Hong Kong Dragon Airlines Case A In this case, Hong Kong Dragon Airlines was trying to figure out the appropriate discount rate in order to determine whether purchase or lease an engine for replacing the spare one. Since Dragon Airlines was acquired by another main Hong Kong airline company ‘Cathay Pacific’, we shall use the data of Cathay pacific to find out the weighted average cost of capital. Unfortunately, Cathay Pacific does not issue any bonds that there is no bond or credit rating to assist us calculate the cost of debt. I chose to use the credit rating of Singapore Airlines as an alternative, because according to Hoover’s.com, they have very similar size, revenue and net profit margin with Cathay Pacific. They are also main competitors to each other. The credit rating of Singapore Airline from 2003 to 2004 is not provided. Instead the credit rating is provided in the period of 2011-2012. According to their annual report of 2011-2012, roughly 80% of their financial assets are rated with grades of A to Aaa and 0% of them are rated at Baa. Therefore their credit rate is approximately Aa, in which this case, the bond yield spread over treasuries is 0.9%, the risk-free rate is 0.43% and the risk premium is 0.43%. By calculation, the cost of debt is 0.7% and cost of equity is 0.89% by using CAPM approach. After a brief discussion with Joseph Mann, the total equity is $32989 which equals the sum of share capital, reserves, and minority interest. Total debt is $22631 which equals the sum of net long-term liabilities and Net current portion of long-term liabilities. Therefore the target capital structure is $55620. Then I calculated the percentage weight of debt of 2004 equals 59%, and percentage weight of common equity equals 41%. Therefore the WACC for Dragonair is approximately 0.67%. In this case, the number shows that the firm’s risk and rate of return on