MGMT 332 Corporate Finance I Assignment- Embry-Riddle Aeronautical University
I. 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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Purchase Price
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$25M
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Yearly Revenue
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$12M
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Operating Costs
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40% of revenue
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Discount Rate
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10%
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Gate Renovation (Fit-out Costs)
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$11M (year 2 and in year 6)
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Revenue Inflator
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2.8%
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Tax Rate
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21%
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What are the NPV and IRR of the gates? Should Apache invest in them? Why or why not?
II. 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:
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Gross Sales
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$124M
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COGS
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54% of sales
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General & Admin
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$3.5M
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Annual Sales Growth Rate
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3.0%
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Advertising, Promotion & Selling
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$5M
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Yearly Inflation for non-COGS expenses
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3.3%
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Tax Rate
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21%
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Discount Rate
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8%
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Cash Balance
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$3M
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Debt
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$5M
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Share o/s
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$44M
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Cash Flow Adjustment
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Year 1
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Year 2
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Year 3
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Year 4
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Year 5
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Year 6
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Working Capital
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2.0
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(2.0)
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(1.2)
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(0.3)
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(1.0)
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(2.0)
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Capital Expenditures
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(2.0)
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(2.0)
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(3.0)
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(4.0)
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(4.0)
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(4.0)
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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.
III. 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%)
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Bond
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Price
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Annual Coupon
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Maturing in
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A
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984.00
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3%
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2 years
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B
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799.00
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6%
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5 years
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C
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767.00
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5%
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10 years
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D
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566.34
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8 years
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IV. Options and Futures
i. Your employer is offering you stock options on the firm as part of your pay package. You know the following about this offer:
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Current Stock Price
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$25
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Exercise Price
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$35
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Maturity (yrs)
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2
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Risk-free Rate
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4.5%
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Stock Volatility
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30%
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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?
ii. 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
iii. 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:
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Current Apache Bond Maturity
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10 years
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Bond Face Value
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$200M
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Current Bond Rate
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6% per year, fixed
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Floating rate
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LIBOR + 100 basis points
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Projected LIBOR rates
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4.5% (years 1-2)
5% (years 3-4)
5.5% (years 5-6)
5% (years 7-10)
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Show the cash flows for Apache and the present value gain/loss of doing the swap.
Format your assignment according to the following formatting requirements:
i) The answer should be typed, using Times New Roman font (size 12), double spaced, with one-inch margins on all sides.
ii) The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
iii) Also include a reference page. The Citations and references must follow APA format. The reference page is not included in the required page length.
Attachment:- Excel-Template-Problem-Set.rar