Matthew Kvilvang FINE 418 Module 4 Assignment

docx

School

Embry-Riddle Aeronautical University *

*We aren’t endorsed by this school

Course

418

Subject

Finance

Date

Jan 9, 2024

Type

docx

Pages

Uploaded by matthewkvilvang

1 Debt and Equity Financing Options Matthew J. Kvilvang Embry Riddle Aeronautical University – WW FINE – 418 Professor Dimitrios Siskos November 08, 2023

2 Debt and Equity Financing Options Introduction Capital infrastructure projects require a lot of overhead wiggle room for an airport to leverage their position in a way that allows them to use equity or debt financing to cover the cost of construction. Equity financing allows airports to take a loan out against the equity of their land, building, etc. in order to fund a project. For example, if the airport land and all the buildings, roads, hangars, runways, etc. were valued at $150,000,000, but the airport was purchased for $80,000,000 30 years ago, the equity would be the difference between what the airport is worth, and what is owed on the initial purchase loan. In this case, the equity of the airport would be $70,000,000 and an airport can take a loan out backed by the value of their equity. Debt vs. Equity In order to raise money for business projects, such as building a new state of the art maintenance facility or runway, airports primarily have two options to do so. Debt financing, and equity financing. Most airports would have a mixture of both methods, in addition to Federal and State loans/grants to acquire enough capital for the project. There are several pros and cons to each method, but with equity financing, there is no obligation for the airport to “pay it back” as they leveraged the value of their land and facilities to back the loan. Similar to Home Equity Lines of Credit (HELOC) the value of the airport can be leveraged for a line of credit or loan to find improvements, projects and overall operations. “Debt financing involves borrowing money and paying it back with interest. The most common form of debt financing is a loan” (Maverick, 2023). Going into large amounts of debt to

3 find a new project that might not give a sustainable rate of return is not necessarily a good option for most airports. However, it is a necessary evil in the business world and should be approached with caution. The benefit of debt financing, is the lender has no say in your business ventures, where as with equity financing, you are selling a portion of your equity to your investors that potentially will have a voice in the matter and limit your business negatively. If the economy is suffering, and your airport is struggling to stay afloat, debt financing still requires you to make your minimum obligated payments no matter how much the airport may be struggling. “Generally speaking, the best capital structure for a business is the capital structure that minimizes the businesses WACC” (Vipond, 2023). Another worthy mention is, even if your personal financial assets and business assets are completely separated, some lenders may require you to essentially “reinforce” the loan they give you for your projects with your personal financial assets. However, for a large airport and not a privately funded airport, this is highly unlikely as the company who operates the airport will be responsible for guaranteeing any loans. Policy, Politics and Economic Influences When funding a large capital venture such as an airport improvement project, a lot of economic, political, national, state and local policies come into play. Economically speaking, an airport expansion project is a good thing for the economic sector in which it resides. Airports bring goods, new jobs, and people to a local economy where it is then bolstered with their money. Politically speaking, it may be a bad thing due to noise, light and environmental pollution concerns. Almost all airports and the cities they call home have different policies regarding light and noise pollution. These are important environmental factors to considered when making capital investments, as it is in the airports best interest to keep these down to a minimum wherever possible.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

4 Economic regulation is another important factor that can affect an airports profitability. “An effective and efficient regulatory structure should not be a burden, but instead a strong mechanism to support and deliver a more efficient use of existing assets and the timely and cost- effective delivery of new investment” (Smyth, 2007). Economic regulation should be a good thing, according to the IATA. All airports are subject to ICAO (International Civil Aviation Organization) principles for setting rates, charges, etc. This is to ensure the airport is operating within the legal scope of limitations for profit. An effective framework that is well designed, “can provide benefits for both users and for regulated companies” (Smyth, 2007). With uncertainty in recent economic events, and global tensions, airports need to find new strategy and effective financial management skills that can continue to grow airport revenue through these trying times. For a CFO (Chief Financial Officer) of a large airport in the United States, financial strategy matters more now than ever before. COVID-19 was a huge obstacle airports and airlines alike needed to overcome. But with careful planning and execution, it was made possible and profitable. Significant upgrades are needed at most airports across the Untied States. “The cash flow problem is compounded by the deterioration of the nation’s airports, which on average are more than 40 years old” (Krishnan, 2022). Investing in the overall experience of the airport, can help accommodate revenue loss from revenue streams that are not simply diverse enough. Most airports receive 50-60 percent of their gross revenue from direct purchases from consumers, airlines and rental companies. The Bipartisan Infrastructure Law (BIL) was signed on November 15, 2021. This source of income was around 1.2 trillion USD, and was a new source for capital investment projects exceeding 500 billion in new funding with 25 billion of that being for airports in the United States.

