FINE 3100 – Fall 2014 Karen Chiykowski
Assignment 1 Canadian Airline sector with focus on WestJet Capital Structure
Due: Thursday October 9, 11:30 am for all classes

Groups: You may work in a group; maximum of 4 students. You are under no obligation to work in a group and may work with students from any section.

TASK: 1. Determine the current WACC for firms in the Canadian airline sector focusing on WestJet Airlines (Ticker Symbol for the S&P/TSX is WJA) 2. Analyze the current capital structure in the context of the industry and the firm’s business model/operating strategy. 3. Perform the capital restructuring described and calculate the resulting WACC. 4. After considering additional relevant factors, recommend a capital structure for the firm by addressing the questions and points below, you are building a case for this firm’s capital structure.

EFFECTIVE DATE Dec 31, 2013. Use this annual report for the capital structure details for WestJet, Transat and Air Canada. Some historical WACC calculations are difficult to estimate. Therefore, you may assume that any current estimated, rd, etc can be applied to the capital structure for the date of the most recent annual report for the purposes of this assignment.

RESEARCH You will find the assigned readings and effective research techniques for this course essential for this assignment. When doing the industry and firm analysis, use the research sources tools and appropriate citations described by the librarian guest lecturers. All descriptions, analysis, conclusions and recommendations must be supported. Marks will be allocated based on the quality of research sources. Yahoo, Google etc may not be used as a research source (stock prices excepted)

REQUIREMENTS

Context and firm business strategy and firm business risk. (approximately 4 pages)
1. Briefly describe the industry in which this firm operates. What are the characteristics of businesses in this industry? (Use tools from previous courses such at Porter Analysis, Value Chain Analysis are just two tools to be considered.)

2. Describe the main business activities of the firm. What is the operating strategy? The assets that the firm has both on and off the balance sheet will provide some insights into their business strategy. What assets, both off and on-balance sheet, does the firm use to conduct its business? (This is not just a list of items from the annual report, think about how the firm fits in the industry; be selective, prioritize and be analytical.) How is the firm’s operating strategy different/similar to firms in the same sector? For the purpose of this assignment, use the firms provided above for comparison.

3. Describe and support what you find to be the important business/operating risks faced by the industry? by WestJet? Calculate the beta of the operating assets to assess the business/operating risk of this firm and the competitors provided. What are your conclusions regarding the firm’s operating risk relative to the industry?

4. Who owns the shares of WestJet? Are there any major shareholders? What implications, if any, do you see arising from its ownership structure? Include print outs that back up ownership discussion in the appendix.

Capital Structure and Financial Risk Research and Analysis approximately 2-3 pages

5. Summarize the MV capital structure of the firms for the dates above. Provide the betas, re, rd etc. and estimate the WACC only for WestJet with its current capital structure. In the appendix for this section attach support for your components of the WACC. This industry uses leases extensively; include those in your analysis. In a table summarize the capital structures for all three firms at market value. For these firms calculate relevant leverage and liquidity ratios and any other data that you think is relevant for the capital structure decision. Are the competitors similar with regards to their capital