Clearway Airlines

Student or Team Name:

Capital Investment

Choosing aircra� to acquire when expanding your business is a cri�cal decision in Airline. In

addi�on to deciding on the speci!c aircra� to acquire, you must also decide on how to !nance

your acquisi�ons. Making a good decision will lead to lower opera�ng costs, increased

pro!tability, and higher return on equity.

Aircra� purchases can be funded out of cash on hand, new debt, or equity issuance. Each

funding method has a cost, and the new asset is depreciated at a rate of 1.75% per quarter in

Airline. The cost of debt is easiest to calculate, since the long-term rate is !xed at 9% in the

simula�on. It might not seem that there is a cost to using cash, but you need to consider the

opportunity cost of alterna�ve investment op�ons. The cost of equity is the most di.cult to

assess, but keep in mind that shareholders expect a return on their investment, and issuing

stock will dilute shareholder equity.

In addi�on to purchasing aircra�, there is also an op�on to lease. The advantage of a lease is

that no capital investment is required to acquire aircra�. Buying may be a be0er op�on if the

aircra� will be used for a long period of �me.

1. There are many ways to calculate the cost of equity. One fairly simple way is to consider

the addi�onal dividend that would have to be paid on the shares of stock that are issued

to maintain the expected return for all investors. What would be the addi�onal “cost” if

the dividend is 15¢ per share each quarter, and you issue 200,000 new shares? What is the

annual return to the investor if the stock price is $20 and there is no change in price?

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Student or Team Name:

2. Assume an aircra* costs $3,000,000 to purchase and $125,000 to lease. Compute the

quarterly expenses for purchasing the aircra* with all cash, all loan, and all stock.

Cash Loan Stock Lease

Capital Required $3,000,000 $3,000,000 $3,000,000 $0

Cost of Capital* $0

Deprecia�on @ 1.75% per qtr. $0

Total Quarterly Expense $125,000

*Note: Assume a CD would earn 5%; the loan rate is 9% per annum; stock price is currently

$20 with a quarterly dividend of 10¢ per share.

3. Why might you not want to use just stock to fund your capital investment? What other

factors might you consider when evalua�ng the investment op�ons? Which op�on (or

combina�on of op�ons) from the table in ques�on 2 makes the most sense?

1. Student or Team Name: Lauren Moya
2. Question 1: The additional costs if the dividend is 15¢ per share each quarter and 200,000 new shares, the additional cost would be $120,000 (multiply 15¢ by 4 quarters then times by 200,000 share). If the stock price is $20 the annual return to the investor would be 3% (dividend per share 15¢ divided by stock price $20 times 4 quarter equal 0.03)
3. Student or Team Name_2: Lauren Moya
4. Question 2a: 37,500
5. Question 2b: 67,500
6. Question 2c: 15,000
7. Question 2d: 525,000
8. Question 2e: 525,000
9. Question 2f: 525,000
10. Question 2g: 90,000
11. Question 2h: 120,000
12. Question 2i: 67,500
13. Question 3: You might not want to use just stock to fund your capital investments. There are many factors to consider when making a decision like this. A loan might not be the best options if the Clearway Airlines expects to see instantaneous numbers in sales as well as the choice of leasing. If possible I believe the best combination would be both loan and cash. With this combination, doing cash and getting a smaller loan at 9 % can minimize risk of the start up.