5 Conclusion Effectively managing an airports finances are critical to ensure the continual operation of the airport even as world events contribute to world wide passenger and air traffic deficits. It would benefit an airport greatly if they focused on replacing and or upgrading assets that are near the end of their life cycle, such as condemned buildings, closed runways, etc. before focusing on their personal business goals. Any efforts related to improving existing infrastructure will most likely improve overall capacity and efficiency, which in turn will improve revenue streams from these sources. References Krishnan, V., Peloquin, S., Rao, A., & Swelbar, B. (2022, February 8). Turning on the Revenue Tap: How US airports could make the most of additional liquidity. McKinsey & Company. https://www.mckinsey.com/industries/travel-logistics-and- infrastructure/our-insights/turning-on-the-revenue-tap-how-us-airports-could-make-the- most-of-additional-liquidity Maverick, J. B. (2023, October 10). Equity financing vs. debt financing: What’s the difference? Investopedia. https://www.investopedia.com/ask/answers/042215/what-are-benefits- company-using-equity-financing-vs-debt-financing.asp Smyth, M., & Pearce, B. (2007, February 1). Economic Regulation - IATA. International Air Transport Association. https://www.iata.org/en/iata-repository/publications/economic- reports/economic-regulation/ Vipond, T. (2023, October 27). Debt vs equity financing. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/commercial-lending/debt-vs-equity/

Related Documents

IMG_4847.jpeg

NPV Crossover.xlsx

WSJ News Brief Chapter 8 William Boswell.docx

Written ROE Exam 1 William Boswell 2.docx

Written ROE Exam 1 William Boswell.docx

Stock and Bond Investments - Chapter 13 Assignment - Part 1.docx

Matthew Kvilvang FINE 418 Module 7 Group Project Final.docx

Matthew Kvilvang FINE 418 Module 6 Assignment.docx

Chapter 3 Exercises.xlsx

undergrad_2021_midterm_solutions.docx

Spring 2019 exams and solutions (1).pdf

Practice Problems and Solutions - Topic 11 - REITs.pdf

Related Questions

Need help with this question solution general accounting

3 https://pwcollege.brightspace.com/d21/le/content/6894/viewContent/7549/View?ou=6894 T 01 2 Cost Pay Back and NPV A company is considering investing in a project to expand the facilities for customers. There are two different ways of doing this and they have each been costed. Projected net cash flow into the company has also been estimated. Project 2 £115,000.00 Year Expected Contributions 1 3 4 Automatic Zoom 5 Project 1 £120,000.00 6 £50,000.00 £40,000.00 £50,000.00 £45,000.00 £50,000.00 £50,000,00 £40,000.00 £40,000.00 £45,000.00 £30,000.00 a. If the company used the payback method, when does each project pay for itself? b. If the company were to employ a discount rate of 12%, what would be the NPV of each project? CIRR to > A view as TexT DOWI £50,000.00 £30,000.00

OPPO A9 2020 2021/01/04 08:53 I give you too much pressure to pay your, IUal ecause the new branch may not have generated enough cash flow within the year to cover the PHP8 million. WHAT'S NEW B. Activity #1. Decide the following scenarios whether long-term or short-term financing is needed. (long-term loan, short-term loan) Need/Activity 1. Acquisition of equipment 2. Franchise of a fast-food outlet 3. Purchase of inventory for a clothing shop 4. Loan for agricultural needs (i.e. palay production, mango, etc.) 5. Loan for purchase of a commercial space 6. Development of a subdivision 7. Auto-loan 8. Loan for sari-sari store supplies 9. Housing Loan 10. Emergency loans (advances) WHAT IS IT

not use ai please

How do I answer (c)?

nku.8

i will 5 upvotes urgent A firm wants to sponsor a new engineering lab at a local university. This requires $4.0M to construct the lab, $1.5M to equip it, and $750,000 every 6 years for new equipment. What is the required endowment if the university will earn 8% interest on the funds?

nku.4 give in table format or i will give you down vote

Using the table below to answer the questions. Part 1 of 2. In a couple of sentences explain what is the most important conversation you nee before proceeding with this project? Part 2 of 2. Would this conversation be with the finance people or the marketing people? Table of Net Present Values given different Scenarios: Different Scenarios Project cost of capital 8% 6% Ability to cross sale existing customers Yes Ability to cross sale existing customers No 10% $ 2,000,000 $1,250,000 $100,000 $1,000,000 $500,000 $ (500,000)

Hii ticher please given correct answer general Accounting

2 f

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:9781260013962

Author:BREALEY

Publisher:RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:9781337909730

Author:Brigham

Publisher:Cengage

Foundations Of Finance

Finance

ISBN:9780134897264

Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:Pearson,

Fundamentals of Financial Management (MindTap Cou...

Finance

ISBN:9781337395250

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i...

Finance

ISBN:9780077861759

Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:McGraw-Hill Education

SEE MORE TEXTBOOKS