Introduction Grading Sheet Problems Your Points Maximum Valu

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This exam requires you, among other things, to estimate the stock price for Virgin America Inc. (Ticker: VA), and provide the analysis as requested. You will need to use “Sources of Financial Data” listed in Course Content to obtain the necessary financial info/statements for Virgin America Inc., to identify its peer companies and to obtain pricing and financial information for them.

A. Choose several peer companies for Virgin America Inc. and justify your choice. Choose several valuation multiples and, using comparable ratios of peer companies (as we did in Project 2 and discussed in Conferences) and Virgin America Inc. financial information from prospectus, estimate the company’s equity value on April 3, 2016. It is required for this question to list your major assumptions and properly reference sources of information that you used in your calculations.

B. Using the same peers and industry data, please estimate Virgin America Inc.’s WACC. Show all your data used for calculations. Again, please state all your assumptions and sources of information.

C. On April 4, 2016, Alaska Air Group Inc. (Ticker: ALK) announced its intent to buy Virgin America Inc. How do your valuations compare to the Alaska Air Group Inc. announced acquisition price? If your valuations differ from observed prices, can you briefly forward any possible explanations? For example, you should discuss and attempt to evaluate possible synergy and other effects of acquisition.

D. The following information is for pedagogical purposes only and does not deal with real terms of the deal. In July 2015, Virgin America and ViaSat (Ticker: VSAT) announced a joint venture (JV) to provide Wi-Fi service onboard. ViaSat invested $5 million for 10% ownership in the form of convertible preferred shares. By July 2016, JV is expected to generate $5 million in revenues with a subsequent 25% annual growth. ViaSat anticipates selling its share in July 2019. Applying a Value/Sales ratio of 16, what is the estimated 2019 value of ViaSat's share in the JV? What is ViaSat’s implied cost of capital that justified the $10 million investment? How would your answers change if the annual growth were only 20%?

What is the advantage of having convertible preferred instead of common equity?

E. The following information is for pedagogical purposes only and does not deal with real terms. Rumors suggest that Virgin America is negotiating a three-year agreement with Amazon (Ticker: AMZN), granting Virgin America the right to stream Amazon Prime content at a predetermined annual price of $50 million. Currently, Virgin America uses Netflix (Ticker: NFLX) streaming service and pays $40 million annually, with each year's value potentially increasing by 20% or decreasing by 10%. Each year, Virgin America can decide whether to use Netflix or Amazon Prime based on these options. How should the company decide each year, and what is the total value of this series of options to Virgin America? How does the risk-free rate (3%) influence your valuation? Support your answer with detailed calculations and reasoning, using option pricing formulas as needed.