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Company Is Boeing, Which Operates In Two Case Study

¶ … company is Boeing, which operates in two distinct sectors. About half the business is in commercial aircraft, and the other half is in defense contracting, usually aircraft, rockets and that sort of thing. Both industries have minimal competition, but the defense industry in particular is dependent on U.S. government spending for its survival. There is always risk when half of your company has only one customer. The aircraft industry faces risk in part relating to the price of fuel and overall demand for air travel. Boeing has a moderate amount of financial risk. The debt-to-equity ratio is 5.22, which means that the company is mainly financed through debt. It should be noted, however, that most of this is current liabilities. Boeing does not have any preferred shares. So the capital structure is 83.9% debt and 16.1% equity. The liabilities are divided between 66.2% short-term liabilities and 33.8% long-term debt.

Boeing's market cap is $107.86 billion, with a share price of $154.95 and 704.39 million shares outstanding.

The current beta for Boeing is 1.04. It is not possible to guess what Boeing's beta would be if it had no long-term debt in its capital structure. The beta is the correlation of movements...

The general market. The capital structure is not included in this calculation. While it is true that some investors may take the capital structure into account when valuing the stock, there are many other factors involved in stock price movements, because stock price movements reflects the present value of expected future cash flows. Guessing about investor behavior, in retrospect, is pretty silly. Now, the book value per share is a metric that will change if the capital structure is different, so that might be a better question to ask.
The current tax rate of the company is 26.4%, based on last year's income statement. Boeing has a number of bonds that can be used to estimate the cost of debt. The yield to maturity of a 10-year issue is 2.76%, according to Morningstar. The after tax cost of debt would therefore be 2.03%. The cost of equity can be calculated by the capital asset pricing model:

Rf + ? (Rm-Rf).

0.22 + 1.04(7) = 7.5%

The dividend yield on common stock is 2.02%.

The weighted average cost of capital for the company is:

.839(2.03) + (.161)(7.5) = 1.70317 + 1.2075 = 2.91%

The current P/E of Boeing is 20.75. The five-year chart…

Sources used in this document:
References

MSN Moneycentral. (2015). Boeing. Retrieved March 9, 2015 from http://www.msn.com/en-us/money/stockdetails/financials/fi-126.1.BA.NYS?ocid=qbeb

Morningstar. (2015). Boeing. Morningstar. Retrieved March 9, 2015 from http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=ba

Treasury.gov (2015). Daily Treasury yield curve rates. U.S. Department of the Treasury. Retrieved March 9, 2015 from http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
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