Valuing an airline for acquisition 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.

. The price discussed by the two CEOs is 25x SkyBlue's 2018 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 Apache is overpaying or underpaying for SkyBlue. Show equations used below

SkyBlue Acquisition
- Earnings Multiple
- 2018 actual net earnings
Price				Price Paid
Value based on free cash flows:
	2019	2020	2021	Notes
EBIT				From Pro Formas - EBIT projection
EBIAT				EBIT minus tax
- Change in Working Capital				From Pro Formas (exclude Bank note plug!)
- Change in PP&E				From Pro Formas
Free Cash Flow				Calculation
Terminal Value				Assumes growth rate given
Present Value				Calculation
PV of Free Cash Flows				Calculation
- Existing Debt				Bank Loan + CPLT + LTD
= Present Value of SkyBlue				Calculated value
(Underpay)/Overpay for SkyBlue				If negative, Apache Airlines paid less than SkyBlue is worth

Balance sheet is below

Actual 2018 Projected 2019 2020 2021 Notes 21% 5,500 3,200 2,300 1,600 700 110 0% 21% 5,500 3,200.00 8,700 1,600 6% 21% 5,830 3,392 9,222 1,696 6% 21% Use current statutory rate of 21% 5,830 Increase at average growth rate 3,392 Use same percent of Net Sales as in 2018 9,222 Calculation 1,696 Use same percent of Net Sales as in 2018 742 Calculation (Use for Free Cash Flow valuation!) 110 Hold at 2018 level 632 Calculation 133 Use implicit rate of 2018 499 Calculation 700 110 742 110 590 124 590 124 466 632 133 466 499 Income Statement Key Assumptions: Average growth rate: Tax Rate Net Sales Cost of Goods Sold (COGS) = Gross Profit -S,G & A Expenses = EBIT - Interest 2 = EBT - Taxes = Net Income 5 Balance Sheet 5 Cash Notes and Acc. Rec. 3 Inventory Prepaid Current Assets Other 2 Total Assets 3 Bank Loan 5 Payables 5 CPLTD 7 Other 3 Current Liabilities LTD Equity 300 1,300 1,100 80 300 1,300 1,100 80 318 1,378 1,166 85 337 1,461 Increase at average growth rate 1,236 90 2,780 1,300 4,080 2,780 1,300 4,080 2,947 1,300 4,247 3,124 1,300 Hold at 2018 level 4,424 830 100 100 125 464 100 100 125 789 575 2,716 692 106 100 125 962 See below 112 Increase at average growth rate 100 Hold at 2018 level 125 Hold at 2018 level 1,299 375 LTD of previous year minus CPLTD of current year 2,749 Equity of previous year plus net income of current year 1,155 675 2,250 1,023 475 2,749 2 Working Capital 2,455 2,455 2,616 2,786 Exclude Bank Loan