Corporate Finance (Stock Valuation)

Module 5 Problem Set 5
Valuing an Airline for Acquisition

JTM Airlines, a privately held firm, is looking to buy additional gates at its home airport for
$1,500,000. 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.
2. Aside from the purchase price, the gates will require a working capital infusion of
$1,500,000 at purchase. JTM estimates the gates will generate cash flows of $295,500 in
year 1, inflating at 4%/year over the next 12 years. After that, the gates will revert back to
the airport operator. Half the working capital is recovered at the end. 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. The price discussed by the two CEOs is $6.5M. You must value PAN Airways using
free cash flows to see if this price is fair or not.

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