FIN3320 American Airlines Group Inc Optimal Wacc and Capital Budgeting Paper details are attached please follow the instructions. Attached is also project

FIN3320 American Airlines Group Inc Optimal Wacc and Capital Budgeting Paper details are attached please follow the instructions. Attached is also project 1 that you will use to complete project 2. my company is American Airlines group. if you have any questions please message me. Project – Part II
Optimal WACC & capital budgeting
Directions to Download Data
1. Log into https://wrds-web.wharton.upenn.edu/wrds/.
ID: fin3320
PW:Csulafin2019
2. Go to HOME GET DATA CRSP Annual Update Stock / Security Files
Monthly Stock File.
3. Set Data Range as “2013-01 to 2017-12”, apply company code as “TICKER”, and type in your company’s ticker.
2013-01
2017-12
4. Select TICKER, HOLDING PERIOD RETURN, and VW Return (includes distributions) as query variables
5. The query output is in Excel Spreadsheet, select YYMMDDn8 as Date Format, and SUBMIT QUERY.
Exercise
1.
(3 pts; Cost of equity) Using the downloaded information on your company, complete the following
exercises by Excel.
(a) Based on the monthly return series of your company and the value-weighted return as the
market return, run a regression to find the beta of your company.
(b) Using beta from (a), what is your company’s cost of equity, according to the CAPM?
• Risk-free rate: Use the 1-year U.S. treasury yield from
https://www.treasury.gov/resource-center/data-chart-center/interestrates/Pages/TextView.aspx?data=yield.
• historical market risk premium: 7.5% per annum.
(c) With your beta from (a) as equity beta (?L), compute the asset beta (?U) of the firm. Compute
the current debt-to-equity ratio with information from Part I.
(d) Create a table of the company’s levered beta (?????) at different levels of debt ratio from 0%to
99% at 10%p intervals.
(e) Using different levels of betas from (d), continue to create a table of cost of equity for each
level of debt ratio, according to the CAPM. Apply the most recent effective corporate tax of
your firm found on the Internet.
2. (3 pts; Cost of debt) Cost of Debt; Ex-ante cost of debt
(a) Compute your company’s cost of debt based on the “synthetic” ratings and default spreads
from the tables available from Ch 11. Use the 1-year U.S. treasury bond yield as the long-term
bond yield. (https://www.treasury.gov/resource-center/data-chart-center/interestrates/Pages/TextView.aspx?data=yield) Use the relevant information on financial statements
from Part I.
(b) Create a table of cost of debt for each level of debt ratio based from 0%to 99% at 10%p
intervals. Make sure you turn on iterative calculation and run iteration. (HINT: Your initial value
for the ex-ante cost of debt should be equal to the minimum cost of debt found on the
synthetic rating table.)
3. (3 pts; WACC & optimal WACC) Suppose your company tries to figure out the weighted-average cost
of capital.
(a) Create a table of WACC for each level of debt ratio.
(b) Based on (a), what is your firm’s lowest WACC? What is your firm’s optimal or target debt ratio?
4. (3 pts; Free cash flows) Suppose your company is contemplating a new investment project based on
the following information. (Hint: 2018 is “Year 0.”)
o
o
o
o
o
o
The project requires purchase of a new equipment in 2018 (=Year 0) worth the larger between 200% of the
2017 capital expenditure and 10% of the 2017 total assets. Equipment purchase price is the larger between
(1) 200%* the capital expenditure in 2017 and (2) 10%*the total assets in 2017. See below for the formula.
Equipment purchase price = max(200%*2017 capex, 10%*2017 total assets)
With this new project, in 2019 (=Year 1), the project will generate as much as 25% of the 2017 revenue
(=25%*sales of 2017). From 2020 to Year 2028, the revenue from this project will grow by 1% every year (=
(100%+1%)*sales of previous year).
Assume your COGS will be 70% of revenue in the same year, and all other operating costs (excluding
depreciation) will remain constant at 5% of the new equipment purchase price.
Assume the equipment will be depreciated based on a straight-line method for 12 years, 2 years more than
the project years. (Hint: This means the salvage book value is 2/12 of the original purchase price.)
At the end of project years, the salvage market value of the equipment will be 30% of the original purchase
value.
Your investment requires net working capital investment of 5% of the revenue in the subsequent years, and
(a) Compute the free cash flows from 2018 to 2028. Continue to assume the same effective
corporate tax bracket and no loss carryover for tax purposes, i.e. a negative taxable income will
result in a corporate tax of $0.
