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Financial Statement Analysis
Financial Statement Analysis
Financial Statement Analysis
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BB403953 Liu Ye-Xin
Business Project Evaluation: The Boeing 7E7
Introduction of Boeing Boeing was incorporated in Seattle by William Boeing, on July 15, 1916, as "Pacific Aero Products Co". Started as a simple airplane factory, Boeing now has become the largest global aircraft manufacturers, with a range of production of commercial and defense aircrafts, satellites, rockets, and so on. Boeing is the largest exporter in the US, and its stock is a component of the Dow Jones Industrial Average.
In terms of its defense segment, Boeing is the second-largest defense contractor in the world as Lockheed Martin stays at the lead. On the other hand, Boeing is one of the only two commercial aircraft manufacturers, with the only and aggressive competitor,
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It is one of the top five defense contractors in the world. 91% of Northrop Grumman’s revenue came from defense and space in 2003.
● Raytheon The Raytheon Company is a major U.S. defense contractor and industrial corporation with core manufacturing concentrations in weapons and military and commercial electronics. It was previously involved in corporate and special-mission aircraft until early 2007. 73% of Raytheon’s revenue is derived from defense and space in 2003.
Calculation of Cost of Capital Since Boeing 7E7 is a project within the commercial segment, we have to find out the cost of capital of Boeing’s commercial segment.
a. Cost of Debt I use the market value-weighted average of all YTM of Boeing bonds as the cost of debt:
Original Issuer Coupon Maturity Rating Price YTM Issue Amount ($millions) Market Value
($ millions) % Market Value Weighted YTM
Rockwell International 7.625% 15/2/05 A- 106.175 3.911% $202 $214.474 4.27% 0.001670
Rockwell International 6.625% 1/6/05 A- 105.593 3.393% $298 $314.667 6.27% 0.002126
McDonnell Douglas 6.875% 1/11/06 A- 110.614 3.475% $249 $275.429 5.48% 0.001906
Boeing 8.100% 15/11/06 A- 112.650 4.049% $175 $197.138 3.93%
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WACC( Cost of capital)
WACC=Rd*Rd*(1-T)+Re*We
Boing’s cost of capital of its commercial segment equals to
5.33%*0.344*(1-35%)+10.74%*0.656 = 8.24%
Free cash Flow Forecast ( based on economic cycle)
According to Boeing’s previous projects, Boeing 757 and 767, the lifecycle of aircrafts has a pattern that can be observed. As the graph shows, aircraft sales increases gradually after the introduction of the new aircraft and then starts to fall around 11 years after introduction. Thereafter, sales would rise and fall as derivatives of the aircraft were offered.
To forecast Boeing’s free cash flow, I set up some assumptions based on its previous financial statement and precedents:
• Total development cost: $8,000 million
● initial price of 7E7: $136.95 million
● initial price of 7E7 stretch: $170.87 million (7E7 stretch is a larger version of 7E7)
● cost of goods sold (% of sales): 80%
● working capital requirement (% of sales): 6.7%
● general, selling and administrative (% of sales): 8%
● research and development (% of sales): 2.3% (excluding 2004~2007)
● capital expenditure (% of sales): 0.16% (excluding
Based on the optimal capital structure analysis, they should pursue as 70% debt proportion, which will give them the lowest cost of capital at 11.58%. Currently Star has no debt in their capital structure, so these new projects should begin to add debt to the company. However, no matter what debt and equity proportions are chosen for each project, the discount rate of 11.58% should be used, as the capital budgeting decisions should be independ...
MCI's capital requirements for the next 3 years are x,y and z. (see exhibit A). These values are based on a number of different assumptions. (See exhibit B). The forecast is not without a level of uncertainty. Specifically there are regulatory decisions where the outcome is not clear at this time. This could impact profit margin plus or minus seven percentage points. (See exhibit c)
Therefore, with respect to the first opportunity relating to GPS transmitters, the cost of capital was estimated at 12.64%. Whereas, the weighted average cost of capital for the industry was estimated at 9.614% in which, 3% extra was added, as an extra provision for risk. On the other hand, for the second investment project relating to surveillance Aircraft. In which, the cost of capital was estimated at 8.548%, calculated by considering the industrial average of Beta, and then estimating its cost of
The Boeing Corporation is one of the largest manufacturers in the world. Rivaled only by European giant Airbus in the aerospace industry, Boeing is a leader in research, design and manufacture of commercial jet airliners, for commercial, industrial and military customers. Despite enjoying immense success in its market and dominating an industry that solely recognizes engineering excellence, it is crucial for Boeing to ensure continued growth through consistent strategy formulation and execution to avoid falling behind in market share to close and coming rivals.
