Valuation Section: Please Value The Following Company Under

Valuation Sectionplease Value The Following Company Under Three Differ

Valuation Sectionplease Value The Following Company Under Three Differ

VALUATION SECTION Please value the following company under three different scenarios. The capital structure and WACC is the same under each scenario. No Growth: This scenario is a typical ‘no growth’ scenario where there are some modest growth assumptions for the forecast period but long term expectations are that competition will eliminate excess profits resulting in a scenario where WACC = ROIC and growth for year 6 and beyond is expected to be 0%. Growth: This scenario is a ‘growth’ scenario where there is robust revenue growth for the next five years expected and then year 6 and beyond is expected to have continued growth and will be able to maintain the competitive edge resulting in ROIC > WACC. Harvesting: This scenario is characterized by declining revenue and reduced levels of NOPAT reinvestment. Residual value has a negative growth rate. Dividend Discount Model 1. Stock X's expected dividend in one year of $3.00 and the dividend is expected to grow at a constant rate of 6%. The required return is 10%. Using the DDM what is the estimate of the current stock price? 2. Stock Y issued a dividend of $2.00 today which is expected to grow at 4% for the next 5 years and then grow at a constant rate of 2% after that. The required return is 10%. Using DDM what is the estimate of the current stock price? Research and Analysis Develop and estimate of WACC for Boeing (BO) using the latest financial statements and market information. Select Market Prices and Other Information 10 Year Treasury Bond Rate2.75 Current Default Risk Premium (over 10 Year Treasury Bonds). Liquity Premium is zero.3.25 Equity Beta 1.20 Equity Market Risk Premium5.00 Current Stock Price55.00 Tax Rate40.00 Shares Outstanding25,000,000 Debt Outstanding (assume book value = market value)425,000,000 Cash and Marketable Securities5,000,000.00 GROWTH STRATEGY Year123456 Forecast information Last Year's Revenue $3,000,000,000 ($3 Billion) Revenue Growth rate assumptions 3%3%3%2%2%2% Operating Margin (including depreciation expense)12%12%12%11%11%10% % of NOPAT invested in incremental Working Capital 3%3%3%2%2% % of NOPAT invested in incremental Fixed Capital7%7%7%6%6% Tax Rate40%40%40%40%40%40% Residual Period (also known as continuing value period) ROIC 20% Growth Rate 2% NO GROWTH STRATEGY Year123456 Forecast information Last Year's Revenue $3,000,000,000 ($3 Billion) Revenue Growth rate assumptions 2%2%1%1%1%1% Operating Margin (including depreciation expense)12%11%11%11%10%10% % of NOPAT invested in incremental Working Capital 2%2%2%1%1% % of NOPAT invested in incremental Fixed Capital5%5%5%4%4% Tax Rate40%40%40%40%40%40% Residual Period (also known as continuing value period) ROIC = WACC Growth Rate 0% Harvesting or Negative Growth Strategy Year123456 Forecast information Last Year's Revenue $3,000,000,000 ($3 Billion) Revenue Growth rate assumptions 2%2%1%1%1%1% Operating Margin (including depreciation expense)12%11%11%11%10%10% % of NOPAT invested in incremental Working Capital 2%2%2%1%1% % of NOPAT invested in incremental Fixed Capital5%5%5%4%4% Tax Rate40%40%40%40%40%40% Residual Period (also known as continuing value period) ROIC = WACC Growth Rate -2%

Paper For Above instruction

The valuation of a company under various scenarios is integral to strategic financial decision-making. The three scenarios—No Growth, Growth, and Harvesting—each provide unique insights into the company's potential future value, considering different market conditions and strategic directions. Additionally, dividend discount models (DDM) are crucial tools for estimating the intrinsic value of stocks based on expected future dividends and their growth rates. This paper discusses the application of DDM in valuing stocks such as Stock X and Stock Y, as well as the comprehensive process of estimating the Weighted Average Cost of Capital (WACC) for Boeing, incorporating latest financial data and market conditions.

Valuation Scenarios

The No Growth scenario assumes a static environment where the company's growth stabilizes, and competitive forces erode excess profits over time. In this case, WACC equals ROIC from year 6 onwards, with zero growth anticipated thereafter. Such a scenario is often used to evaluate the company's value in a mature phase where growth opportunities are limited.

Conversely, the Growth scenario assumes robust revenue expansion during the forecast period, with the company maintaining its competitive edge beyond year 5. Here, ROIC exceeds WACC, and the company's value appreciates significantly due to sustained high returns on invested capital. The model considers revenue growth rates, operating margins, and reinvestment percentages to project future cash flows.

The Harvesting scenario involves declining revenues and reduced reinvestment, leading to a negative residual growth rate. This approach is relevant for mature or declining industries where the company's strategic focus shifts from expansion to extracting existing value, often resulting in lower or negative growth in residual value calculations.

Dividend Discount Model Applications

In the context of stock valuation, the DDM provides a systematic approach for estimating current stock prices based on expected dividends and their growth prospects. For Stock X, given an expected dividend of $3.00 in one year and a constant growth rate of 6%, the current price (P0) can be calculated using the Gordon Growth Model:

\( P_0 = \frac{D_1}{r - g} = \frac{3.00}{0.10 - 0.06} = \frac{3.00}{0.04} = \$75.00 \)

This indicates the stock's fair value based on current dividend expectations and growth assumptions.

For Stock Y, which has a dividend of $2.00 today, a growth of 4% for the next five years, and then a constant rate of 2% thereafter, a two-stage DDM approach is appropriate. First, projecting dividends for the next five years, then calculating the terminal value at year 5, which considers the perpetual growth at 2%. Discounting both to present value yields an estimated stock price, which aligns with commonly used valuation techniques.

Estimating WACC for Boeing

WACC represents the average rate required by investors, weighted by the company's capital structure. Using market data, the current 10-year treasury yield is 2.75%, and the equity beta is 1.20, with a market risk premium of 5.00%, and a corporate tax rate of 40%. The cost of equity (Re) is computed as:

\( Re = R_f + \beta \times Market\,Risk\,Premium = 2.75\% + 1.20 \times 5\% = 2.75\% + 6\% = 8.75\% \)

The after-tax cost of debt (Rd) is:

\( Rd = 3.25\% \times (1 - 0.40) = 1.95\% \)

Capital structure percentages are derived from market values: debt and equity totals, with cash considered separately. The weighted average cost of capital combines the cost of equity and after-tax debt typical for Boeing's capital structure. Incorporating these figures, WACC can be calculated as:

\( WACC = \frac{E}{V} \times Re + \frac{D}{V} \times Rd \),

where E/V and D/V are the proportion of equity and debt in the company's capital structure. Accurate estimation involves detailed analysis of market values versus book values, considering Boeing’s latest financials.

The different strategic scenarios—No Growth, Growth, and Harvesting—affect the projections of future cash flows and terminal values, ultimately influencing corporate valuation. The comprehensive valuation process combines discounted cash flow analyses, dividend valuation models, and capital cost estimations, providing a holistic view of Boeing’s valuation under current market and financial conditions.

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  • U.S. Department of the Treasury. (2023). Daily Treasury Long-Term Rates. Retrieved from https://home.treasury.gov
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