B462 Week 2 Live Case Analysis
Feng Manyu
BA462
Live case
Key Questions
What is the risk profile of your company? (How much overall risk is there in this firm? Where is this risk coming from [market, firm, industry, or currency]? How is the risk profile changing?)
What is the performance profile of an investment in this company? What return would you have earned investing in this company’s stock? Would you have under or performed the market? How much of the performance can be attributed to management?
How risky is this company’s equity? Why? What is its cost of equity?
How risky is this company’s debt? What is its cost of debt?
What is the mix of debt and equity used by this firm to fund its investments?
What is this company’s current cost of capital?
1. Estimating …show more content…
Historical Risk Parameters (Top-Down Betas)
Run a regression of returns on your firm’s stock against returns on a market index, preferably using monthly data and five years of observations.
Regression Statistics
Multiple R
0.70297673
R Square
0.49417628
Adjusted R Square
0.48545519
Standard Error
0.05230491
Observations
60
What is the intercept of the regression?
What does it tell you about the performance of this company’s stock during the period of the regression?
The intercept is 0.0113. Since I calculate the excess return of Boeing and S&P 500 (the return of Boeing minus Rf, the return of S&P500 minus Rf), I compare the intercept with 0. The intercept suggest that Boeing’s stock performed 1.13% better than expected.
What is the slope of the regression?
-What does it tell you about the risk of the stock?
The slope of the regression is beta. Beta is a measure of the systematic risk. The slope is greater than 1. When the market change 1%, the stock of Boeing will change 1.08%
-How precise is this estimate of risk? (Provide a range for the estimate.) The standard error is 0.0523.
The range is 1.019-1.123
What portion of this firm’s risk can be attributed to market factors? What portion to firm-specific factors? Why is this important?
R square is 0.494. It means 49.4% of the risk Boeing comes from market source, and that the balance of 51.6% of the risk comes from firm-specific components. It is important because the r-squared can measure of how well the company excess returns are explained by the benchmark index like
S&P500.
How much of the “risk” for this firm is due to business factors? How much of it is due to financial leverage?
The operating leverage is 0.51.So 51% of the risk for Boeing is due to business factors. 49% of Boeing is due to financial leverage.
2. Comparing to Sector Betas(Bottom-up Betas)
Break down your firm by business components, and estimate a business beta for each component.
The business components of Boeing:
Commercial Airplanes
Defense Space & Security
Boeing Capital Corporation
Shared Services Group
Estimate a business beta?
Attach reasonable weights to each component and estimate a unlevered beta for the business
Estimate an unlevered beta:
Commercial Airplanes: 1.95
Defense Space & Security: 0.75
Boeing Capital Corporation: 0.76
Shared Services Group: 0.36
Using the current leverage of the company, estimate a levered beta for each component.
Commercial Airplanes: 1.18
Defense Space & Security: 4.129
Boeing Capital Corporation: 2.48
Shared Services Group: 7.79
3. Choosing between betas
Which of the betas that you have estimated for the firm (top-down or bottom-up) would you view as more reliable? Why?
I would like to choose bottom-up. Because the beta is more close to the yahoo finance shows. For the bottom-up, I do not get the business beta, so the beta is not accurate.
Using the beta that you have chosen, estimate the expected return on an equity investment in this company to equity investors in the company? The expected return is 1.63%
As a manager in this firm, how would you use this expected return?
Expect returns could be referring to the value of the future returns, so I would like use this as an advertisement to attract investment.
4. Estimating Default Risk and Cost of Debt
If you company is rated,
-What is the most recent rating for the firm?
AA-
-What is the default spread and interest rate associated with this rating?
CDS spread is 0.
-If your company has bonds outstanding, estimate the yield to maturity on a long-term bond? Why might this be different from the rate estimate in the last step?
I would estimate the yield to maturity on a long-term bond as 3.7%
Because the rate estimate is not for long term, it has lower yield to matuiry.
-What is the company’s marginal tax rate?
36.7%
5. Estimating cost of capital
Weights for debt and equity:
-What is the market value of equity?
The market value of equity is generally the number of shares outstanding time the current stock price.
The shares outstanding is 747.38 million
The stock price is $130.16
Market value of equity: $97,278,980,800
Estimate a market value for debt.
$10890.43 billion
What are the weight of debt and equity?
We=E/E+D=34%
Wd=D/E+D=66%
Cost of capital
-What is the cost of capital for the firm?
