The case is in the attachment

Questions

Suppose you are Kay Biddle and you will prepare the memorandum.

You have to structure your memorandum around the following items:

1. Describe the company's core business and the market it serves.

2. Discuss the role of a corporate board of directors. To whom is the board responsible?

3. Why are capital market data and information useful when a firm is considering its cost of capital?

4. Discuss the roles of historical and marginal costs of capital.

5. In general, describe the effect upon the cost of capital of changes in capital market conditions such as an increase in interest rates, or a decline in stock prices.

6. Calculate FPC's weighted average cost of capital.

7. How should the company's marginal cost of capital information and its optimal capital structure fit with its expansion plans?

8. Calculate the firm values of the two target companies to acquire.

Please turn in a hard copy of the report which demonstrates your thoughtfulness, rigor, technical proficiency, and ability to tell the story.

The body of your memorandum must not exceed 10single-sided letter-size pages of typed 12-point-font double-spaced characters

. You may include tables and figures in an appendix and reference them in the body of the report.

If you make anyassumptions or use information from external sources, state or cite them clearly. Writing and analysis should be performed by each student individually.

Flight Plan Consulting, Inc. Cost of Capital and International Firm Valuation Based on: Bennie Nunnally (2002), Flight Plan Consulting, Inc., Cases (A) and (B) The Company Bill Gibson began Flight Plan Consulting, Inc. (FPC) in 1990. The company offered very specialized consulting services to corporate flight departments, i.e., to those companies that have their own planes for purposes of executive transportation. This consultancy focused on the cost versus benefit considerations of the acquisition and use of corporate aircraft. Bill Gibson was ideally suited for this line of work; he was both a commercial pilot and had held an adjunct position as a finance professor in a university near his home. His company had its first and only public offering of stock in 1995; at that time revenue had reached the $5 million dollar mark, and the employee headcount was up to ten. In the twelve years since the company's inception, sales, earnings and the company's fine reputation have increased steadily. The company's financial information, and selected capital market and industry data and information are provided in Table 1. A major contributor to the company's good fortunes is a particular area of concern taking place in many corporate flight departments around the United States. This concern is known as \"fractional ownership\" versus full ownership of corporate aircraft. Gibson, while not a corporate pilot, understood well the costs, benefits, concerns and industry dynamics of corporate flight departments and the companies that supplied the aircraft. This knowledge and breadth of understanding formed the basis for his consulting company. Fractional ownership, in its simplest terms, is when several companies, usually three or four companies, share the ownership of a corporate aircraft. One web site dedicated to fractional ownership described the arrangement as \"similar to condominium time-sharing\". That description may oversimplify the situation, however, there are similarities. For example, a company that wishes to buy fractional ownership will buy or lease a 1/5-th interest in an airplane. Such an arrangement would allow for approximately 160 hours per year of usage. The total cost would depend upon the type of aircraft chosen. The fractional purchaser or lessee would also have access to aircraft crew, maintenance and everything else needed to complete the operation of a corporate aircraft. The interest in fractional ownership has several origins, the most prominent of which is the corporate \"downsizing\" and \"rightsizing\" of the decade of the 1990's. The closing of a corporate flight department could possibly mean a significant reduction in total corporate overhead expenses. Moreover, fractional ownership may be more \"flexible\" in the manner in which the services are customized for each individual fractional owner. A rule of thumb among consultants was if the aircraft will be needed between 100 and 350 hours per year, fractional ownership would likely be the best option. (The other options are, for less than 100 hours per year, use a charter service; for usage over 350 hours per year, operate an in-house flight department.) Within that environment, FPC has become a major source of consulting services for firms that are moving from having an in-house flight department to fractional ownership, or are considering corporate aircraft acquisition for the first time. The operations of FPC involved Gibson or one of his five consultants working with the client to determine the most efficient manner in which to acquire the use of a corporate aircraft. The consulting relationships were always quite involved and of long duration. A consultant's reputation, however, depended upon the word-of-mouth goodwill of each client. In the last year or so, Gibson had considered expanding by acquisition. There were several smaller consultancies in the same line of business as FPC. Gibson, after extensive discussions with his investment bank, had decided to focus upon two firms. Either one of those two would permit him immediately to acquire clients in Canada or Germany. The more pronounced international reach was exactly what FPC's strategic plan called for. While the company had done business in both Canada and parts of Western Europe for several years, the companies being considered for acquisition had very positive reputations in their respective locations. Cost of Capital Gibson believed that long-term capital from external sources would be needed to finance the acquisition. Gibson believed FPC's common stock to be valued fairly at present. He also believed that the company's excellent bond rating would make a debt issue feasible. Although the company's board of directors was made up of successful and knowledgeable people from a variety of backgrounds, not all of them were intimately familiar with finance; it was, therefore, essential to answer any questions they had with authority. The firm's investment in any asset, including other companies, was a result of the strategic plan, which the board had helped to develop and had certainly approved. The cost of capital issue was a very necessary tool in the implementation of that plan. The economic worth of any investment made by FPC would be measured against the firm's cost of money, its opportunity cost, its cost of capital; terms that Gibson knew were interchangeable. At this crucial stage of the company's development, he wanted his board to be \"conversational\" with those terms. Gibson decided that he had better provide some specific and detailed information to his board concerning the company's cost of capital and its relation to the valuation process. In order to move the process along, Gibson decided to hand over the task of preparing a draft of \"Cost of Capital and Acquisition Plans Memo\