Corporate Finance: Qantas Airways Investment Appraisal and Report

This report provides a comprehensive analysis of Qantas Airways' investment strategies and financial performance. It begins by examining the development of a new project, focusing on fleet upgrades like the Embraer E2 and Airbus A220, and justifying its viability through competitive advantages and technological advancements. The report then presents an investment appraisal, calculating the Weighted Average Cost of Capital (WACC), Net Present Value (NPV), and payback period to assess project feasibility. It also discusses the potential impacts of the project on share price, considering scenarios like project announcements, capital raising, and project completion. Furthermore, the report explores three potential financing sources for the project, including debt, equity, and working capital loans, and delves into shareholder wealth valuation methods such as asset-based, earning value, and market value approaches. Finally, it examines the signaling effect of dividends, analyzing how dividend announcements influence market perception and investor behavior, supported by historical finance literature and empirical data.

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Contents
PART I........................................................................................................................................................3
Development of the project.........................................................................................................................3
Justification of viability...........................................................................................................................3
Presentation of the Investment Appraisal................................................................................................4
Discussion of the potential impacts.........................................................................................................5
Three potential sources of the finance to fund the project.......................................................................6
PART II.......................................................................................................................................................6
Asset based approach...............................................................................................................................6
Earning value approach...........................................................................................................................7
Market value approach............................................................................................................................7
Discussion about the signalling effect of dividend......................................................................................7
References.................................................................................................................................................10

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PART I
Development of the project
Qantas Airways is one of the largest flagships in the world to provide the world class airline
services to the customers across the world. It is the flag carrier of the Australia and it is the
largest airline by the fleet size, international flights and international destinations. The company
is running under the name of the Alan Joyce and the company is listed on the Australian stock
Exchange. It is one of the globally recognized stock exchanges. In this report, the development
of the product has been chosen for the Qantas Company. It has been found recently that the
Qantas Company is engaged in the change of the fleet size and shape for the longer durability
and the customer sustainability. The new market plans of the Qantas suggests the next generation
air fleets such as Embrarer E2 and Airbus A220 which are under the evaluation of the
competitive technology. Beyond the competition there are many other factors due to which it has
been chosen to be one of the most pivotal airlines in the world. In this report a detailed
discussion of the product development is carried out (Airline Watch, 2018).
Justification of viability
Other than considering the financial grounds, the company’s agenda to buy the fleet from Boeing
and the Airbus is to give a competitive advantage to the other Airlines such as Lufthansa,
Emirates. By the end of this year, the Qantas is moving towards the market development by
introducing the new product in the market for Airbus A30Neo or Boeing 737 MAX.
Airbus is also taking a shot at an A350-1000 with expanded range, a recipe like that of the A350-
900 ULR requested by Singapore Airlines. As far it is concerned, Boeing offers the littlest

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variation (777-8) of its new wide body stream 777X as of now a work in progress. The 777-8 can
suit 350 to 375 travellers on a 8,693 mi. (16,100 km) flight (Brainrants, 2019).
The flight scope of the base form of the A350-1000 is a little beneath of 8370 nmi (15,500 km)
yet the flying machine offers more edge with the expansion of additional fuel tanks as on the
A350-900 ULR, which would enable the Airbus' improved wide body to show improvement
over its American rival. These flights will give the customers extra leg room for more comfort.
Also this light weighted aircraft will consume less fuel and hence, the new technology enhances
the major opportunities for the Qantas other than just on the financial grounds (Cummins, 2019).
Presentation of the Investment Appraisal
There are several investment appraisal techniques that can help in deciding whether the project
of the new Boeing shall be accepted by the company or not. This acceptance or the rejection can
be done on the basis of the various parameters, such as Net present value, internal rate of Return
and payback period. This can be done step by step by first finding out the cash flows and cash
inflows, calculating the cost of the capital and lastly using the two investment appraisal
techniques.
Weighted Average Cost of Capital
Cost of Equity
Risk free rate of return 4.23%
Beta 1.65
Market Premium return 6.40% 7.8%
Cost of debt
Interest expense 2300
Long term liabilities 43440 5.29%
MARKET VALUE OF EQUITY 75560

