Financial Management

Question 1 In an effort to capture the large jet market, Airbus invested $13 billion developing its A380, which is capable of carrying 800 passengers. The plane had a list price of $280 million. In discussing the plane, Airbus stated that the company would break even when 249 A380s were sold. a. Assuming the break-even sales figure given is the accounting break-even, what is the cash flow per plane? b. Airbus promised its shareholders a 20 percent rate of return on the investment. If sales of the plane continue in perpetuity, how many planes must the company sell per year to deliver on this promise? c. Suppose instead that the sales of the A380 last for only 10 years. How many planes must Airbus sell per year to deliver the same rate of return? Question 2 Landman Corporation (LC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of 0.60 . It's considering building a new $73 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $9.4 million in perpetuity. The company raises all equity from outside financing. There are three financing options: 1. A new issue of common stock: The flotation costs of the new common stock would be 6 percent of the amount raised. The required return on the company's new equity is 13 percent. 2. A new issue of 20-year bonds: The flotation costs of the new bonds would be 3 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 7 percent, they will sell at par. 3. Increased use of accounts payable financing: Because this financing is part of the company's ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of 0.15 . (Assume there is no difference between the pretax and aftertax accounts payable cost.) What is the NPV of the new plant? Assume the tax rate is 21 percent