Petrobras has high cost of capital because of several factors such as lack of international diversification, they only being listed publicly in Sao Paulo in 1997 and on the New York Stock Exchange (NYSE: PBR) in 2000. They seem to only focus on domestic market rather than internationally. Furthermore, they have high sovereign spread which means they have higher different in the yield compared against the US Treasury. Brazilian government had to pay higher additional yield of dollar funds to the global market as compared to lower paid made up by US Treasury. The higher the yields give greater risk to the investor and US Treasury have better sovereign and creditworthiness rating compared to Brazil that have political stability and economic growth problem. The better ways to calculate the weighted average cost of capital is by diversify the business and market international to reduce the risk as well as reducing the capital cost. Next, try to reduce the weighted average of capital (WACC) by changing the composition of the debt and equity capital on the cost structure by the reducing the amount of them and being alert with the volatility happen in sales and
My company is Lockheed Martin. They are in the manufacturing industry of aerospace and defense and were founded in 1995 in the United States of America. As stated on Lockheed Martin’s website, their reason for existing is to, “Help the future arrive. We solve the great problems of our times. We create the innovative technologies that define eras. While no one knows what's going to change the world next, we're probably already working on it.” This company is talented in many categories. For example, they are skillful in aerospace and defense, where they have capabilities is aircraft, directed energy, ground vehicles, missile defense, logistics and sustainment, and the list goes on. Also, they are gifted in areas, such as information technology,
Even with its more recent founding in 1970, Airbus still has a roughly even market share of aircraft as Boeing, which was founded in 1916. Each aircraft manufacturer each has their perks and they both have their disadvantages. Boeing and Airbus each have a similar safety record within the past six years. Comparing each aircraft manufacturer in its entirety does not accurately represent the safety information of Airbus or Boeing. To be able to differentiate each aircraft manufacturer, we need to compare similar aircraft from each company. For our purposes we will compare the flagship plane of Boeing and Airbus, the 747 and A320, with Airbus being the latter.
Qantas to Hike Best Profits before the GFC Qantas freight service is happy to announce record profits this year with 114 million dollars compared to 24 million dollars recorded in last year. Moreover, there are huge transformation benefits achieved by the company with 38 million dollar benefits and high load factors. These are the strong profits recorded by the company before the Global Financial Crisis. Along with profits, the company has placed an order for eight B787-9 aircrafts more which are expected to be delivered in the year 2017. The newly ordered aircrafts are going to replace five old aircrafts of the B747 model in order to start a new era of Qantas International.
Boeing has looked at everything from the design of the anti-collision lights, to the reduction of small gaps in the airfoil. This has created an aircraft that is extremely aerodynamic and efficient at any task it performs. The 737 was originally created on May 11, 1964, however it wasn’t until November 9, 1964 that production was officially approved. On February 19th 1965 Lufthansa placed its first order for the 737-100, and on the 9th of April 1967 the 737 flew for the first time. In 1970, Boeing had less than 35 orders for the 737 and considered canceling the program.
Boeing/Airbus Case Analysis Competition in the Commercial Aircraft Business. With only a few large companies across the globe (Boeing, MD, and Airbus), the commercial aircraft industry essentially exhibits the qualities of an oligopolistic competition with intense rivalry. Here is an analysis of competition in the commercial aircraft business using Porter’s Five Forces. Figure 1: Porter’s Five Forces Applied to Aircraft Industry. Barrier to entry: - High barriers to entry, to a certain extent, help understand the risks involved in operating in the aircraft industry.
Surging jet-fuel prices had a significant effect on the carrier’s operating results, as fuel is the group’s biggest single cost. Cristopher Pratt, chairman of Cathay Pacific Airways said Cathay pacific’s core business knock down into the red in the first half of the year because of indefatigably high fuel prices, the global economic fall and weak air cargo demand (Cathay Pacific blames fuel costs, 2012). Managing director of Air Cargo Management Group, Seattle, and the first issue for the air cargo industry is the forever-increasing price of fuel and fuel now symbolizes a greater percentage of total operating costs, Cathay Pacific increases about 39percent (Cathay Pacific 2013 profit, 2014). Operating costs include both fixed cost and variable costs. Fixed costs, such as overhead, remain the same regardless of the number of products produced; variable costs, such as materials, can vary according to how much product is produced (Mankiw et al, 2012).
WACC is the weighted average return on capital that includes both cost of debt and equity, whereby we discount total cash flows by the appropriate discount rates
Boeing 787 Dreamliner was first announced to the public in January 2003 with approximated costs of five billion dollars , since the sales of the aircraft were high it was supposed to enter commercial service during 2008 but the building up of aircraft seemed more anticipated than expected , since the management decided to use composite materials as an alternative for traditional metals as composite materials are lighter , stronger , cheaper and also resistance to wild variety of chemical agents including acid rain and salt spray as these are the conditions under which metals suffer , Boeing also shared their views in development of air craft with suppliers which effected in a project significantly more anticipated than expected . More than three years later after the project exceeded the estimated budget at last 787 entered commercial service in September 2011.
a. 1. What sources of capital should be included when you estimate Harry Davis’s weighted average cost of capital (WACC)?
In 1990 Boeing was set to introduce the 777, the world’s largest and longest haul twin-bodied jet at the time. The 777 would serve the medium and long haul markets like the expanding Asian market. Boeing’s main competitors, Airbus Industries and McDonnell Douglas, had already announced plans to produce airliners that would compete directly with the 777. Analysts believed that the intense competition between the manufacturers would serve to depress prices for the airliners. Lower prices for aircraft would mean lower earnings.