$1-)$ Based on the information provided in the case, estimate the cost of debt and

the cost of equity for Dragonair. Explain and justify how you arrived at those

estimates.

Debt:

If publicly traded debt, use that ratio.

Check for a very close competitor

Check capital market information on debt $($ie long term short term risk free rates$).$

Make a judgment there!

If capital markets are used then an additional risk premium for a similar bond grade

company should be added on top of risk free rate.

http:$//$www$-$

$2.$rotman.utoronto.ca$/$ hull$/$DownloadablePublications$/$CreditSpreads$.$pdf

Table $2$:

Maybe use the best lending rate.$($what are pros and cons?$)$

Equity

Maybe, Use the company beta!

If not, a competitor or industry beta!

Use CAPM!

Explain every point and your selection very carefully USING BULLET POINTS!!!

Explain carefully why you chose a particular method!!!!!

If not explained well, you may lose points!

$2-$ J What is Dragonair's weighted average cost of capital?

Equity$=$ Sum of its share capital $+$ reserves

Debt$=$total liabilities$=$ net long term liabilities $+$ net current portion of long

term liabilitiesTable $2$: Excess Expected Returns Earned by Bond Traders

$\backslash$table$[[$Rating$,\backslash$table$[[$Bond Yield$],[$Spread over$],[$Treasuries$],[($bps$)]],\backslash$table$[[$Spread of risk$-$free$],[$rate used by market$],[$over Treasuries$],[($bps$)]],\backslash$table$[[$Spread to$],[$compensate for$],[$default rate in the$],[$real world $($bps$)]],\backslash$table$[[$Extra Risk$],[$Premium$],[($bps$)]]],[$Aaa$,83,43,2,38],[$Aa$,90,43,4,43],[$A$,120,43,8,69],[$Baa$,186,43,28,115],[$Ba$,347,43,144,160],[$B$,585,43,449,93],[$Caa and Lower,$1321,43,1014,264]]$