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FINE 332 | Jan ’22 | worldwide.erau.edu
All rights are reserved. The material contained herein is the copyright property of Embry-Riddle Aeronautical
University, Daytona Beach, Florida, 32114. No part of this material may be reproduced, stored in a retrieval
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FINE 332
Corporate Finance I

Module 5 Problem Set
Valuing an Airline for Acquisition

JTM Airlines, a privately held firm, is looking to buy additional gates at its home airport. It has money in the
bank, but that money may not be spent as it is used to pay salaries, suppliers, and equipment. It asked its
bank for a loan, but the bank refused unless the project had a return higher than JTM’s weighed average cost
of capital. Separately, PAN Airways’s CEO approached JTM’s CEO to sell the airline.

As a result of all this, JTM has contracted you to:

1. Calculate JTM’s weighed average cost of capital (WACC) based on two airlines trading in the

capital markets – PDM and GAL. Since JTM does not trade, it has no beta, so you need to use these
two firms as proxies. JTM’s CFO kindly gave you the necessary information on PDM and GAL for you
to do this with some assumptions for the combined entity too.

2. Aside from the purchase price, the gates will require a working capital infusion at purchase. JTM
estimates the gates will generate cash flows over the next 15 years. After that, the gates will revert back to
the airport operator and 100% of the working capital is recovered. Calculate the NPV and IRR of the
gates.

3. You were given PAN’s 2020 income statement (IS) and balance sheet (BS), along with forecasts of the
revenue growth. Forecast the IS and BS for the next 5 years.

4. You must value PAN Airways using free cash flows to see the price of the equity.

5. Last, you will consolidate the calculated balance sheet for PAN and the actual balance sheet for JTM
and calculate the three ratios shown in the JTM balance sheet. All the data you need is in the template
provided for you by JTM’s CEO.

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