Apache Airlines, a privately held firm, is looking to buy additional gates at its home airport for $800,000 Apache has $240,000 in the bank but that money may not be spent as it is used to pay salaries, suppliers, and equipment Apache asked its bank for a loan but the bank refused saying that Apache's interest-bearing debt to equity was too high at 3.1 The bank said that Apache needed to lower that ratio below 2.3 in order to get the loan Separately, SkyBlue Airlines has approached Apache to see if Apache will buy it.

Calculate Apache's cost of capital based on two airlines trading in the capital markets. Eastern and Western Since Apache does not trade, it has no beta, so you need to use Eastern and Western as proxies.

Please show all Excel formulas.

Component 1 Net Income (M$) 2 Earnings per share 3 # of shares (M) 4 Price per share 5 Market Value - Equity (M) 6 Market Value - Debt (M) 7 Market Value - Total (M) 8 -% Debt 9 -% Equity 10 Beta (levered) 11 Beta (unlevered) 12 Average Beta (unlevered) Caledonian 33.40 1.04 32.12 14.00 450 341 791 43% 57% 1.07 0.61 Laker Source 24.10 Given 1.53 Given 15.75 Net Income / Earnings per share 12.63 Given 199 # of shares x Price per share 75 Given 274 Market Value - Debt + Equity 27% Market Value - Debt / Market Value - Total 73% 1 - % Debt 0.93 Given 0.68 Beta (levered) x % Equity 0.64 Average Values for combined Apache/SkyBlue airline: % Debt 50.0% % Equity 50.0% Beta (relevered) 1.28 Risk free rate 6.0% Market risk premium 5.0% Expected equity return 12.4% Expected cost of debt 7.0% Tax rate 21.0% WACC Given 1- % Debt Average Beta (unlevered) / % Equity Assumption Historical figure CAPM calculation Given Statutory rate Weighed average of costs of equity and debt| 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 she 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 Component 1 Net Income (M$) 2 Earnings per share 3 # of shares (M) 4 Price per share 5 Market Value - Equity (M) 6 Market Value - Debt (M) 7 Market Value - Total (M) 8 -% Debt 9 -% Equity 10 Beta (levered) 11 Beta (unlevered) 12 Average Beta (unlevered) Caledonian 33.40 1.04 32.12 14.00 450 341 791 43% 57% 1.07 0.61 Laker Source 24.10 Given 1.53 Given 15.75 Net Income / Earnings per share 12.63 Given 199 # of shares x Price per share 75 Given 274 Market Value - Debt + Equity 27% Market Value - Debt / Market Value - Total 73% 1 - % Debt 0.93 Given 0.68 Beta (levered) x % Equity 0.64 Average Values for combined Apache/SkyBlue airline: % Debt 50.0% % Equity 50.0% Beta (relevered) 1.28 Risk free rate 6.0% Market risk premium 5.0% Expected equity return 12.4% Expected cost of debt 7.0% Tax rate 21.0% WACC Given 1- % Debt Average Beta (unlevered) / % Equity Assumption Historical figure CAPM calculation Given Statutory rate Weighed average of costs of equity and debt| 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 she 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