# Corporate Finance I Probem Set Final Exam Practice

## Prob. 1

Argo Airlines | ||||||||||||||||

Purchase price | ||||||||||||||||

Fit-out costs | ||||||||||||||||

Yearly revenue | ||||||||||||||||

Revenue inflator | ||||||||||||||||

Operating costs (% of revenue) | ||||||||||||||||

Discount rate | ||||||||||||||||

Tax rate | ||||||||||||||||

Years | ||||||||||||||||

Start | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | |

Investment | ||||||||||||||||

Revenues | ||||||||||||||||

Expenses | ||||||||||||||||

Income before tax | ||||||||||||||||

Taxes | ||||||||||||||||

Net income after tax | ||||||||||||||||

NPV | ||||||||||||||||

IRR | Text answer here. |

## Prob. 2

BOAC Airline Supply | ||||||||||

Yrs. 1-6 | ||||||||||

Sales growth | Cash Flows | |||||||||

Costs: | 1 | 2 | 3 | 4 | 5 | 6 | ||||

Cost of Goods Sold (% of sales) | Sales | 103.0 | ||||||||

Advert., Prom., & Selling | Cost of Goods Sold | |||||||||

General & Administrative | Advert., Prom., & Selling | |||||||||

Rates: | General & Administrative | |||||||||

Tax | Net Income before Tax | |||||||||

Discount | Taxes | |||||||||

Inflation | Net Income after Tax | |||||||||

Results | Cash flow adjustments: | |||||||||

PV of NCF (incl. TV) | Working Capital | |||||||||

+ Cash | Capital Expenditures | |||||||||

– Debt | Net Cash Flows | TV | ||||||||

Total Equity (M$) | NCF (incl. terminal value) | |||||||||

– # of shares outstanding (M) | ||||||||||

– Price/share ($) | Growth rate | |||||||||

Price/share ($) for: | 3.0% | 3.5% | 4.0% | |||||||

6.0% | Disc. Rate | |||||||||

7.0% | ||||||||||

8.0% |

## Prob. 3

A | B | C | D | |

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 |

## Prob. 4

a. Option Pricing | b. Futures Prices | |||||||||

Base | Fed | Price drop | Base | Ukraine | ||||||

Exercise price | Bushels | |||||||||

Maturity | Bushels/contract | |||||||||

Stock price | # of contracts | |||||||||

Risk free rate | Contract price | |||||||||

Volatility | Spot price | |||||||||

BS calculations: | Profit/(Loss) to cousins | |||||||||

d1 | ERROR:#DIV/0! | ERROR:#DIV/0! | ERROR:#DIV/0! | |||||||

N(d1) | ERROR:#DIV/0! | ERROR:#DIV/0! | ERROR:#DIV/0! | c. Interest Rate Swap | ||||||

d2 | ERROR:#DIV/0! | ERROR:#DIV/0! | ERROR:#DIV/0! | Cash Flows | ||||||

N(d2) | ERROR:#DIV/0! | ERROR:#DIV/0! | ERROR:#DIV/0! | Bond outstanding | Original | Swap Pmts. | Net | |||

Price of call | ERROR:#DIV/0! | ERROR:#DIV/0! | ERROR:#DIV/0! | Maturity (yrs.) | Year 1 | |||||

Fixed rate | Year 2 | |||||||||

Spread over LIBOR | Year 3 | |||||||||

LIBOR: | Year 4 | |||||||||

Years 1-2 | Year 5 | |||||||||

Years 3-4 | Year 6 | |||||||||

Years 5-6 | Year 7 | |||||||||

Years 7-10 | Year 8 | |||||||||

Year 9 | ||||||||||

Year 10 | ||||||||||

Present value of net |

## v. MAR 2021

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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

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.

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 semi- annual 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%

What is the value of the option? Suppose the Fed raises Treasury rates to 2.3%, what is the new price of the option? After this Fed action, your company’s share price falls to $12, what is the new price of the option?

b. Your cousins grow corn in Wisconsin and plan to harvest 10,000,000 bushels at the end of the season. They are unsure whether to sell the futures contracts and lock the price in at $5.40/bushel or take a gamble and sell it all at the spot price at season’s end. They think they can get $4.80/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 $5.44 at maturity? Ukraine had a bumper harvest and spot prices fall to $5.33/bushel, what will the cousins’ profit/loss be now?

Question 4 continues on next page.

Page 3 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 10 years Bond Face Value $333M Current Bond Rate 4.5% per year, fixed Floating rate LIBOR + 100 basis points Projected LIBOR rates 3.3% (years 1-2)

3.4% (years 3-4) 3.5% (years 5-6) 3.6% (years 7-10)

Show the cash flows for Argo and the present value gain/loss of doing the swap.

- 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.

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