King Fisher Aviation is in the business of green jet fuel, an advanced renewable fuel alternative to traditional jet fuel. The process used produces green jet fuel from a variety of sustainable feedstocks. King Fisher Aviation uses technology that allows them to meet regulatory compliance obligations for renewable energy in the aviation transportation fuel sector, as well as produce high-quality fuel. You have recently taken on the role of financial manager for the young and growing company.
King Fisher Aviation is ready to grow and is considering investing in new technologies. As the financial manager for King Fisher Aviation, you are asked to provide some critical information on company bonds, present and future values, and cash flow in order to make some tough decisions and appropriate recommendations to the Chief Executive Officer (CEO).
This is the second of three King Fisher activities that will assist you in completing a full analysis of the company’s financial status. Your decisions and proposed recommendations can make a significant difference to King Fisher’s growth. For complete project details, review the information on the King Fisher Aviation Project page.
Problems
1. As the new Financial Manager, the CEO of King Fisher has asked you to review some bonds. What is the price of a 15 year, semi-annual zero coupon bond, paying $1000 at maturity if the YTM is:
8%
10%
12%
Fill in the values in the spreadsheet.
2. King Fisher has issued a bond with the following characteristics:
Par $1,000
Time to maturity: 15 years
Coupon rate: 7 percent
Semiannual payments
Calculate the price of the bond if the YTM is:
8%
10%
12%
Fill in the values in the spreadsheet.
3. King Fisher Aviation is expected to pay the following dividends over the next four years:
$12.00
$5.00
$7.00
$3.00
Afterwards the company anticipates paying a constant 4%. If the required return on the stock is 15 percent, what is the current share price?
Fill in the values in the spreadsheet.
4. King Fisher Aviation is evaluating an investment project with the following case flows:
$6,000
$5,500
$7,000
$8,000
Discount rate 14 percent
What is the discounted payback period for these cash flows if the initial cost is 15,000? What if the initial cost is $12,000? What if the cost is $16,000?
Fill in the values in the spreadsheet.
5. King Fisher Aviation is considering an investment in a new technology for a drone project with a price of $16 million. Their current technology has a book value of $5 million and a market value of $5 million. The new technology is expected to have a five (5) year life, and the old technology has three (3) years left in which it can be expected to be used. If the firm replaces the old technology with the new technology it expects to save $5.7 million in operating costs each year over the next four years. If the firm purchases the new technology, it will also need an investment of $300,000 in net working capital. The required return on the investment is 12 percent, and the tax rate is 39 percent.
What are the NPV and IRR of the decision to replace the old technology?