1. In May 2011, Apache issued a 10-year, $263M bond paying 8.0% annually in two equal coupons each May and November. It is now May 2015 and Apache just paid the May coupon on its existing bond. Rates have come down, so it is thinking of buying back the bond and issuing a 5-year, $330M bond. This bond matures in May 2020 and will pay 3.0% per year in equal coupons each May and November.

a. What is the price that Apache must pay the current bond holders to buy back the bond? (Hint - the present value of the coupon payments and the final face value)

b. What are the cash flows associated with the new bond?

c. What are the cash flow differentials to Apache? In other words, what are the net cash flows in or out for Apache each May and November when comparing both bonds?

d. What is the present value of these cash flow differentials?

e. What does the answer to Question 1, Part d tell you?

2. Apache's real estate department is considering buying a hangar and leasing it out to private jet operators. They ask you to calculate the NPV and IRR of the investment and have given you the data below. Assume that the hangar is sold in year 25 and that the mortgage runs 25 years. (Table Below)

Item Value Inflator 1,910 1,015,000 10% 3.9% 8.00 Square Footage Property Price ($) Down Payment Interest Rate Closing Costs at Start Broker Fee in Year 25 Yearly Property Appreciation Rent/ sq. ft/ Inflator Op. Costs/ year ($)/ Inflator Tax Rate Depreciation/ year ($) 5.0% 1.5% 3.00 1.0% 1.0% 11,640 21.0% 4,524 E K M s s D 2011 May F G 2012 May Nov. H 2013 May 2014 May L 2015 May N 2016 May Nov. P O 2017 May Nov. R 2018 May T 2019 May V w 2020 May Nor. 2021 May Nov. Nov. Nov. Nov. Nor. Nov. B 1 in MS 2 Amt. Coupon 3 Existing Bonds 4 New Bonds 5 Purch. Price of Exist.Bonds 6 Incremental CF 7 8 NPV of Incremental CF in May 2015: 1 10 11 12 123 1 15 16 11 18 19 20. 21 23 24 25 1 2 4 5 1 8 2 Key Assumptions > Square footage Property price ($) $ Down payment 6 Interest rate 7 Closing coste ut stort # Broker fec in year 25 . Property Value 10 Yearly appreciation 11 Mortgage Balance 12 Net Property Yalee 13 Operating Assumptions 14 Rentioq.ft./Inflator 15 Op. costlyr. ($) / Inflator * Tax rate 17 Depreciation year ( Cash Floys 19 Rent Income 20 minus: Operating Costs 21 minus: Debt Amortization 22 plus: Interest tax shield 23 plus: Depreciation tax shield 24 minus: Initial Expenses 25 plus: Sale Property in year 25 26 Total Cask Flors 27 IRR NPY 52 29 30 Note: Tax shields are the tax gains from expcncing interest or depreciation. The general formula is interest expensex tax rate for interest tax shield 18 B c D G H J L N e R s T U Y z AA 7 10 11 12 13 14 15 16 17 18 19 20 21 22 23 25 A 1 2 3 Beg. Balance 4 Payment 5 Interest 6 Principal 7 Ending Balance 8 9 10