Setting
You are analysts working for investment bank teams that cover the aviation sector (Lufthansa) The CEO
of the company has decided to pursue an aggressive business strategy. To finance the projects proposed
by the CEO, the company has to raise additional capital.
Key Assumptions in this Exercise:
• Lufthansa’s CEO has decided to offer additional long-distance flight routes
• For these connections 10 brand-new aircrafts of the type Airbus A380-800 will be ordered
• Total investment volume for this project will be EUR 5 billion and shall be financed with additional
capital
• Make a reasonable assumption on the impact of the new routes on the company’s projected revenues
(expect the routes to be operated from 2021 onwards)
Your investment bank team will prepare a pitch either for Lufthansa, advising the company’s CFO about
the optimal method of implementing their desired capital increase (issuing new shares or issuing a new
bond). Your group will pitch to Lufthansa. Your task is to prepare a presentation that is to be presented
to the CFO of your assigned company and its major investors. It is in your interest that the company
appreciates your analysis and commissions your investment bank to underwrite the issue.
Your presentation should include the following components:
• A valuation of the current enterprise and equity value of Lufthansa. Explain what economic
development would be necessary to justify your valuation? Run a sensitivity analysis, i.e. check how your
firm value changes when you change the inputs (terminal growth rate, WACC, beta, revenue growth and
margins…). Report and interpret these figures. What is the impact of the sensitivity analysis with regard
to your recommendation? The CFOs will want to discuss your inputs into the analysis. Make sure you
state your assumptions clearly. What are the most crucial inputs, strategically and financially?
• Evaluate the two financing options: new shares or bond issue. Distinguish in your analysis the impact of
either choice on firm value, its future financial figures, the WACC, beta etc. What would be the price
impact for the existing shareholders if Lufthansa issues new shares (what share price would you expect)?
What would be the costs (yield) of a new bond with a maturity of 5 or 10 years? What would be the
potential S&P credit rating of such a bond in your view? What yield would you offer to investors? (You
can use the S&P table in the attached file.)
• What is your final recommendation to Lufthansa senior management on how to finance potential
expansions? Issuing of new shares or a new bond? What are the pros and cons for the two possibilities?
Sources You may make use of all the information that you find, as long as you state all the sources on the
slides. This is a real-life, real-time case; there is no pre-specified information package. We are aware that
the companies do not provide a lot of information about the future – laying down assumptions is
therefore critical. The basis for your analysis and future assumptions are the official financial statements
of the companies. These reports can be downloaded from the firm’s webpages. Make sure that you state
all sources that you use on the respective slides. This is important.
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