1. Capital Budgeting Apache Airlines is looking to buy some gates at a West Coast...

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1. Capital Budgeting Apache Airlines is looking to buy some gates at a West Coast airport. The key financial variables are below. Note that the gates revert back to the airport at the end of year 10....

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1. Capital Budgeting

Apache Airlines is looking to buy some gates at a West Coast airport. The key financial variables are below. Note that the gates revert back to the airport at the end of year 10.

Purchase Price	$25M
Yearly Revenue	$12M
Operating Costs	40% of revenue
Discount Rate	10%
Gate Renovation (Fit-out Costs)	$11M (year 2 and in year 6)
Revenue Inflator	2.8%
Tax Rate	21%

What are the NPV and IRR of the gates? Should Apache invest in them? Why or why not?

2. Company Valuation

Fley Airline Supply is trading at $15/share but you think that price may not be right. You have the following data and you want to use it to calculate its share price:

Gross Sales	$124M
COGS	54% of sales
General & Admin	$3.5M
Annual Sales Growth Rate	3.0%
Advertising, Promotion & Selling	$5M
Yearly Inflation for non-COGS expenses	3.3%
Tax Rate	21%
Discount Rate	8%
Cash Balance	$3M
Debt	$5M
Share o/s	$44M

Cash Flow Adjustment	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Working Capital	2.0	(2.0)	(1.2)	(0.3)	(1.0)	(2.0)
Capital Expenditures	(2.0)	(2.0)	(3.0)	(4.0)	(4.0)	(4.0)

Calculate the per share price and run sensitivities for growth rates of 3.0%, 3.5%, and 4% as well as discount rates of 8%, 9%, and 10%. Put these in a matrix.

3. Bond Valuation

Given the purchase prices, coupons and maturities of four bonds, calculate the yields to maturity to you, the investor. Assume a $1,000 par value. Bonds A, B, and C are semi-annual. Bond D is a zero but calculate its yield with a semi-annual equivalency. Provide your answers to 4 significant digits (example: 6.1234%)

Bond	Price	Annual Coupon	Maturing in
A	984.00	3%	2 years
B	799.00	6%	5 years
C	767.00	5%	10 years
D	566.34		8 years

4. Options and Futures

A. Your employer is offering you stock options on the firm as part of your pay package. You know the following about this offer:

Current Stock Price	$25
Exercise Price	$35
Maturity (yrs)	2
Risk-free Rate	4.5%
Stock Volatility	30%

What is the value of the option? Suppose the Fed reduces Treasury rates to 4.0%, what is the new price of the option? Your company's share price falls to

$23, what is the new price of the option?

B. Your cousins grow corn in Iowa and plan to harvest 500,000 bushels at the end of the season. They are unsure whether to sell the futures contracts and lock the price in at $4.05/bushel or take a gamble and sell it all at the spot price at season's end. They think they can get $4.10/bushel based on historical prices and their own analysis.

Assuming no transaction costs and each contract covers 5,000 bushels, what will the cousins' profit/loss be if they sell the contracts and the spot price is

$4.10? Mexico had a bumper harvest and spot prices fall to $3.86/bushel, what will the cousins' profit/loss be now?

CONITINUES ON THE NEXT PAGE

C. Because its financial position has strengthened considerably very recently, Apache Airlines is offered an interest rate swap - fixed to floating (LIBOR). The details are as follows:

Current Apache Bond Maturity	10 years
Bond Face Value	$200M
Current Bond Rate	6% per year, fixed
Floating rate	LIBOR XXXXXXXXXXbasis points
Projected LIBOR rates	4.5% (years 1-2) 5% (years 3-4) 5.5% (years 5-6) 5% (years 7-10)

Show the cash flows for Apache and the present value gain/loss of doing the swap.

excel-spreadsheet-template-ygs0xnew.xlsx homework-questions-1-dt4l3v4k.docx

Answered Same Day Oct 05, 2021

Rishi · Accepted Answer

Prob. 1
	Apache Gate Purchase
	Purchase price	25,000,000
	Fit-out costs	11,000,000
	Yearly revenue	12,000,000
	Revenue inflator	2.8%
	Operating costs (% of revenue)	40.0%
	Discount rate	10.0%
	Tax rate	21.0%
		Years
		1	2	3	4	5	6	7	8	9	10
	Investment	(25,000,000.0)	(11,000,000.0)				(11,000,000.0)
	Revenues	12,000,000.0	12,336,000.0	12,681,408.0	13,036,487.4	13,401,509.1	13,776,751.3	14,162,500.4	14,559,050.4	14,966,703.8	15,385,771.5
	Expenses	4,800,000.0	4,934,400.0	5,072,563.2	5,214,595.0	5,360,603.6	5,510,700.5	5,665,000.1	5,823,620.1	5,986,681.5	6,154,308.6
	Income before tax	7,200,000.0	7,401,600.0	7,608,844.8	7,821,892.5	8,040,905.4	8,266,050.8	8,497,500.2	8,735,430.2	8,980,022.3	9,231,462.9
	Taxes	1,512,000.0	1,554,336.0	1,597,857.4	1,642,597.4	1,688,590.1	1,735,870.7	1,784,475.0	1,834,440.3	1,885,804.7	1,938,607.2
	Net income after tax	5,688,000.0	5,847,264.0	6,010,987.4	6,179,295.0	6,352,315.3	6,530,180.1	6,713,025.2	6,900,989.9	7,094,217.6	7,292,855.7
	Net Cash flow	(19,312,000.0)	(5,152,736.0)	6,010,987.4	6,179,295.0	6,352,315.3	(4,469,819.9)	6,713,025.2	6,900,989.9	7,094,217.6	7,292,855.7
	NPV	827,612
	IRR	11%
Prob. 2
	Fley Airline Supply Valuation
		Yrs. 1-6
	Sales growth	3.0%			Cash Flows
	Costs (% of sales):				1	2	3	4	5	6
	Cost of Goods Sold 	54%		Sales	124,000,000.0	127,

1. Capital Budgeting Apache Airlines is looking to buy some gates at a West Coast airport. The key financial variables are below. Note that the gates revert back to the airport at the end of year 10....

What are the NPV and IRR of the gates? Should Apache invest in them? Why or why not?

Calculate the per share price and run sensitivities for growth rates of 3.0%, 3.5%, and 4% as well as discount rates of 8%, 9%, and 10%. Put these in a matrix.

What is the value of the option? Suppose the Fed reduces Treasury rates to 4.0%, what is the new price of the option? Your company's share price falls to

Assuming no transaction costs and each contract covers 5,000 bushels, what will the cousins' profit/loss be if they sell the contracts and the spot price is

Show the cash flows for Apache and the present value gain/loss of doing the swap.

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