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MARKET VALUE OF DEBT 78000
TOTAL VALUE 153560
WACC KE 3.8%
KD 1.9%
5.7%
Initial Cost -7800
Operating cash
flows Annual Cash Flows Discounting factor 5.7%
Net Present
Value
0 -7800 1.000 -7800
1 2520 0.946 2384
2 2788 0.895 2495
3 3120 0.847 2642
4 3586 0.801 2873
5 3789 0.758 2872
NET PRESENT VALUE 5466
PAYBACK PERIOD
ANNUAL CASH
FLOWS
CUMULATIVE CASH
FLOWS
0 -7800 -7800
1 2520 -5280
2 2788 -2492
3 3120 628
4 3586 4214
5 3789 8003
PAYBACK PERIOD 2.20
YEARS
The two investment appraisal techniques that have been used are the net present value and the
payback period. The net present value is the term which is used to determine the present value is
worthy more than the future cash flows. The cost of the capital being the 5.7%, the initial cost is
$7800 dollars and the same can be recovered within 2.20 years. The net present value of the
project of the Qantas is $5466. This suggests that the net present value is positive and out of 5

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years the cost can be recovered within 2.20 years hence, the project shall be accepted. These
techniques suggest that the project is feasible for the future growth of the Qantas (Freed, 2019).
Discussion of the potential impacts
Share price is the price that determines the value per dollar invested in the business. There are
certain events which have a direct impact on the movement of the share price of the company.
Case 1: Announcement of the new project
At the point when an organization chooses to pick the date of their new item declaration,
generally they have just played out some exploration to boosting the planning impact on their
offer cost. They are aware of the way that investors might want to have an expanding offer cost
so as to amplify the estimation of the organization. The several could also include the change in
the market strategies or change in the expectations of the market. Hence it can be said that share
price tends to increase in this case (News Corp, 2018).
Case 2: Raising capital for the project
When the company decides to raise the capital in addition to the exiting one, it can be stated that
the price of the share is determined by the buyer and the seller and in order to have the buyers
participate in the offerings by the company, the company cannot set the share price more than the
market price. Raising capital could result in dilution of the price.
Case 3: Completion of the project
When the project gets completed the share price of the company the major impact on the price is
that the share price of the company will reduce. Once the project has been completed the share

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price of the company increases as the value of the business enhances (Shum, Hejazi, Haryanto,
and Rodier, 2015).
Three potential sources of the finance to fund the project
The three potential sources of the finance to fund the project can be form debt, equity as well as
the working capital loans. Some of the sources are of short term, nature and some of the sources
are of the long term nature. It depends upon the payment capacity of the company and the
suitability of the business as to which potential source shall be opted. In case of the Qantas the
potential source could be the equity shares and the blend of the debt. The huge leverage shall be
avoided but minimal loans can be accepted as they would give a competitive advantage to the
other companies (The Motley Fool, 2017).
PART II
Three shareholders’ wealth valuation methods that are majorly used in the market are as follows.
Asset based approach
This approach is used by those companies who accept the concept of the going concern or have
decided to liquidate the company. Generally these business valuations total up all the
investments in the business.
The going concern approach determines the net valuation of the assets and the liabilities whereas
the liquidation approach defines the net cash received from the assets to pay back the obligations.
Utilizing the advantage based way to deal with worth a sole ownership is increasingly
troublesome. In an organization, all benefits are possessed by the organization and would
typically be incorporated into a closeout of the business. Resources in a sole ownership exist for

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the sake of the proprietor and isolating resources from business and individual use can be
troublesome (García and Ozturk, 2017).
For example, a sole owner in a yard care business may utilize different bits of garden care
hardware for both business and individual use. A potential buyer of the business would need to
deal with which resources the proprietor means to sell as a major aspect of the business.
Earning value approach
These business valuation strategies are predicated on the possibility that a business' actual worth
lies in its capacity to deliver riches later on. The most widely recognized winning worth
methodology is Capitalizing Past Earning.
With this methodology, a valuator decides a normal dimension of income for the organization
utilizing an organization's record of past profit, standardizes them for abnormal income or costs,
and duplicates the normal standardized money streams by a capitalization factor. The
capitalization factor is an impression of what rate of return a sensible buyer would expect on the
venture, just as a proportion of the hazard that the normal income won't be accomplished (Yee,
and Thaker, 2018.
Market value approach
The market value based approach is the one that determines the appraisal value of the asset on
the basis of the similar selling price. This method can be used to value the property of the
business and the hence this is also considered as the vital choice for the business. This method
basically uses the similar assets (Di Maio, Rem, Baldé and Polder, 2017).

