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?
2. Company Valuation Fley Airline Supply is trading at $15/share but you think that price may not be right.
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%)
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:
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?
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: