Corporate Finance: Data Collection, Cost of Equity, Cost of Capital, Project Evaluation

This report explores the concepts of corporate finance, including data collection, cost of equity, cost of capital, and project evaluation. It focuses on a case study of Qantas and their 10-year upgrade plan with Airbus. The report discusses the importance of financing decisions and maximizing profits through the optimal financial structure.

Corporate Finance

Contents
INTRODUCTION.......................................................................................................................................3
TASK..........................................................................................................................................................3
Data collection.........................................................................................................................................3
Cost of equity..........................................................................................................................................4
Cost of capital..........................................................................................................................................6
Project Evaluation...................................................................................................................................6
CONCLUSION...........................................................................................................................................7
REFERENCES............................................................................................................................................8

INTRODUCTION
Corporate finance is the branch of finance that deals with the detection of financing
options, as well as the allocation and cash flow from financing activities to the most profitable
ventures for the company. Corporate financing provides for the study of the best financial
structure combination of debt and equity financing was using to finance a company in order to
maximize liquidity and efficacy (Cao, Liang and Zhan, 2019). This report based on the Qantas
which is currently working on a 10 year upgrade plan with Airbus. Company was planning to
acquire 10 aircrafts in 2021 and retire old aircrafts. In this report consist of data collection, cost
of equity, and cost of capital and comment on results.
TASK
Data collection
Cost of capital
Weight Cost Weight*Cost
Equity 65.30% 8.30% 5.40%
Debt 34.70% 1.80% 0.60%
Preferred equity 0.00% 0.00% 0.00%
WACC 6.00%
Capital structure
Market capitalization 9412.50 65.30%
Short term debt 373 2.60%
Long term debt 4637 32.20%
Preferred equity 0.00 0.00%
Total 14422.50 100.00%
Data collection process

Data processing is a difficult undertaking that requires several questions that must be
resolved before data can be compiled and used. For the data collection use different sites like
Bloomberg, yahoo finance etc.
•It is a repetitive task that requires a long time to do, lasting from months or years as recorded.
•It is intrusive and entails consumer privacy concerns, among several other concerns.
•The gathered data will not be available immediately and will entail further attempts to render it
accessible.
Regardless of the area of study, data collection is usually the first and most critical phase in the
analysis process. Based on the information necessary, various approaches to data collection are
used in different fields of research. The most important goal of data collecting is to gather
relevant data and accurate data for this research so that data-driven scientific decisions can be
taken (Tsekrekos, 2019).
Cost of debt:
Cost of Debt Benchmarks
3 Year Avg Effective Interest Exp 4.2%
Cost of Debt Low High
Selected Long-term Debt 5.5% 6.0%
Tax Rate 27.0% 27.0%
After-tax Cost of Debt 3.96% 4.32%
Cost of equity
The Capital Asset Pricing Model (CAPM) is a mathematical representation of the
relationship between systemic portfolio optimization for assets, particularly stocks (Bardos,
Ertugrul and Gao, 2020). The CAPM model is commonly used during financing to price

speculative investments and generate potential returns on investments based on their probability
and cost of capital.
Cost of equity CAPM (capital asset pricing model)= Rf + B (Rm – Rf)
Rf,- the risk free rate of return (interest rate on a government bond)
B- Beta sensitivity to risk of asset or share
Rm - Market rate of the share
Cost of Equity Low High
Selected Beta 1.04 1.66
(x) Country Market Risk Premiu
m 4.7% 4.7%
Adjusted Market Risk Premium 4.9% 7.9%
(+) Risk-free Rate 2.25% 2.50%
(+) Additional Risk Adjustments 1.79% 3.58%
Cost of Equity 9.00% 14.00%
The risk-free rate is the 10-Year Treasury Constant Maturity Rate. It is kept up to date.
The risk-free rate is currently 1.69000000 percent. For more statistics, please visit the Economic
Statistics tab. Please note that we use the country/10-year region's Treasury Steady Maturity Rate
(Dang and et.al, 2021). The vulnerability of estimated surplus asset returns to planned excess
market returns is known as beta. The beta of Qantas Airways is 1.65.
Demand price is also known as (Average Return of the Market - Risk-Free Rate of Return).
According to a business premium of 6% is needed.
1.65 * 6% = 11.59% Cost of Equity = 1.69000000 percent + 1.65 * 6%
Cost of capital
The weighted average cost of capital (WACC) is a method of calculating a company's
cost of capital whereby each capital group is weighted percentage wise. Since an increase in

WACC signifies a fall in the value and a change in inflation, it rises as the beta and rate of return
on equity rise.
WACC: E/ (E-D)*cost of equity + D/(E/D) * cost of debt * (1 – tax rate)
= 0.647 * 11.59% + 0.3953 * 3.0163% * (1 - 27%)
= 7.86%
Cost Estimates
…..Cost of Equity 9.00% 14.00%
…..After-tax Cost of Deb
t 3.96% 4.32%
Weights
…..Equity % of Capital 60.0% 40.0%
…..Debt % of Capital 40.0% 60.0%
…..WACC Range 7.00% 8.25%
…..Selected WACC 7.75%
Project Evaluation
Project evaluation tax benefit from sale of old aircrafts = (WDV-salvage)*tax rate = {40M-
(40/20)*15 years}-5M)*0.26
= (40M - 30M) – 5 M* 0.26
= 10M -5M * 0.26
= 5M * 0.26
= 1.3M
Approach Calculation of Depreciation Rate No. of Years= 15years
Salvage Value = $5 million USD

Purchase Price = $ 40 million USD
Depreciation Rate = (Purchase Price - Salvage Value)/No of Years
= (40 – 5) / 15
= 35/15
= 2.33%
CONCLUSION
As per the above report it has been concluded that corporate financing refers to the
strategic decisions made by a company in its day-to-day activities. Its goal is to make more
profits from the investments that the company already has thereby lowering the costs associated
with those decisions. As a result, investment decisions including the recognition of reserves of
resources for financing companies are considered corporate financial judgments.

REFERENCES
Books and Journal
Cao, J., Liang, H. and Zhan, X., 2019. Peer effects of corporate social
responsibility. Management Science. 65(12). pp.5487-5503.
Tsekrekos, A.E., 2019. Moreno-Bromberg, Santiago and Rochet, Jean-Charles: Continuous-
Time Models in Corporate Finance, Banking and Insurance.
Dang, R. and et.al, 2021. Do women on corporate boards influence corporate social
performance? A control function approach. Finance Research Letters. 39. p.101645.
Bardos, K. S., Ertugrul, M. and Gao, L. S., 2020. Corporate social responsibility, product market
perception, and firm value. Journal of Corporate Finance. 62. p.101588.