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Discussion about the signalling effect of dividend
In the history of the finance literature, the dividend policy is the most debatable topic. Dividend
signalling is the term which is used by the company when there is an announcement of the
dividend. The theory asserts that increased dividend payments give the strongest and the robust
signals about the bright future and the prospect of the company. An announcement of the
dividend by any company is taken out in the most positive manner, and helps in enhancing the
image of the company. Dividend signalling builds a positive image in the minds of the investors.
According to the dividend signalling hypothesis, dividend change announcements create a
fluctuation in the market. One of the most crucial assumptions while applying the process of the
signalling can be seen when there is a change in the announcements that have a positive
correlation with the share prices and the future earnings. This can be observed from the in depth
analysis of the theory proposed by the two professors of the Massachusetts Institute of
Technology (MIT), James Poterba and Lawrence Summers, who wrote a wide range of the
papers particularly from the year 1983, to 1985. Thereafter, once the empirical data over the
market value of the dividends have been obtained, its reaction on the effect of the dividend
taxation was studied thoroughly. The dividend pay-out ratio and the impact of the dividend over
the various other transactions can also be analysed through the signalling effect.
The dividend signalling theory recommends that organizations paying the most abnormal amount
of profits are, or ought to be, more gainful than generally indistinguishable organizations paying
littler profits. This idea demonstrates that the dividend signalling theory can be questioned if a
financial specialist analyses how broadly current profits go about as indicators of future income.
Prior investigations, led from 1973 to 1978, reasoned that a company's profits are essentially
random to the income that pursue. Be that as it may, an investigation in 1987 inferred that

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examiners ordinarily right income gauges as a reaction to startling changes in profit pay-outs,
and these rectifications are a sane reaction (Bhargava, 2018).
The concept of the dividend signalling in the real world can be seen with the help of the example
of a company with a huge history of the dividend. The dividend of this company increased over
the year is signalling to the market that the management of the company and the board of the
directors must make sure to get an idea of the future profits. Dividends are typically not
increased unless the board is quite certain and there is a possibility of the sustainability of the
cost. The names of these stocks are as follows, namely National fuel gas, the Fed Ex Corporation
and the Franco Nevada Corporation.

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References
Airline Watch, (2018). Qantas prepares to place mega orders for new planes from Boeing and
Airbus [Online] Available from https://airlinerwatch.com/qantas-prepares-to-place-mega-orders-
from-boeing-and-airbus/ [Accessed on 2nd July 2019]
Brainrants, (2019). Product Manager Qantas Loyalty – Cards / Financial Services [Online]
Available from https://brainmates.com.au/general/product-manager-qantas-loyalty-cards-
financial-services/ [Accessed on 2nd July 2019]
Cummins, N. (2019). Qantas Might Order The ‘Boeing 797’ For New Domestic Fleet [Online]
Available from https://simpleflying.com/qantas-boeing-797-order/ [Accessed on 2nd July 2019]
Di Maio, F., Rem, P.C., Baldé, K. and Polder, M., 2017. Measuring resource efficiency and
circular economy: A market value approach. Resources, Conservation and Recycling, 122,
pp.163-171.
Freed, J. (2019). Australia's Qantas to decide on future domestic fleet next year - CEO [Online]
Available from https://www.reuters.com/article/qantas-fleet-orders/australias-qantas-to-decide-
on-future-domestic-fleet-next-year-ceo-idUSL3N20G2W6 [Accessed on 2nd July 2019]
News Corp, (2018). Qantas unveils new menu to reduce jet lag on long haul flights [Online]
Available from https://www.escape.com.au/news/qantas-unveils-new-menu-to-reduce-jet-lag-on-
long-haul-flights/news-story/5392ca6f60f5e9b81291b7ddf9b29168 [Accessed on 2nd July 2019]
Shum, P., Hejazi, W., Haryanto, E. and Rodier, A., 2015. Intraday share price volatility and
leveraged ETF rebalancing. Review of Finance, 20(6), pp.2379-2409.

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The Motley Fool, (2017). What Happens to the Share Price When New Shares Are Issued?
[Online] Available from https://www.fool.com/knowledge-center/what-happens-to-the-share-
price-when-new-shares-ar.aspx [Accessed on 2nd July 2019]
Yee, E.C.P. and Thaker, H.M.T., 2018. DETERMINANTS OF SHARE PRICE
FLUCTUATION: EVIDENCE FROM THE MANUFACTURING INDUSTRY IN
MALAYSIA. Skyline Business Journal, 14(1), pp.58-71.
Bibliography
Bhargava, S., 2018. Theory of Signalling Dividends: An Economic Analysis. Available at SSRN
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García, E.E. and Ozturk, M., 2017. An asset-based approach to latino education in the united
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Lotfi, T., 2018. Dividend Policy in Tunisia: A Signalling Approach. International Journal of
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Ofori‐Sasu, D., Abor, J.Y. and Osei, A.K., 2017. Dividend policy and shareholders’ value:
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