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Argo Airlines, a privately held firm, is looking to buy additional gates at its home airport for $350,000. Argo has money 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. The bank said that Argo needed to lower that ratio below 0.5 in order to get the loan. Separately, SkyBlue Airlines has approached Argo to see if Argo will buy it.

The price discussed by the two CEOs is 24.5x SkyBlue's 2020 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.

SkyBlue Acquisition Price Paid 2022 2023 - Earnings Multiple - 2020 actual net earnings Price Value based on free cash flows: 2021 EBIT EBIAT Change in Working Capital Change in Other assets Free Cash Flow PV of Free Cash Flows - Existing Debt = Present Value of SkyBlue equity TV Notes From Pro Formas - EBIT projection EBIT minus tax From Pro Formas (exclude Bank note plug!) From Pro Formas EBIAT plus changes in WC/Other assets Calculation Bank Loan + CPLT + LTD Calculated value (Underpay)/Overpay for SkyBlue If negative, the purchase prices is less than SkyBlue is worth SkyBlue Acquisition Price Paid 2022 2023 - Earnings Multiple - 2020 actual net earnings Price Value based on free cash flows: 2021 EBIT EBIAT Change in Working Capital Change in Other assets Free Cash Flow PV of Free Cash Flows - Existing Debt = Present Value of SkyBlue equity TV Notes From Pro Formas - EBIT projection EBIT minus tax From Pro Formas (exclude Bank note plug!) From Pro Formas EBIAT plus changes in WC/Other assets Calculation Bank Loan + CPLT + LTD Calculated value (Underpay)/Overpay for SkyBlue If negative, the purchase prices is less than SkyBlue is worth