Looking forward to next year, if Chester’s current cash amount
Subject: Business   / Finance
Question
Prepare the Southwest Airlines Winglet Project mini-case that is on pages 88-91 of the textbook. Estimate the project’s annual project free cash flow for each of the next 20 years, as well as the initial cash outflow. For questions 1-9 use a 10% cost of capital. Conduct the analysis on a per plane basis. Answer the following questions:
1.   What is the initial cash outflow?
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2.   What is the free cash flow in year 1?
3.   What is the free cash flow in year 20?
4.   What is the project’s NPV?
5.   What is the project’s IRR?
6.   Do you suggest Southwest Airlines undertake the project? Why or why not?
Southwest Airlines decides to check its cost of capital calculation. It has gathered the following data. The current interest on long-term US treasury bonds is 3 percent. The interest rate on Southwest’s existing corporate debt is 9 percent. The average interest rate on the other airlines recently issued debt was approximately 11 percent. The marginal corporate income tax rate was 39 percent. Southwest’s stock was currently selling at $24 per share, a price-earnings ratio of 14.8. The most recent year’s earnings were $20.1 million or $1.62 per share. The balance sheet included $365 million of debt and $175 million of shareholders equity. The unlevered Beta for the airline industry is 0.86.
7.   What is the weight of equity in Southwest’s capital structure?
8.   What is the cost of equity for Southwest?
9. What is the cost of debt for Southwest? 10.   What is the WACC for Southwest? Put all your answers on a spreadsheet separate from your DCF and WACC calculation spreadsheets (but in the same file).
