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Income statement,Balance sheet

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Consider that Blue Sky Airlines has the following options:

The government has offered a potential "gift" to cover the incremental cost of fuel. This will be an elimination of a 6% fuel excise tax as well as an interest-free $100 million gift in return for agreeing to purchase only U.S.-manufactured aircraft over a three-year period with no reduction in aircraft cost financed by an additional debt at 10%.

The company has been offered a fuel-hedging program that involves a one-time investment of $10 million but will guarantee a 4% annual price increase in operating costs.

The company has been offered a five-year union contract for no wage increases in return for a guarantee of no reduction in jobs.

The company has been offered a 10% reduction in the cost of a planned $600 million aircraft order by a foreign supplier financed by a debt at 10% or the company can forego buying new aircraft but will incur a 10% higher ongoing cost in fuel and labor.

The company has the option to create a low-cost structure that will replace its existing labor structure. This will involve taking the company into bankruptcy to void union contracts, will reduce overall labor costs by 25%, and will involve a 40% premium in ongoing debt expense.
Compare and contrast the options given above, choose the best options for the company, and create a three-year pro forma for Blue Sky. The pro forma should include an income statement and a balance sheet. Assume that revenues will continue to rise by 5% in year-2 but by 25% in year-3 when marketing initiatives take effect.

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Solution Summary

The answer contains the preparation of income statement and balance sheet and also preparing financial statements under five options viz., change in excise rate,reduction in operating cost,new contract with union,increase in debt and reduction in labour cost

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