1. In May 2011, Apache issued a 10-year, $263M bond paying 8.0% annually in two equal coupons each May and November. It is now May 2015 and Apache just paid the May coupon on its existing bond. Rates have come down, so it is thinking of buying back the bond and issuing a 5-year, $330M bond. This bond matures in May 2020 and will pay 3.0% per year in equal coupons each May and November.

a. What is the price that Apache must pay the current bond holders to buy back the bond? (Hint - the present value of the coupon payments and the final face value)

b. What are the cash flows associated with the new bond?

c. What are the cash flow differentials to Apache? In other words, what are the net cash flows in or out for Apache each May and November when comparing both bonds?

d. What is the present value of these cash flow differentials?

e. What does the answer to Question 1, Part d tell you?

2. Apache's real estate department is considering buying a hangar and leasing it out to private jet operators. They ask you to calculate the NPV and IRR of the investment and have given you the data below. Assume that the hangar is sold in year 25 and that the mortgage runs 25 years. (Table Below)

Item Value Inflator Square Footage 1,910 Property Price ($) 1,015,000 Down Payment 10% Interest Rate 3.9% Closing Costs at Start 8.00 Broker Fee in Year 25 5.0% Yearly Property Appreciation 1.5% Rent/ sq. ft/ Inflator 3.00 1.0% Op. Costs/ year ($)/ Inflator 11,640 1.0% Tax Rate 21.0% Depreciation/ year ($) 4,524A B C D E F G H M N O P Q R 5 U V W X in MS 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 IN Amt. Coupon May Nov. May Nov. May Nov. May Nov. May Nov. May Nov. May Nov. May Nov. May Nov. May Nov. May W Existing Bonds 4 New Bonds Purchrice of Exist.Bonds 6 Incremental CF NPV of Incremental CF in May 2015: 8Ken Assumptions J 2 6 I 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Square footage Property price ($) Down payment Interest rate Closing costs at start Broker fee in year 25 Property Value Yearly appreciation Mortgage Balance Net Property Value Operating Assumptions Rent/agift. / Inflator Op, costalur, ($) / Inflator Tax rate 17 Depreciation/wear [$1 Cash Flows Rent Income minus: Operating Costs minus: Debt Amortization plus: Interest tax shield 23 plus: Depreciation tax shield minus: Initial Expenses 25 plus: Sale Property in year 25 Total Cash Flows IRR NPY @52 Note: Tax shields are the tax gains from expensing interest or depreciation. The general formula is interest expense x tax rate for interest tax shield.