FIN 201/CASE ASSIGNMENT/ SPR 2021 ©DEPT OF FINANCE, SBE, IUB

Comprehensive Final Case

Assignment FIN 201: Introduction to Finance

The airline industry of Bangladesh is still in its infancy. Especially the domestic routes are not
lucrative enough yet since very few fly on air from one district to another. Currently there are four
major airlines operating in Bangladesh: Biman, NovoAir, Regent and US Bangla. A new airline
company named Comfort Airlines is exploring the possibility of starting domestic flights either
for DHK-CTG route or DHK-RAJ route. Expenses to consider include aircraft rental cost, gate
and landing fees and labor costs such as local baggage handlers and maintenance workers.

The following table provides a summary of the after-tax cash flows associated with two investment
alternatives. The after-tax cash flows associated with each investment are:

Year Net Cash flow

DHK-CTG DHK-RAJ
0 (BDT 51,00,000) (BDT 36,00,000
1 Group Member 1 ID Group Member 1 ID
2 Group Member 2 ID Group Member 2 ID
3 Group Member 3 ID Group Member 3 ID
4 Group Member 4 ID Group Member 4 ID
5 Group Member 5 ID Group Member 5 ID

The firm needs to decide now which project it should invest and thus it needs to apply different
capital budgeting tools.
A number of capital budgeting tools need a discount rate. The financial manager of the company
identified that the firm’s WACC is the appropriate discount rate for evaluating the projects
applying the capital budgeting tools. But, its WACC is not yet calculated.
So, now the firm is interested in measuring its overall cost of capital. The firm is in the 40% tax
bracket. Current investigation has gathered the following data:
Debt: The firm can raise an unlimited amount of debt by selling BDT 1,000 par-value, 10% coupon
interest rate, 10-year bonds on which annual interest payments will be made. Current market price
of the bond is BDT 1,200.
Preferred stock: The firm can sell 10% (annual dividend) preferred stock at its BDT 100 per share
par value. The cost of issuing and selling the preferred stock is expected to be BDT 2.5 per share.
An unlimited amount of preferred stock can be sold under these terms.
Common stock (New issue): The firm’s common stock is currently selling for BDT 80 per share.
The firm expects to pay cash dividends of BDT 6 per share next year. The firm’s dividends have
been growing at an annual rate of 6%, and this rate is expected to continue in the future. Floatation
costs are expected to amount to BDT 3 per share.

The financial manager of the company is already overwhelmed with enormous workload and hence
hired you as the assistant manager of the finance department for the company and seeing
FIN 201/CASE ASSIGNMENT/ SPR 2021 ©DEPT OF FINANCE, SBE, IUB

your competence in the area of finance assigned you to suggest the best route based on the
following calculations:

1. Calculate specific cost of each source of financing (Round the answer to the nearest two
decimal points percent, like 11.12%).

2. Calculate WACC (The firm’s optimum capital structure shows 40% Long-term debt; 15%
Preferred stock, and 45% Common stock equity).

3. Determine the Payback period, Net present value, Internal rate of return and Profitability
index for both of the routes.

4. Which one is the best route if they are independent or mutually exclusive projects?

5. Suppose DHK-CTG route is risky due to the possible entry of new competitor in the future.
Accordingly, the risk-adjusted discount rate for this route will be 9% plus existing rate.
How this will affect your decision? Support your decision by calculation.

Instructions:

Form a group with five members.

You need to use your ID number as cash flows.
Clearly segregate your responsibility.
All of the members must have understanding regarding the entire report.

Report:
The main report should be not more than 10 pages not including the appendix
[typewritten, double -spaced].
Put the details of the computations in the appendix.
Submit the soft copy by e-mail attachment.
Due Date (tentative): By 17th April, 2021

Presentation:
Present the project in PowerPoint format by all the group members.
Note: Any kind of copy paste (cheating) will conclude to F grade to all members.

FIN 201/CASE ASSIGNMENT/ SPR 2021 ©DEPT OF FINANCE, SBE, IUB