The RyanJet Plc is a low-cost airline company that offers cheap flights across Europe. It is...

 

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The RyanJet Plc is a low-cost airline company that offers cheap flights across Europe. It is all-equity financed company and it is listed on London Stock Exchange. Currently rate of return on short-term UK gilts is 4% and the expected return on FTSE 100 Index is 20%. The unlevered market beta for the RyanJet Plc equals 1.65. The company would like to offer a new connection from London Heathrow to Malaga, which would be available for five years. The mangement of the company forecasts net cash flows from this new project as follows: Year Net Cash Flows 1 500,000 2 750,000 4 3 1,000,000 1,500,000 5 1,500,000 The entire project is financed by equity investment and it requires an initial investment of | 1.5 million-. Assume the markets are perfect and there are no taxes. a) Calculate the opportunity cost of capital for this project. Explain why you can use this value to evaluate the new project of the RyanJet Plc. (25 marks) b) Calculate the NPV of the project and decide whether the RyanJet Plc should offer a new connection from London Heathrow to Malaga. (25 marks) Suppose now that the management of the RyanJet Plc considers financing 40% of the cost of the project by debt and debtholders require the rate of return of 7%. Assume there are no taxes. c) Calclate the rate of return required by the equity holders of the RyanJet.Plc. Why is it now lower/higher than the retum required by equity holders when the project was all- equity financed? (25 marks) d) Calculate the new discout rate the management of the RyanJet Plc Plc should use to evaluate the project and the NPV of the project. Compare your answers with the results you obtained in a) and b). How would relaxing the assumption of no taxes change your answer in (c) (no need to make any calcuations). The RyanJet Plc is a low-cost airline company that offers cheap flights across Europe. It is all-equity financed company and it is listed on London Stock Exchange. Currently rate of return on short-term UK gilts is 4% and the expected return on FTSE 100 Index is 20%. The unlevered market beta for the RyanJet Plc equals 1.65. The company would like to offer a new connection from London Heathrow to Malaga, which would be available for five years. The mangement of the company forecasts net cash flows from this new project as follows: Year Net Cash Flows 1 500,000 2 750,000 4 3 1,000,000 1,500,000 5 1,500,000 The entire project is financed by equity investment and it requires an initial investment of | 1.5 million-. Assume the markets are perfect and there are no taxes. a) Calculate the opportunity cost of capital for this project. Explain why you can use this value to evaluate the new project of the RyanJet Plc. (25 marks) b) Calculate the NPV of the project and decide whether the RyanJet Plc should offer a new connection from London Heathrow to Malaga. (25 marks) Suppose now that the management of the RyanJet Plc considers financing 40% of the cost of the project by debt and debtholders require the rate of return of 7%. Assume there are no taxes. c) Calclate the rate of return required by the equity holders of the RyanJet.Plc. Why is it now lower/higher than the retum required by equity holders when the project was all- equity financed? (25 marks) d) Calculate the new discout rate the management of the RyanJet Plc Plc should use to evaluate the project and the NPV of the project. Compare your answers with the results you obtained in a) and b). How would relaxing the assumption of no taxes change your answer in (c) (no need to make any calcuations).

Answer rating: 100% (QA)

a The opportunity cost of capital represents the rate of return that investors could earn by investing in alternative projects with similar risk profiles In this case the opportunity cost of capital c... View the full answer