2.08%
BA462
Live case
Key Questions
What is the risk profile of your company? (How much overall risk is there in this firm? Where is this risk coming from [market, firm, industry, or currency]? How is the risk profile changing?)
What is the performance profile of an investment in this company? What return would you have earned investing in this company’s stock? Would you have under or performed the market? How much of the performance can be attributed to management?
How risky is this company’s equity? Why? What is its cost of equity?
How risky is this company’s debt? What is its cost of debt?
What is the mix of debt and equity used by this firm to fund its investments?
What is this company’s current cost of capital?
1. Estimating …show more content…
Historical Risk Parameters (Top-Down Betas)
Run a regression of returns on your firm’s stock against returns on a market index, preferably using monthly data and five years of observations.
Regression Statistics
Multiple R
0.70297673
R Square
0.49417628
Adjusted R Square
0.48545519
Standard Error
0.05230491
Observations
60
What is the intercept of the regression?
What does it tell you about the performance of this company’s stock during the period of the regression?
The intercept is 0.0113. Since I calculate the excess return of Boeing and S&P 500 (the return of Boeing minus Rf, the return of S&P500 minus Rf), I compare the intercept with 0. The intercept suggest that Boeing’s stock performed 1.13% better than expected.
What is the slope of the regression?
-What does it tell you about the risk of the stock?
The slope of the regression is beta. Beta is a measure of the systematic risk. The slope is greater than 1. When the market change 1%, the stock of Boeing will change 1.08%
-How precise is this estimate of risk? (Provide a range for the estimate.) The standard error is 0.0523.
The range is 1.019-1.123
What portion of this firm’s risk can be attributed to market factors? What portion to firm-specific factors? Why is this important?
R square is 0.494. It means 49.4% of the risk Boeing comes from market source, and that the balance of 51.6% of the risk comes from firm-specific components. It is important because the r-squared can measure of how well the company excess returns are explained by the benchmark index like
S&P500.
How much of the “risk” for this firm is due to business factors? How much of it is due to financial leverage?
The operating leverage is 0.51.So 51% of the risk for Boeing is due to business factors. 49% of Boeing is due to financial leverage.
2. Comparing to Sector Betas(Bottom-up Betas)
Break down your firm by business components, and estimate a business beta for each component.
The business components of Boeing:
Commercial Airplanes
Defense Space & Security
Boeing Capital Corporation
Shared Services Group
Estimate a business beta?
Attach reasonable weights to each component and estimate a unlevered beta for the business
Estimate an unlevered beta:
Commercial Airplanes: 1.95
Defense Space & Security: 0.75
Boeing Capital Corporation: 0.76
Shared Services Group: 0.36
Using the current leverage of the company, estimate a levered beta for each component.
Commercial Airplanes: 1.18
Defense Space & Security: 4.129
Boeing Capital Corporation: 2.48
Shared Services Group: 7.79
3. Choosing between betas
Which of the betas that you have estimated for the firm (top-down or bottom-up) would you view as more reliable? Why?
I would like to choose bottom-up. Because the beta is more close to the yahoo finance shows. For the bottom-up, I do not get the business beta, so the beta is not accurate.
Using the beta that you have chosen, estimate the expected return on an equity investment in this company to equity investors in the company? The expected return is 1.63%
As a manager in this firm, how would you use this expected return?
Expect returns could be referring to the value of the future returns, so I would like use this as an advertisement to attract investment.
4. Estimating Default Risk and Cost of Debt
If you company is rated,
-What is the most recent rating for the firm?
AA-
-What is the default spread and interest rate associated with this rating?
CDS spread is 0.
-If your company has bonds outstanding, estimate the yield to maturity on a long-term bond? Why might this be different from the rate estimate in the last step?
I would estimate the yield to maturity on a long-term bond as 3.7%
Because the rate estimate is not for long term, it has lower yield to matuiry.
-What is the company’s marginal tax rate?
36.7%
5. Estimating cost of capital
Weights for debt and equity:
-What is the market value of equity?
The market value of equity is generally the number of shares outstanding time the current stock price.
The shares outstanding is 747.38 million
The stock price is $130.16
Market value of equity: $97,278,980,800
Estimate a market value for debt.
$10890.43 billion
What are the weight of debt and equity?
We=E/E+D=34%
Wd=D/E+D=66%
Cost of capital
-What is the cost of capital for the firm?
2.08%