(b) Using the WACC from 3-(b), compute the NPV, IRR, and PI of this project. Do you think the
company should choose to invest in this project? Why or why not?
AMERICAN AIRLINES GROUP INC (AAL) CashFlowFlag INCOME STATEMENT
Fiscal year ends in December. USD in millions except
per share data.
2017-12
2016-12
2015-12
Revenue
42,207
40,180
40,990
Cost of revenue
32,609
29,648
29,332
Gross profit
9,598
10,532
11,658
Operating expenses
Restructuring, merger and acquisition
Other operating expenses
Total operating expenses
Operating income
Interest Expense
Other income (expense)
Income before income taxes
Provision for income taxes
Net income from continuing ops
Net income
Net income available to common shareholders
EBITDA
(a)Diluted
(b) Average shares outstanding
(c) Close prices
(d) Annual effective tax rates
527
4,413
4,940
4,658
1,053
(521)
3,084
1,165
1,919
1,919
1,919
6,154
14
4,511
4,525
6,007
991
(717)
4,299
1,623
2,676
2,676
2,676
7,108
4
52
492
0
5
47
556
0
29
4,345
4,374
7,284
880
(1,788)
4,616
(2,994)
7,610
7,610
7,610
7,105
11
42
687
0
AMERICAN AIRLINES GROUP INC (AAL) CashFlowFlag BALANCE SHEET
Fiscal year ends in December. USD in millions
except per share data.
2017-12
2016-12
2015-12
Assets
Current assets
Cash:
Cash and cash equivalents
295
322
390
Short-term investments
4,771
6,037
5,864
Total cash
5,066
6,359
6,254
Restricted cash
Receivables
Inventories
Prepaid expenses
Total current assets
Non-current assets
Property, plant and equipment
Gross property, plant and equipment
Accumulated Depreciation
Net property, plant and equipment
Goodwill
Intangible assets
Deferred income taxes
Other long-term assets
Total non-current assets
Total assets
Liabilities and stockholders’ equity
Liabilities
Current liabilities
Short-term debt
Accounts payable
Accrued liabilities
Deferred revenues
Other current liabilities
Total current liabilities
Non-current liabilities
Long-term debt
Deferred revenues
Pensions and other benefits
Other long-term liabilities
Total non-current liabilities
Total liabilities
318
1,752
1,359
651
9,146
638
1,594
1,094
639
10,324
695
1,425
863
748
9,985
49,802
(15,646)
34,156
4,091
2,203
427
1,373
42,250
45,353
(14,194)
31,159
4,091
2,173
1,498
2,029
40,950
40,654
(13,144)
27,510
4,091
2,249
2,477
2,103
38,430
51,396
51,274
48,415
2,554
1,688
3,953
2,791
3,978
14,964
1,855
1,592
3,724
2,789
3,912
13,872
2,231
1,563
3,539
2,525
3,747
13,605
22,511
22,489
526
7,842
2,760
33,617
47,489
18,330
667
7,450
2,728
29,175
42,780
7,497
2,498
32,506
47,470
Stockholders’ equity
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders’ equity
5
5,714
3,361
(5,154)
3,926
5
7,223
1,640
(5,083)
3,785
6
11,591
(1,230)
(4,732)
5,635
Total liabilities and stockholders’ equity
51,396
51,274
48,415
Ratios
1 Liquidity Ratios
Current Ratio
Quick Ratio
2 Financial Leverage Ratios
Total Debt Ratio
Debt-equity Ratio
3 Efficiency Ratios
Inventory Turnover
Receivables Turnover
Total Asset Turnover
4 Coverage Ratios
Interest Coverage Ratio
5 Profitability Ratios
Gross Profit Margin
Net Profit Margin
Return on Assets
Return on Equity
6 Valuation Ratios
Price-Earnings Ratio
Market-to-book Ratio
2017
0.61
0.34
2016
0.74
0.46
2015
0.73 Bad
0.46 Bad
92.36%
12.09
92.62%
12.55
88.36% Bad
7.59 Bad
23.99
24.09
0.82
27.1
25.21
0.78
33.99 Bad
28.76 Bad
0.85 Bad
5.84
7.17
8.07 Bad
22.74%
4.55%
3.73%
48.88%
26.21%
6.66%
5.22%
70.70%
19.93
0.15
10.04
0.15
28.44%
18.57%
15.72%
135.05%
Bad
Bad
Bad
Bad
0.09 Excellent
0.19 Excellent

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