Argo Airlines, a privately held firm, is looking to buy additional gates at its home airport for $635,000 Argo has $200,000 in the bank but that money may not be spent as it is used to pay salaries, suppliers, and equipment Argo asked its bank for a loan but the bank refused saying that Argo's interest-bearing debt to equity was too high at 3.1 The bank said that Argo needed to lower that ratio below 2.3 in order to get the loan Separately, SkyBlue Airlines has approached Argo to see if Argo will buy it.

Argos CFO hired you to help with the following task:

1. The price discussed by the two CEOs is 22x SkyBlue's 2019 net earnings You must calculate this price and compare it with the free cash flow value of SkyBlue, which you must also calculate The CFO wants to know if Argo is overpaying or underpaying for SkyBlue.

IMPORTANT: SHOW FORMULAS USED TO CALCULATE

1 SkyBlue Acquisition 2 - Earnings Multiple 3 - 2018 actual net earnings 4 Price 5 Value based on free cash flows: Price Paid 6 2019 2020 2021 TV Notes From Pro Formas - EBIT projection EBIT minus tax From Pro Formas (exclude Bank note plug!) From Pro Formas Calculation - 7 EBIT 8 EBIAT 9 - Change in Working Capital 10 Change in PP&E 11 Free Cash Flow 12 13 PV of Free Cash Flows 14 - Existing Debt 15 = Present Value of SkyBlue 16 17 (Underpay)/Overpay for SkyBlue Calculation Bank Loan + CPLT + LTD Calculated value If negative, Argo Airlines paid less than SkyBlue is worth 1 SkyBlue Acquisition 2 - Earnings Multiple 3 - 2018 actual net earnings 4 Price 5 Value based on free cash flows: Price Paid 6 2019 2020 2021 TV Notes From Pro Formas - EBIT projection EBIT minus tax From Pro Formas (exclude Bank note plug!) From Pro Formas Calculation - 7 EBIT 8 EBIAT 9 - Change in Working Capital 10 Change in PP&E 11 Free Cash Flow 12 13 PV of Free Cash Flows 14 - Existing Debt 15 = Present Value of SkyBlue 16 17 (Underpay)/Overpay for SkyBlue Calculation Bank Loan + CPLT + LTD Calculated value If negative, Argo Airlines paid less than SkyBlue is worth