Professional Documents
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Instructions
1. Please read the instructions carefully before proceeding.
2. This paper consists of one case. Please provide the solution to the case.
3. Please read the entire case carefully before attempting the solution.
4. The solution must be provided in the form of a structured report. The
desired report format is given as an integral part of the case.
5. This is a closed book exam. You will need a scientific calculator for
calculations during the exam. Please arrange for the calculator before beginning
the paper. Please note that no exchange of calculators with other students
is allowed during the exam under any circumstances. Present value tables as
required for solving the case are provided with the paper.
6. Total marks 100.
7. Marking pattern :The marks distribution pattern is clearly explained in the case
itself and is based on the following principles:
The desired structure of the report along with the marking pattern for the report is
given in Annexure 1 of the case along with total marks assigned thereof. The report
should be crisp and precise and should not exceed 750 words.
The body of the case poses various numerical problems. All the financial workings
should be presented as annexures to the report, clearly numbered with crossreferences in the main report. The brief findings from the financials only should be
presented in the report.
8. The exam aims to test your understanding of the subject.
I WISH YOU THE BEST OF LUCK
Case study
Jeet Airways (JA)
Jeet Airways (JA) is the countrys premium airline operator with a fleet size of 50
aircrafts operating both in the domestic and international sectors.
While JA is
operating in the domestic sector since 10 years, it has recently entered the
international sector following regulatory changes. In the beginning of 2006, JA,
looking to consolidate its already strong position in the industry, was exploring
opportunities for growth, both in the domestic and international sectors.
The opportunities being explored specifically included:
passenger load factor of 75% and a cargo business of 5 metric tones (mt)/flight. We
need 2 additional aircrafts to establish our presence on the vital routes, which will
enable us to route our traffic in a more flexible manner. This will result in achieving a
higher passenger and cargo business of 80% & 7 mt/flight respectively, for the new
airplanes.
The international sector in the airline business has generally more competition and
therefore commands a lower fare per km. It also has a marginally higher in-flight or
operations costs.
sector. Since the sectors flown are usually the busy sectors, this results in higher
average passenger load factor than domestic flights. Moreover, since flights operate
throughput day and night and with fewer stopovers, it operates more kms annually,
compared to the domestic sector with fewer take-offs. It has higher airport costs,
taxes and duties.
2
Mr. Mohit, while making his case for the domestic sector informed the Board, In the
domestic segment, we are a well established player. Since we operate both on the
premium and feeder routes, our passenger load factor, on an average, is lower than
the international sector. However, our fares per km are higher. Please remember,
the local market is witnessing a revolution in air travel, which is growing rapidly. With
growing volumes, we need to have our presence on more routes. Our load factors
will also grow with time. However, I am not basing my current business case on
higher passenger Load Factos (PLFs). As per his estimates, JA had a demand for
5 new aircrafts to meet his near time growth plans.
Mr. Inamdar, the CFO explained JAs leveraging policy of a long term debt: equity
ratio of 1:1 and expressed doubts regarding JAs financial strength to order 7 new
aircrafts.
We need to recognize our financial limitations given the DER constraints and the
balance sheet position to arrive at our current spending capacity. Moreover, any
decision to add capital investments should be taken up within the accepted capital
budgeting processes and practices.
combination of payback and IRR as capital budgeting methods, but given the large
scale of investment and its complexity, I am open to accepting the most scientific
technique for evaluating these investments (please justify the method you propose
for capital budgeting). Appendix 2 provides the financial highlights for JA.
Aircraft Choice
The business managers, then presented their financial case, the numbers are placed
at Appendix 3. The qualitative highlights and analysis are presented below:
In the international sector, JA is evaluating purchase of the 400 seat range aircrafts.
It is evaluating one of the two aircrafts:
Airbus A340
- 450 seater
Boeing 777
- 375 seater
The management is keen to evaluate which of the two aircraft to purchase, if any.
capacity utilization.
The costs include:
(i) Fuel, (ii) maintenance, (iii) operations cost, (iv) manpower cost, (v) airport
taxes & charges & (vi) administrative costs.
The fuel and maintenance costs vary significantly from aircraft to aircraft. Moreover,
the costs are either per km, per flight or per year. International aircrafts cover more
kms but fewer flights per day. Their fares per km are lower but so are their fuel,
maintenance and service costs.
higher. The working capital consists of 1 month of receivables and 1 month of fuel
creditors and an inventory of spares equivalent to 1% of the aircraft capital cost.
At this juncture, after listening to all the details, Mr. Kumar, the CEO took charge of
the meeting.
We want to expand in the most profitable sectors. We are committed to spend all
the available funds in line with our corporate policy. Thus the options are clear.
(Can you help JA to draw-up the options tree and compute the available funds?).
While we can use opportunity cost of funds, (adjusted for inflation) for discounting
cash flows for the domestic sector, the international sector being more risky, we
should use a risk premium of 2% over the inflation adjusted opportunity cost.
(Please compute the applicable rates of discount).
Most importantly we want to decide on the mix of aircrafts to be purchased and their
quantities, which should be decided based on their economics. (Can you help Mr.
Kumar in making this decision?).
4
The Board would like to see the financial report for the problem and the decision so
that we consider it for approval. (Please present this report). Please note that we
convene our Board meeting on 24th April06 at 6.30 p.m., so please present your
report before that. The guidelines for the submission are at Appendix 1.
@ copyright 2006. Vikram Sampat. No reproduction of this case in whole or any part hereof
can be made without the written permission from the author.
Notes:
1.
2.
3.
4.
5.
6.
Appendix 1
The Board of Directors set the following guidelines for the investment committees
final report and directed the following inclusions/ analysis/ explanations in the report.
The report should be crisp and precise and not exceeding 750 words (excluding
annexures), with cross-references for annexures.
30 marks
Report Structure
1. Objective
2. Problem definition and options analysis
3. Methodology with rationale
4. Brief financial results (findings of your calculations)
5. Conclusions and recommendations
6. ANNEXURES (Financials)
(as per break-up given below)
70 marks
1. Assumptions
(5 marks)
(15 marks)
(15 marks)
(25 marks)
(10 marks)
Appendix 2
Rs. in Millions
2001
2006
Sales
21000
60000
PBDIT
12700
30000
Deprecation
3000
7500
Interest
2000
7500
Tax
1500
4000
PAT
6200
11000
11700
100
100
100
EPS, Rs.
62
110
117
DPS, Rs.
15
20
21
1060
Equity capital
1000
1000
32000
75000
40000
87000
67000
143000
5000
18000
Net investments*
1000
2000
2007 Projected
7500
Appendix 3
International
Domestic
A-340
777
737-400
Seating capacity
450
375
175
185
165
65
1.5
1.5
1.0
No. of landing/yr
1050
1050
1400
75%
80%
72%
Year 2
78%
83%
72%
Year 3 onwards
80%
86%
72%
80
60
25
350
325
240
0.3
0.3
0.15
3%
3%
3%
200
200
150
100
100
100
50000
50000
15000
20%
20%
20%
3.5
50
50
100
Appendix 4
Useful formulae/ concepts in Financial Management
1. Cost of Equity
Div1
P0
Ke =
+g
NPV
Capex
+1
NPV =
FT x (1 - rn)
(1 - r)
Appendix 5
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