i need Cost of Capital and Capital Structure:

Managerial Finance Term Project

American Airlines

Section 1:

Background Information

American Airlines, founded in 1926 by Charles Lindbergh, began as a small mail carrying business. Now, AA is a major United States airline organization housed within the Dallas-Fort Worth metroplex. It is the worlds largest airlines averaging an estimated 6,700 flights worldwide per day. The organization provides transportation to over 51 million consumers annually and has grown immensely over the years to operate in over ten headquarters worldwide.

American Airlines began as a transportation union, in which roughly 80 small airplanes were utilized. The Robertson Aircraft Corporation and the Colonial Air Transport organizations merged in 1929 to create this booming organization. Over the years, AA has purchased and merged with many organizations, has been renamed and has grown internationally. All of which have turned the organization into what it is today. In 2001, AA purchased Trans World Airlines, which grew the organization into being an international carrier. Finally, in 2013, AA merged with US Airways. This brought increased recognition and has reinforced the reputation and consumption of the organization.

Section 2:

Financial Ratios for past 3 years

Over the past three years (roughly 2015-2017 fiscal) AA has maintained an increasing gross profit by roughly $4,000, 2014-2017 fiscal year. There are many instances and procurements that play into this development. These financial ratios are illustrated below (See Excel Sheet for calculations):

Liquidity or Working Capital (values in 000s)

	2015	2016	2017
CURRENT RATIO	73%	74%	61%
QUICK RATIO	67%	67%	52%
WORKING CAPITAL	-3,620,000	-3,548,000	-5,815,000

The American Airlines Corporation has maintained a negative working capital three years in a row.

Efficiency and Asset Management

	2015	2016	2017
TOTAL ASSET TURNOVER	0.439	0.444	0.480
FIXED ASSET TURNOVER	0.773	0.731	0.722
DAYS SALES OUTSTANDING	24.45	25.54	25.95

Debt Management (values in 000s)

	2015	2016	2017
TOTAL LIABILITIES TO TOTAL ASSETS	0.88	0.93	0.92
LONG-TERM DEBT TO CAPITAL	0.612	0.757	0.797
TIMES INTEREST EARNED RATIO	6.245	5.338	3.929

The above data indicates that most of the assets of AA for fiscal years 2014-2017 were financed through debt, rather than equity. Further, the long-term debt to capital ratios indicates the financial leverage of the firm year to year. Lastly, the above data illustrates the ability of AA to honor its debt payments.

Performance

	2015	2016	2017
PROFIT MARGINS	19%	7%	5%
RETURN ON ASSETS	0.157	0.052	0.037

DuPont Ratio

The DuPont Ratio breaks the Return on Equity (ROE) into three parts: Operating Efficiency (profit margin), Efficiency of using assets (total asset turnover) and Financial Leverage.

	Profit Margin	TA Turnover	Financial Leverage	ROE
2015	19%	0.439	8.592	135.05%
2016	7%	0.444	13.547	70.70%
2017	5%	0.480	13.091	48.88%

Section 4:

Stock Valuation

Stock Valuation focuses on the connection between stock vs. bond. Both are financial aspects within a firm; however, a stock focuses mostly on dividends and the value of the company, while bonds are more relatable to cash flows and maturity frequencies. American Airlines issues dividend annually with a rough $35.59 stock price. According to a recent Nasdaq report, American Airlines began trading dividend in August 2018 with cash payment of $0.1 per share. Further, with the current stock price of precisely $37.93, the dividend yield (D1/P0) results in 1.05%. Reported August 2018, American Airlines has paid the same dividend for 17 consecutive quarters.

Section 5:

Capital Budgeting

The airline industry is highly capital intensive and in the last 5 years have not have any acquisitions. Their last acquisition was in 2013 when they took over British Airways. When looking into the finances of American Airlines they did purchase 20 new 737s and 360 A320s before their parent owner filed from bankruptcy. American Airlines has been quite conservative compared to the competition since they have not had an acquisition since 2013 with British Airways. I believe that American doesnt take on more acquisitions is because with the bankruptcy their parent company had years ago made them more cautious and really takes the time and research they need into what is best for their company as a whole before making big decisions like that.

Section 6:

Cost of Capital and Capital Structure