1. JTM is considering purchasing a small Cessna for corporate travel. The price is
$700,000. The dealer is offering a payment plan in which JTM pays 50% down
and finances the rest over 12 months at $30,499/month. What is the implicit
financing rate? If JTM’s WACC is 7.9%, should it accept the financing offer?
2. ABC FBO is looking to buy a flight school. It is being offered an established
school whose owner wants to sell. ABC’s CFO gave you the school’s numbers
and asked you to calculate its price. The CFO asks that you use a 4.5% discount
rate and a 2% growth rate for year 6 and on. What should ABC consider paying
for the flight school?
3. JTM’s treasury office is looking at buying a bond to earn some money on its cash
balances. It has four options, all semi-annual bonds, to pick from:
A B C D
Coupon 3.3% 4.1% 4.5% 0.0%
PAR Value 1,000 1,000 1,000 1,000
Market Rate 4.6% 3.8% 4.5% 3.2%
The market rate is the expected yield for a bond of that credit quality. They have
price quotes, but they want you to calculate the prices of each bond
independently.
One week after you provided the prices (which were right, by the way), they ask
you to calculate the yields being earned on four bonds that JTM owns. The
details are:
D E F G
Coupon 2.88% 5.15% 4.26% 0.0%
PAR Value 1,000 1,000 1,000 1,000
Market Price (983) (1,032) (1,072) (565)
4. JTM
A. JTM pays its C-suite officers with stock options. Treasury asked you to
price them. JTM’s stock trades at $11.25/share; U.S. Treasurys, aka the
risk-free rate, yield 1.97% and stock’s volatility is 18%. The details of
the stock option offers are below. What are the prices of the options?
CEO CFO CIO
Exercise Price 22.00 21.00 20.00
Maturity (yrs.) 7.0 5.0 3.0
B. JTM’s treasury unit bought jet fuel futures to hedge its expenses. It uses
9.5M gallon/yr. Each contract runs 42,000 gallons. The contract price
locked JTM at $1.6355/gal. At maturity, JTM found that the spot price was
$1.6210/gal. In effect, had they not taken the futures, they’d have paid
less. What was the loss on the contract?
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