Hong Kong Dragon Airlines Limited

Question 1
1. Beta
2. Historical Risk Free Rate
3. Historical Market Return
4. Market Risk Premium
5. Cost of Equity
6. Pre-Tax Cost of Debt
7. After-Tax Cost of Debt
8. WACC
Question 2
1. Unleverage Beta
2. D/E Ratio
3. Leverage Beta
4. Cost of Equity
6. Pre-Tax Cost of Debt
7. After-Tax Cost of Debt
8. WACC
9. Sesitivity Table changes in % Debt vs D/E and WACC

EXHIBIT 1
CATHAY PACIFIC AIRWAYS BALANCE SHEETS, 31 DECEMBER (HK$ MILLION)
2004

2005

Current Assets
Liquid funds
Securities
Trade and other receivables
Total current assets

15,200
398
4,753
20,351

11,474
524
5,311
17,309

Non-Current Assets
Fixed assets
Investments in associated companies
Other long-term receivables
Total current assets

51,762
1,661
1,263
54,686

52,156
1,743
4,076
57,975

Total Assets

75,037

75,284

Current Liabilities
Trade and other payables
Net current portion of long-term debt
Unearned transportation revenue
Taxation
Total current liabilities

5,543
4,879
2,839
1,259
14,520

7,163
4,969
3,622
1,497
17,251

Non-Current Liabilities
Net long-term debt
Retirement benefits obligations
Deferred taxation
Total non-current liabilities

21,418
181
7,762
29,361

17,662
102
7,280
25,044

669
30,383
104
31,156

674
32,181
134
32,989

Shareholders Equity
Share capital
Reserves
Minority interest

NOTES:
1. At the end of January 2006, Cathay Pacific Airways had 3,860 million shares outstanding,
and its shares traded at HK$14.15 per share on Hong Kong Stock Exchange. The company's
equity beta was 0.85.

2. Cathay Pacific's bonds were of medium grade (somewhere between A1 and Baa3 under the
Moody rating), with the premium between 120 basis points to 186 basis points.

MILLION)

outstanding,
e company's

aa3 under the

EXHIBIT 2
CAPITAL MARKET INFORMATION
Year
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Average

HK Exchange Fund
1-Year Bill
10-Year Note
5.00%
7.27%
9.41%
9.22%
5.72%
6.36%
5.82%
7.74%
5.38%
6.46%
2.22%
6.22%
1.39%
4.39%
0.26%
4.37%
0.58%
3.63%
3.90%
4.18%
3.97%
5.98%

Hang Seng Index

Return
33.50%
-20.30%
-6.30%
68.80%
-11.00%
-24.50%
-18.20%
34.90%
13.20%
4.50%
7.46%

Recent Rates of Return

Dec-05

3.74%

4.18%

5.91%

NOTE:
Hong Seng Index earned an average return of 12.58% during 1976-2005.

TION
Best Lending
Rate
8.50%
9.50%
9.00%
8.50%
9.50%
5.13%
5.00%
5.00%
5.00%
7.75%
7.29%

turn

1976-2005.

7.42%

2004
4,879
21,418
26,297
31,156

2005
4,969
17,662
22,631
32,989

Equity %
Debt %

54%
46%

59%
41%

D/E Ratio

0.844

0.686

Net current portion of long-term debt

Net long-term debt
Total Debt
Equity

Beta Cathay Pacific Airways=DragonAir

Corporate Tax Rate
Recent Risk Free Rate
Historical Market Rate of Return
Market Risk Premium

0.85
17.50%
5.98%
12.58%
6.60%

Recent Risk Free Rate

Cost of Equity

4.18%
9.79%

Best Lending Rate

After-tax Cost of Debt

7.42%
6.12%

WACC

8.30%

Unleveraged Beta of Business

0.54

Debt
Equity
Total

45%
55%

D/E Ratio

0.82

Leveraged Beta of DragonAir

0.91

Cost of Equity

450
550
1000

10.18%

Best Lending Rate

After-tax Cost of Debt

7.42%
6.12%

WACC

8.35%
% Debt D/E Ratio
30%

WACC

45%
60%