Argo Airlines, a privately held firm, is looking to buy additional gates at its home airport...

 

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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. 4. 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. A E F Actual Projected 1 2 Income Statement 2020 2021 2022 2023 Notes - S,G & A Expenses 1,199 1,239 1,281 1,326 Use same percent of Net Sales as in 2018 10 = EBIT 334 345 357 369 Calculation (Use for Free Cash Flow valuation!) 11 - Interest 77 77 77 77 Hold level 12 = EBT 257 268 280 292 Calculation 13 - Taxes 54 56 59 61 Use implicit rate of 2018 14 = Net Income 203 212 221 231 Calculation 15 Balance Sheet 16 Cash 230 238 245 254 17 Notes and Acc. Rec. 664 686 709 732 18 Inventory Increase at average growth rate 788 715 739 763 19 Prepaid 65 67 69 72 20 Current Assets 1,674 1,729 1,786 1,845 21 Other 102 102 102 102 Increase at average growth rate 22 Total Assets 1,776 1,831 1,888 1,947 23 177 Plug to make balance sheet balance 36 Increase at average growth rate 24 Bank Loan 550 433 309 25 Payables 33 34 35 26 CPLTD 42 42 42 42 Leave flat 27 Other 34 35 36 38 Increase at average growth rate 28 Current Liabilities 659 545 423 293 125 83 41 (1) LTD of previous year minus CPLTD of current yea 1,656 Equity of previous year plus net income of current y 1,947 29 LTD 30 Equity 31 Total Liabilities & Equity 992 1,204 1,425 1,776 1,831 1,888 32 33 Working Capital 1,565 1,618 1,673 1,729 Exclude Bank Loan 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. 4. 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. A E F Actual Projected 1 2 Income Statement 2020 2021 2022 2023 Notes - S,G & A Expenses 1,199 1,239 1,281 1,326 Use same percent of Net Sales as in 2018 10 = EBIT 334 345 357 369 Calculation (Use for Free Cash Flow valuation!) 11 - Interest 77 77 77 77 Hold level 12 = EBT 257 268 280 292 Calculation 13 - Taxes 54 56 59 61 Use implicit rate of 2018 14 = Net Income 203 212 221 231 Calculation 15 Balance Sheet 16 Cash 230 238 245 254 17 Notes and Acc. Rec. 664 686 709 732 18 Inventory Increase at average growth rate 788 715 739 763 19 Prepaid 65 67 69 72 20 Current Assets 1,674 1,729 1,786 1,845 21 Other 102 102 102 102 Increase at average growth rate 22 Total Assets 1,776 1,831 1,888 1,947 23 177 Plug to make balance sheet balance 36 Increase at average growth rate 24 Bank Loan 550 433 309 25 Payables 33 34 35 26 CPLTD 42 42 42 42 Leave flat 27 Other 34 35 36 38 Increase at average growth rate 28 Current Liabilities 659 545 423 293 125 83 41 (1) LTD of previous year minus CPLTD of current yea 1,656 Equity of previous year plus net income of current y 1,947 29 LTD 30 Equity 31 Total Liabilities & Equity 992 1,204 1,425 1,776 1,831 1,888 32 33 Working Capital 1,565 1,618 1,673 1,729 Exclude Bank Loan