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Homework answers / question archive / 1 ) How terminal value growth assumptions affect a project’s overall value with the interactive tool ? 2) Will Pandemic COVID-19 increase the Cost of Capital in the Airlines industry and why? Explain by your strategies
1 ) How terminal value growth assumptions affect a project’s overall value with the interactive tool ?
2) Will Pandemic COVID-19 increase the Cost of Capital in the Airlines industry and why? Explain by your strategies.
A. Terminal value growth option will be leading to overall increase in the valuation of the project and it will lead to additional valuation because the overall increase in the realisation associated with the terminal value.
Terminal value is also the type of cash flows which will be discounted at present and increase in the cash flows which are associated with a particular project will be leading to increase in the net present value and it will be leading to higher value associated with the project due to increase in the growth associated with the particular project.
B. YES, pandemic will be increasing the cost of capital in the airline system because the risk has increased substantially and it will also mean that there has been an increase in the cost of equity due to higher risk premium and there have also been a risk associated with lower Tax so the overall interest tax shied will decrease and it will be leading to a higher cost of debt leading to higher cost of capital of the airlines stock and they have a high risk associated with survival, so cost of equity will increase because the equity shareholders will be demanding higher risk premium.