WACC Business Report

Analyze Singapore Airline Ltd compare with Air China Ltd

Prepare an individual analytical report by completing the following tasks

Search for data and financial information e.g. the firm’s beta and the current risk free rate.

1. Calculate the Weighted Average Cost of Capital using an appropriate technique.
2. Explain your calculations and the judgements you made in arriving at your answer.
3. Calculate gearing ratios and describe any difficulties in doing so.
4. Analyse your findings with reference to capital structure theory.
5. Provide a recommendation to the Board on the firm’s current capital structure.
6. Provide a reflection on your work and your report. In undertaking your reflection you should consider the following (Hint it is helpful to keep notes on your sources of information in addition to the ones you chose).

a.  What weights should you use when calculating the WACC, market value weights or accounting book values? To do this find the market value of equity (no. of shares times the share price) and the market value of financial debt(if no traded debt you may need to use accounting book values) then compare the weight calculations with those calculated using book values (shareholder funds plus total financial debt). Do they differ and what would you use?

b.  What risk free rate would you use – 30-day, 3 month, 6 month 1 year,3 year, 10 year, of 30 year? Would it make a difference?

c.  Should you use a published beta such as that available on the Morning Star Database (DatAnalysis in the Library), Bloomberg Database and/or Annual reports on company’s website and stock exchanges or calculate the beta yourself (you can get share prices and market indexes from Yahoo or Google Finance website), or pay someone to do it for you?

d.  Do you calculate a return on the market or use the spread between the market and the risk-free rate (6% to 8% premium according to research)?

e.  Do you use the debt expense as per the accounts or some indicator rate?