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16 March, 16:02

Aerelon Airways, a commercial airline, suffers a major crash. As a result, passengers are

considered to be less likely to choose Aerelon as their carrier, and it is expected free cash flows

will fall by $15million per year for five years. If Aerelon has 55 million shares outstanding, an

equity cost of capital of 10%, and no debt, by how much would Aerelonʹs shares be expected to

fall in price as a result of this accident?

A) $0.93

B) $1.03

C) $1.14

D) $1.34

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Answers (1)
  1. 16 March, 16:06
    0
    Option B $1.03

    Explanation:

    First lets calculate present value = cash flow (PVAF, life, rate) where PVAF = present value annuity factor

    = 15 (PVAF, 10, 5 years)

    from the annuity table

    Present value = 15 * 3,790 = $56.8618 million

    The decrease in Present value will be $56.8618 million

    Decrease in price = present value/number of share = 56.8618/66 = 1.033851 approx $1.03
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