years of substantial losses Qantas has returned profits in 2016. Maximising shareholder wealth has been a strategic priority of the senior leadership of Qantas. Note that Qantas share price was at its highest in 2007 ($ 6.40) and lowest in 2012 ($1.03) and is currently trading at $ 3.35. 1. 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 (10 marks) B) Using information available within the 2016 Preliminary Final Report consolidated financial statements computing average debt-levels for 2016 and calculate the cost of debt? Show all relevant calculations.( 5 marks) C) Using information available within Qantas 2016 Preliminary Final Report consolidated financial statements compute average equity-levels for 2016 and calculate the average total equity. Using your knowledge of either the Capital Asset Pricing Model (CAPM) or alternative calculate beta and market risk premium, clearly stating any assumptions you may make, and derive an appropriate cost of equity? (15 marks) D) Drawing on your answers for (B) and (C) calculate the weighted average cost of capital for 2016? ( 5 marks) E) A financial-analyst friend working with Credit Suisse reviews Qantas results for 2016 and says, 'hypothetically, if one was to apply company tax of 30% on Qantas's ROIC of 22.7% the ROIC reduces to 15.9%.' Using WACC calculation in (D) as the basis explain whether 15.9% is an acceptable ROIC? As a student of finance, do you judge as appropriate for Qantas to declare the fully-franked 7c per share ordinary dividend? Should Qantas continue to buy back shares, pay dividends or follow an alternative strategy? Give reasons and show relevant calculations to support your judgement.(10 marks) 2 A) Assume that Qantas is exploring raising $20m through the issue of corporate bonds for financing the aircraft cabins and wi-fi. Qantas bonds, face value $1000, a coupon rate of 5.5% paid semi-annually, and maturity period of 10 years. If yield to maturity is 8% calculate the value of the bond? ( 5 marks) B) Assuming all other factors remain the same what impact would the issue of bonds in (A) have on the Weighted Average Cost of Capital calculated in 1 (D). Show calculations and compute the new WACC. (5 marks) 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 5 of $ 1.2 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 8.  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  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 $ 0.4m;  Qantas will not qualify for any depreciation on this project and will pay tax at 30%. (C) Calculate the Net Present Value for each of the two investment options - using the weighted average cost of capital of 1 (D) and - the new weighted average cost of capital of 2 (B) (10 marks) (D) Which of the two investments and the appropriate financing will you recommend for Qantas? Clearly indicate reasons for your choice (13 marks) 3. On a night out with friends to a Casino in Canberra you won $ 50,000. You have recently read an article on Qantas shares being one of the cheapest in the Airline industry. On the 26th of August the shares closed at $ 3.35. Considering the risk and return would you buy Qantas shares, buy their issue of bonds or return to the Casino to gamble with the $50,000? Give reasons and show relevant calculations.(12 marks)