Financial Position
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| Argo Airlines | ||||||||||||||||
| Purchase price | 22,000,000 | |||||||||||||||
| Fit-out costs | 3,000,000.0 | |||||||||||||||
| Yearly revenue | 11,000,000.0 | |||||||||||||||
| Revenue inflator | 1.2% | |||||||||||||||
| Operating costs (% of revenue) | 43.0% | |||||||||||||||
| Discount rate | 6.6% | |||||||||||||||
| Tax rate | 21.0% | |||||||||||||||
| Years | ||||||||||||||||
| Start | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | |
| Investment | 22,000,000.0 | 3,000,000.0 | 3,000,000.0 | |||||||||||||
| Revenues | 11,000,000.0 | 11,132,000.0 | 11,265,584.0 | 11,400,771.0 | 11,537,580.0 | 11,676,031.0 | 11,816,144.0 | 11,957,937.0 | 12,101,433.0 | 12,246,650.0 | 12,393,610.0 | 12,542,333.0 | 12,692,841.0 | 12,845,155.0 | 12,999,297.0 | |
| Expenses | 4,730,000.0 | 4,786,760.0 | 4,844,201.0 | 4,902,332.0 | 4,961,160.0 | 5,020,693.0 | 5,080,942.0 | 5,141,913.0 | 5,203,616.0 | 5,266,059.0 | 5,329,252.0 | 5,393,203.0 | 5,457,922.0 | 5,523,417.0 | 5,589,698.0 | |
| Income before tax | (22,000,000.0) | 6,270,000.0 | 6,345,240.0 | 6,421,383.0 | 6,498,439.0 | 3,576,421.0 | 6,655,338.0 | 6,735,202.0 | 6,816,024.0 | 6,897,817.0 | 3,980,590.0 | 7,064,357.0 | 7,149,130.0 | 7,234,919.0 | 7,321,738.0 | 7,409,599.0 |
| Taxes | (4,620,000.0) | 1,316,700.0 | 1,332,500.0 | 1,348,490.0 | 1,354,672.0 | 751,048.0 | 1,397,621.0 | 1,414,392.0 | 1,431,365.0 | 1,448,541.0 | 835,924.0 | 1,483,515.0 | 1,501,317.0 | 1,519,333.0 | 1,537,565.0 | 1,556,016.0 |
| Net income after tax | (17,380,000.0) | 4,953,300.0 | 5,012,740.0 | 5,072,892.0 | 5,133,767.0 | 2,825,372.0 | 5,257,717.0 | 5,320,809.0 | 5,384,659.0 | 5,449,275.0 | 3,144,666.0 | 5,580,842.0 | 5,647,812.0 | 5,715,586.0 | 5,784,173.0 | 5,853,583.0 |
| NPV | 29,317,111 | |||||||||||||||
| IRR | 27% | Text answer here. | ||||||||||||||
MGMT 332 Corporate Finance I
1. Capital Budgeting
Final Exam
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 $22M
Yearly Revenue $11M
Operating Costs 43% of revenue
Discount Rate 6.6%
Gate Renovation (Fit-out Costs) $3M (in year 5 and 10)
Revenue Inflator 1.2%
Tax Rate 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) $103M
COGS 61% of sales
General & Admin $3.4M
Annual Sales Growth Rate 3.3%
Advertising, Promotion & Selling $3.4M
Yearly Inflation for non-COGS expenses 3.0%
Tax Rate 21%
Discount Rate 6.6%
Cash Balance $2M
Debt $2.4M
Shares o/s 33M
Cash Flow
Adjustment
Year
1
Year
2
Year
3
Year
4
Year
5
Year
6
Working Capital (2.1) (2.2) (2.3) (2.4) (2.4) (2.4)
Capital
Expenditures
(1.5) (1.6) (1.9) (2.2) (2.4) (3.0)
Question 2 continues on next page
March 2021 | MGMT 332 | College of Business | worldwide.erau.edu
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Page 2 of 3
Calculate the per share price and run sensitivities for growth rates of
3.0%, 3.5%, and 4% as well as discount rates of 6%, 7%, and 8%.
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 Price Annual Coupon Maturing in
A 604.00 2.2% 8 years
B 780.00 2.4% 9 years
C 1,001.00 2.8% 10 years
D 455.00 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 $13
Exercise Price $19
Maturity (yrs) 3
Risk-free Rate 2.1%
Stock Volatility 30%
Complete Answer:
