Air Thread

The leverage ratio would be 20%, which was measured by debt divided by the market value of AGI’s invested

3. Compute the unlevered free cash flow and the interest tax shields from 2008 to 2012 based on estimates provided in Exhibit 1 and Exhibit 6. (3 points)

Here is a rundown of the variables we used to first determine the cash flows for Years 0 through 10: depreciation of equipment over the 10 years, sales minus COGS to identify gross profit, summed expenses (advertising, start-up, and Jell-o erosion only; the test market expense in Year 1 is considered a sunk cost and thus should not be included), and subtracted taxes to come up with the cash flow. When assessing the below issues, the team concluded the following

WACC = Cost of Debt X proportion of debt + Cost of Preferred Stock X Proportion of preferred stock + Cost of equity X proportion of equity

To calculate the cost of debt and equity for this project, we combined the risk-free rate with a risk premium based on the market risk premium and the riskiness of Southwest Airlines.

The next step was to calculate the free cash flows for the eleven-year period. In order to do so, we used to following formula: FCF = EBIT(1-tax) + depreciation - change in NWC – CapEx. From here, we used to WACC of 13.89% previously calculated, in order to find the present value of each FCF.

The debt/equity ratio for Boeing is provided in exhibit 10, 0.525, from where we can infer the weights of both debt and equity.

14. WACC – Table 19.4 shows a simplified balance sheet for Rensselaer Felt. Calculate this company’s weighted-average cost of capital. The debt has just been refinanced at an interest rate of 6% (short term) and 8% (long term). The expected rate of return on the company’s shares is 15%. There are 7.46 million shares outstanding, and the shares are trading at $46. The tax rate is 35%.

1 From 2003-2009, the revenue per aircraft is $17 million and increase by 4 percent per year.

A widely used measure to balance between debt and equity in the firm's long-term capital structure. In the case of Airtel it is 0.25.

• The company’s business as at the time in order to determine its expected net cash flow from business by deducting from projected future sales the cash expenses which would be necessary to generate those sales; and

2. Another method of deriving the cost of equity is by using the capital asset pricing model (CAPM). The underlying assumption of CAPM is that the market is pricing in the risk of the stock in relation to the risk of the market. This firm-specific risk is the cost of equity for the firm. The formula for CAPM is:

5 approach to estimating cash flow to the firm, which should yield equivalent results, is to estimate the cash flows to the firm prior to debt payments but after reinvestment needs have been met: EBIT (1 - tax rate) –

According to the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 230 (ASC 230), cash flows are classified in the Statement of Cash Flows (SCF) as cash flows from operating, investing, and financing activities. ASC 230 replaced FASB Statement No 95 (SFAS-95). This paper will discuss certain problems in SFAS-95 that continue to exist. Certain related cash flows are classified differently because of inconsistencies and ambiguities in classification. Further, the indirect method is widely executed while the direct method discloses more cash flow information. This paper alerts users to make more informed assessments of cash flow information with regards to the subtotals from operating, investing, and financing activities. This paper also suggests the FASB require the direct method for reporting purposes to improve investors’ and creditors’ judgment accuracy. At the same time, this paper provides users ratios to assess the quality of income to make more informed decisions.

FCFF= Net Income + Depreciation + Interest Expense – Change in net working capital – CapEx