MGMT 332 TAMIU Corporate Finances Apache Gate Purchase Excel Worksheet

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Business Finance

MGMT 332

Texas A & M International University

MGMT

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MGMT 332 Corporate Finance I Final Exam 1. Capital Budgeting Argo 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 15. Note that any losses trigger tax benefits. Purchase Price Yearly Revenue Operating Costs Discount Rate Gate Renovation (Fit-out Costs) Revenue Inflator Tax Rate $35M $15.5M 45% of revenue 9% $6M (each in years 5 and 10) 2.2% 21% What are the NPV and IRR of the gates? Should Argo invest in them? Why or why not? 2. Company Valuation BOAC 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 (year 1) COGS General & Admin Annual Sales Growth Rate Advertising, Promotion & Selling Yearly Inflation for non-COGS expenses Tax Rate Discount Rate Cash Balance Debt Shares o/s Cash Flow Adjustment Working Capital Capital Expenditures Year 1 (2.1) (1.5) Year 2 (2.2) (1.6) $114M 57% of sales $3.3M 3.2% $5.5M 3.1% 21% 8.5% $3.3M $5.2M 40M Year 3 (2.3) (1.9) Year 4 (2.4) (2.2) Question 2 continues on next page November 2020 | MGMT 332 | College of Business | worldwide.erau.edu All rights are reserved. The material contained herein is the copyright property of Embry-Riddle Aeronautical University, Daytona Beach, Florida, 32114. No part of this material may be reproduced, stored in a retrieval system or transmitted in any form, electronic, mechanical, photocopying, recording or otherwise without the prior written consent of the University. Year 5 (2.4) (2.4) Year 6 (2.4) (3.0) 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 semiannual equivalency. Provide your answers to 4 significant digits (example: 6.1234%) Bond A B C D Price 744.00 990.00 1,331.00 460.34 Annual Coupon 2.3% 6.6% 5.5% Maturing in 6 years 8 years 10 years 10 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 Exercise Price Maturity (yrs) Risk-free Rate Stock Volatility $33 $38 1 2.5% 20% What is the value of the option? Suppose the Fed reduces Treasury rates to 2.0%, what is the new price of the option? After the rate reduction, your company's share price falls to $28, what is the new price of the option? B. Your cousins grow corn in Wisconsin and plan to harvest 5,000,000 bushels at the end of the season. They are unsure whether to sell the futures contracts and lock the price in at $4.55/bushel or take a gamble and sell it all at the spot price at season's end. They think they can get $4.70/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 $4.80 at maturity? Ukraine had a bumper harvest and spot prices fall to $3.95/bushel, what will the cousins' profit/loss be now? Question 4 continues on next page. Page 2 of 3 C. Because its financial position has strengthened considerably very recently, Argo Airlines is offered an interest rate swap - fixed to floating (LIBOR). The details are as follows: Current Argo Bond Maturity Bond Face Value Current Bond Rate Floating rate Projected LIBOR rates 15 years $250M 6.5% per year, fixed LIBOR + 150 basis points 4.0% (years 1-2) 4.3% (years 3-4) 4.5% (years 5-6) 4.7% (years 7-15) Show the cash flows for Argo and the present value gain/loss of doing the swap. Page 3 of 3 Argo Gate Purchase Purchase price Fit-out costs Yearly revenue Revenue inflator Operating costs (% of revenue) Discount rate Tax rate Start Investment Revenues Expenses Income before tax Taxes Net income after tax NPV IRR 1 2 3 4 5 Argo Gate Purchase 6 Years 7 8 9 10 11 12 13 14 15 BOAC Airline Supply Valuation Yrs. 1-5 Sales growth Costs (% of sales): Cost of Goods Sold Advert., Prom., & Selling General & Administrative Rates: Tax Discount Inflation Results PV of NCF (incl. TV) + Cash - Debt Total Equity (M$) - # of shares outstanding (M) - Price/share ($) Cash Flows 1 2 Sales Cost of Goods Sold Advert., Prom., & Selling General & Administrative Net Income before Tax Taxes Net Income after Tax Cash flow adjustments: Working Capital Capital Expenditures Net Cash Flows NCF (incl. terminal value) Growth rate Price/share ($) for: n Cash Flows 3 4 5 6 TV Growth rate Disc. Rate A YTM Start 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0 B C D a. Option Pricing Base Fed Exercise price Maturity Stock price Risk free rate Volatility BS calculations: d1 N(d1) d2 N(d2) Price of call Price drop b. Futures Prices Base Bushels Bushels/contract # of contracts Contract price Spot price Profit/(Loss) to cousins #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! c. Interest Rate Bond outstanding Maturity (yrs.) Fixed rate Spread over LIBOR LIBOR: Years 1-2 Years 3-4 Years 5-6 Years 7-15 Prices Ukraine c. Interest Rate Swap Original Cash Flows Swap Pmts. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Present value of net Net No content - Intentionally left blank
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Explanation & Answer

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Apache Gate
Purchase Price
Yearly Revenue
Operating cost (% of revenue)
Discount rate
Gate Renovation
Revenue inflator
tax rate

$35
$15.50
45%
9%
$6
2.20%
21%

Start
1
2
3
4
Investment (A) in million
($35)
Revenues in $ million
15.500 15.841 16.190 16.546
Less expenses in $ million
6.975
7.128
7.285
7.609
Income before tax (invest. - revenue)
8.525
8.713
8.905
8.937
less tax @ 21%
1.790
1.830
1.870
1.911
Net income after tax B (income before tax - tax)
6.735
6.883
7.035
7.026
Cash flow (A+B)
$35
6.735
6.883
7.035
7.026
NPV
$19.921
IRR
17.32%
Decision
Agro should invest because the Net Present value (NPV) is poistiv

Apache Gate Purchase (calculations done in USD millions

5
($6.00)
16.910
7.609
9.301
1.953
7.348
7.348

6

7

8

9

17.282
7.777
9.505
1.996
7.509
7.509

17.662
7.947
9.715
2.040
7.675
7.675

18.0...


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