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This case has the following road map:
Tab
WACC Shows the financials for both airlines and calculated the weighed average cost of capital (WACC) for the combined airline
Machine NPV Please calculate the NPV of the new gates
SkyBlue financials Calculate SkyBlue’s income statement (IS) and balance sheet (BS) in order to run free cash flows in the valuation tab
SkyBlue valuation Calculate the present value of SkyBlue using free cash flows
Apache BS (balance sheet) Shows Apache’s balance sheet for 2018 and forecast 2019-2021
Consolidated BS Consolidates Apache’s and SkyBlue’s balance sheets and recalculates the bank ratios
Please note: All figures are in thousand $ unless noted otherwise
WACC
Component Caledonian Laker Source
1 Net Income (M$) 33.40 24.10 Given
2 Earnings per share 1.04 1.53 Given
3 # of shares (M) 32.12 15.75 Net Income / Earnings per share
4 Price per share 14.00 12.63 Given
5 Market Value – Equity (M) 450 199 # of shares x Price per share
6 Market Value – Debt (M) 341 75 Given
7 Market Value – Total (M) 791 274 Market Value – Debt + Equity
8 – % Debt 43% 27% Market Value – Debt / Market Value – Total
9 – % Equity 57% 73% 1 – % Debt
10 Beta (levered) 1.07 0.93 Given
11 Beta (unlevered) 0.61 0.68 Beta (levered) x % Equity
12 Average Beta (unlevered) 0.64 Average
Values for combined Apache/SkyBlue airline:
% Debt 50.0% Given
% Equity 50.0% 1 – % Debt
Beta (relevered) 1.28 Average Beta (unlevered) / % Equity
Risk free rate 6.0% Assumption
Market risk premium 5.0% Historical figure
Expected equity return 12.4% CAPM calculation
Expected cost of debt 7.0% Given
Tax rate 21.0% Statutory rate
WACC Weighed average of costs of equity and debt
trombino:
trombino:
Exhibit 5
Gate NPV
Start Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
Investment
Working Capital
Operating Cash Flow
Total Cash Flow
NPV
IRR
Note: Show all numbers in thousand dollars.
SkyBlue financials
Actual Projected
Income Statement 2018 2019 2020 2021 Notes
Key Assumptions:
Average growth rate: 0% 6% 6%
Tax Rate 21% 21% 21% 21% Use current statutory rate of 21%
Net Sales 5,500 Increase at average growth rate
– Cost of Goods Sold (COGS) 3,200 Use same percent of Net Sales as in 2018
= Gross Profit 2,300 Calculation
– S,G & A Expenses 1,600 Use same percent of Net Sales as in 2018
= EBIT 700 Calculation (Use for Free Cash Flow valuation!)
– Interest 110 Hold at 2018 level
= EBT 590 Calculation
– Taxes 124 Use implicit rate of 2018
= Net Income 466 Calculation
Balance Sheet
Cash 300 Increase at average growth rate
Notes and Acc. Rec. 1,300
Inventory 1,100
Prepaid 80
Current Assets 2,780
Other 1,300 Hold at 2018 level
Total Assets 4,080
Bank Loan 830 See below
Payables 100 Increase at average growth rate
CPLTD 100 Hold at 2018 level
Other 125 Hold at 2018 level
Current Liabilities 1,155
LTD 675 LTD of previous year minus CPLTD of current year
Equity 2,250 Equity of previous year plus net income of current year
Total Liabilities & Equity 4,080
Working Capital 2,455 Exclude Bank Loan
Note: the Bank Loan is a plug figure. Its formula starts with total assets and subtracts the liability and equity accounts.
If the Bank Loan number is positive, it is debt. If negative, it is basically cash.
SkyBlue valuation
SkyBlue Acquisition
– Earnings Multiple
– 2018 actual net earnings
Price Price Paid
Value based on free cash flows:
2019 2020 2021 Notes
EBIT From Pro Formas – EBIT projection
EBIAT EBIT minus tax
– Change in Working Capital From Pro Formas (exclude Bank note plug!)
– Change in PP&E From Pro Formas
Free Cash Flow Calculation
Terminal Value Assumes growth rate given
Present Value Calculation
PV of Free Cash Flows Calculation
– Existing Debt Bank Loan + CPLT + LTD
= Present Value of SkyBlue Calculated value
(Underpay)/Overpay for SkyBlue If negative, Apache Airlines paid less than SkyBlue is worth
Apache BS
Actual Projected
Balance Sheet 2018 2019 2020 2021 Notes
Cash 240 250 250 250
Notes and Acc. Rec. 7,013 8,385 9,998 12,040
Inventory 5,588 6,630 7,905 9,520
Prepaid 192 195 232 280
Current Assets 13,033 15,460 18,385 22,090
Other 3,325 3,830 4,393 5,105
Total Assets 16,358 19,290 22,778 27,195
Bank Loan 6,070 7,586 9,321 11,404
Payables 3,057 3,705 4,417 5,320
CPLTD 433 450 450 450
Other 1,477 1,712 1,994 2,350
Current Liabilities 11,037 13,453 16,182 19,524
LTD 2,458 2,008 1,558 1,108
Equity 2,863 3,829 5,038 6,563
Total Liabilities & Equity 16,358 19,290 22,778 27,195
Ratios:
Bank Loan to Receivables 0.9 0.9 0.9 0.9
Liabilities / Equity 4.7 4.0 3.5 3.1
Debt / Equity 3.1 2.6 2.2 2.0
Consolidated BS
Actual Projected
Balance Sheet 2018 2019 2020 2021
Cash
Notes and Acc. Rec.
Inventory
Prepaid
Current Assets
Other
Total Assets
Bank Loan
Payables
CPLTD
Other
Current Liabilities
LTD
Equity
Total Liabilities & Equity
Ratios:
Bank Loan to Receivables
Liabilities / Equity
Debt / Equity
