Posted: April 18th, 2022

FINE 332 | Jan ’22 | worldwide.erau.edu All rights are reserved.

FINE 332 | Jan ’22 | 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.

FINE 332 Corporate Finance I

Module 5 Problem Set Valuing an Airline for Acquisition

JTM Airlines, a privately held firm, is looking to buy additional gates at its home airport. It has money in the bank, but that money may not be spent as it is used to pay salaries, suppliers, and equipment. It asked its bank for a loan, but the bank refused unless the project had a return higher than JTM’s weighed average cost of capital. Separately, PAN Airways’s CEO approached JTM’s CEO to sell the airline. As a result of all this, JTM has contracted you to:

1. Calculate JTM’s weighed average cost of capital (WACC) based on two airlines trading in the

capital markets – PDM and GAL. Since JTM does not trade, it has no beta, so you need to use these two firms as proxies. JTM’s CFO kindly gave you the necessary information on PDM and GAL for you to do this with some assumptions for the combined entity too.

2. Aside from the purchase price, the gates will require a working capital infusion at purchase. JTM estimates the gates will generate cash flows over the next 15 years. After that, the gates will revert back to the airport operator and 100% of the working capital is recovered. Calculate the NPV and IRR of the gates.

3. You were given PAN’s 2020 income statement (IS) and balance sheet (BS), along with forecasts of the revenue growth. Forecast the IS and BS for the next 5 years.

4. You must value PAN Airways using free cash flows to see the price of the equity.

5. Last, you will consolidate the calculated balance sheet for PAN and the actual balance sheet for JTM and calculate the three ratios shown in the JTM balance sheet. All the data you need is in the template provided for you by JTM’s CEO.

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FINE 332 | January 22nd, 22nd, 22nd, 22nd, 22nd, 22nd, 22nd, 22nd, 22nd, 22nd, 22nd, All intellectual property rights are reserved. Embry-Riddle Aeronautical University, Daytona Beach, Florida, 32114, owns the copyright to the material included herein. Without the previous written authorization of the University, no portion of this material may be copied, stored in a retrieval system, or transmitted in any form, electronic, mechanical, photocopying, recording, or otherwise.

FINE 332 Corporate Finance I is an introductory course in corporate finance.

Problem Set 5: Valuing an Airline for Acquisition

JTM Airlines, a privately held company, is looking to purchase more gates at its home airport. It has money in the bank, but it cannot spend it since it is used to pay salaries, suppliers, and equipment. It approached its bank for a loan, but the bank refused unless the project was completed.

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