Corp Finance

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MGMT 332 Corporate Finance I

Module 7: Long Term Financing and Leasing Problem Set 7 – Long Term Financing and Leasing

1. In May 2011, Apache issued a 10-year, $263M bond paying 8.0% annually in two equal coupons each May and November. It is now May 2015 and Apache just paid the May coupon on its existing bond. Rates have come down, so it is thinking of buying back the bond and issuing a 5-year, $330M bond. This bond matures in May 2020 and will pay 3.0% per year in equal coupons each May and November.

a. What is the price that Apache must pay the current bond holders to buy back the bond? (Hint - the present value of the coupon payments and the final face value)

b. What are the cash flows associated with the new bond? c. What are the cash flow differentials to Apache? In other words, what are the net

cash flows in or out for Apache each May and November when comparing both bonds?

d. What is the present value of these cash flow differentials? e. What does the answer to Question 1, Part d tell you?

2. Apache's real estate department is considering buying a hangar and leasing it out to

private jet operators. They ask you to calculate the NPV and IRR of the investment and have given you the data below. Assume that the hangar is sold in year 25 and that the mortgage runs 25 years.

Item Value Inflator

Square Footage 1,910 Property Price ($) 1,015,000 Down Payment 10% Interest Rate 3.9%

Closing Costs at Start 8.00 Broker Fee in Year 25 5.0%

Yearly Property Appreciation 1.5% Rent/ sq. ft/ Inflator 3.00 1.0%

Op. Costs/ year ($)/ Inflator 11,640 1.0% Tax Rate 21.0%

Depreciation/ year ($) 4,524