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Hong Kong Dragon Airlines Limited (A): Determining the Cost of Capital Case Solution & Answer

This Case is about COSTS

PUBLICATION DATE: January 15, 2010 PRODUCT #: HKU882-PDF-ENG

In order to shield its operation from 2007 onwards, Dragonair needed to replace a reserve engine that was deemed beyond economical repair back in late 2002. Three alternatives were available to address this need. First, the engine could be purchased by Dragonair which would require it to put an order with the maker 12 months ahead of time and pay an upfront deposit. The airline could pick a sale and leaseback transaction with a leasing company the engine it bought to the leasing company would be sold by it and then rent it back from the leasing company for an established interval. Third, a brand new engine could be leased by the airline from a leasing company, in which case the leasing arrangement would be the same as the sale and leaseback transaction.

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