Boeing's Strategy

10. What is the correct capital structure and weighted average cost of capital for discounting the investment’s free cash flow. Assume a 35% tax rate. A correct response requires that you define capital structure and Weighted Average Cost of Capital (WACC) with a formula. When defining a term with a formula be sure that all the variables are also defined.

Based on the suggestion that the focus should be on market values, compute the weights of debt, preferred stock, and common stock.

According to the company’s annual report in 2009, the Federal statutory tax rate is 35%. Along with the above analysis, we have gathered all the key information necessary to estimate the WACC as following:

Answer: WACC covers computation of SIVMED’s cost of capital in which each category of capital is proportionately weighted. All capital basis - common stock, preferred stock, bonds or any other long-term borrowings – should be listed under SIVMED’s WACC. We determine WACC by multiplying the cost of the corresponding capital component by its proportional weight and then adding: where: Re is a cost of equity Rd is a cost of debt E is a market value of the firm's equity D is a market value of the firm's debt V equals E + D E/V is a proportion of financing that is equity

WACC = Cost of Debt X proportion of debt + Cost of Preferred Stock X Proportion of preferred stock + Cost of equity X proportion of equity

The debt/equity ratio for Boeing is provided in exhibit 10, 0.525, from where we can infer the weights of both debt and equity.

Moreover, let’s calculate the Weighted Average Cost of Capital (WACC). And in order to calculate it we need to know the capital structure of the company. Knowing the capital structure of the

WACC = (1-corporate tax rate)(Pretax rate of cost of debt)(Market value of debt/ D+E))+ After tax rate of cost of equity(market value of equity/D+E))

.5189 for FY 2015, they show that almost half of the remaining assets are acquired by the shareholders. This is similarly projected by the equity ratio. Meanwhile, the debt-to-equity ratio foretells that there is a proportion of 143% total liabilities (for FY 2015) against the shareholder’s equity. The ratio seems high, yet it only shows the value allocation of the total liabilities against the total equity. On the other hand, for FY 2014, the total liabilities and total equity

Weights of Debt and equity are 8.3 and 91.7%. Now, plugging all the values in, we can derive company’s Weighted Average Cost of Capital.

The debts to asset ratio is a measure of a company’s total liabilities divided by the total assets. It demonstrations how much of a company’s assets are funded by borrowing (source). Using the formula, Lockheed Martin had a value of 0.937 in 2015 and Boeing Co.’s value was 0.932 (Source). Therefore, 93.7% of Lockheed Martin’s and 93.2% of Boeing’s assets were funded from borrowing. As a result, these two companies

After terminal value was calculated, we proceeded by valuing KMB using the entity approach. As shown in the Exhibit 5, the value of the assets is $55,128.44. This was calculated by discounting all the unlevered cash flows and the terminal value by our WACC of 6.8257%. For the total value of debt we used the market value of $7064.3 million. After the value of the equity was calculated, we got the implied debt

Debt to Equity calculating by dividing the Total Debt of a company by Equity. If the debt exceeds equity of a company. the creditors have more stakes than stockholders. Anyway, Debt to Equity ratio provides analysts with details about composition of both equity and debt and the influence on the value of the company on the market. Boeing is on the fourth place in debt to equity rating category among similar companies with the score 1.03 times.

Weighted Average Cost of Capital D E WACC = rd(1 – t) –– + re –– C C Cost of Internal Capital re (CAPM2 model) 18.,42% = 10.5 + (1.1 x

The financing decision has a direct effect on the weighted average cost of capital (WACC). The weighted-average cost of capital (WACC) represents the overall cost of capital for a company, incorporating the costs of equity, debt and preference share capital, weighted according to the