Final Exam ‘take home’

| June 25, 2015

Paper, Order, or Assignment Requirements

 

For Question 1: I will upload the picture so you should change the default assumptions and then you should calculate the computed value below and explain.
Here is the assumptions:
Left column: The first four boxes, earnings per share FY1, 2, 3 and dividends per share FY1
Right column:Country premium, Beta and Risk Premium

For question 4: you should read the outsider book to get the some idea of the explanations and analysis.

All questions refer to Boeing (BA)

 

Question 1) Using Bloomberg, prepare a dividend discount model valuation 10 points  e-mail me a screen shot or print it out.

Describe why you modified any fields.

User hint:   BA<F8> DDM   BEFORE you press enter to get to the model, you can right click any of the items for an explanation.

Dave’s explanation:  The dividend discount model is very much like a free cash flow model, but less useful.  The free cash flow model doesn’t care what the cash flow is used for; it simply values $1 at cash flow at some multiple.  The dividend discount model (DDM) is simple in that it only values dividends, although it does recognize that not all of earnings/cash flow will be paid out in dividends.

Bloomberg’s default is to assume a 3 stage model consisting of growth years, transition years and a perpetuity growth rate.  You can (and should!) change the default assumptions that pop up.

Here are assumptions to leave in place:

Left column:   The first four boxes, earnings per share FY1, 2, 3 and dividends per share FY1

Right column:    Country premium, Beta and Risk Premium

All others are fair game for your best estimates, just hit the drop box and replace the default with your views.

 

Question 2) Describe any concerns or lack of concerns you have about Boeing’s supply chain – 5 points

User hint:  BA<F8> FA, then menu item #8, supply chain analysis.

Dave’s explanation:  The supply chain consists of both customers and suppliers.  It is always a good idea to look for customer concentrations – fewer people look at suppliers, especially when no one supplier may have a concentrated dollar weighting, but there can be a supplier of critical items with no good secondary source in an emergency

 

Question 3) Describe HOW Boeing’s free cash flow yield is calculated (for the years 2013 & 2014) – 10 points

  • A) what comprises free cash flow?
  • B) what is the equation used?

User hint:  BA<F8> FA and then choose the ratios tab and look up the answer!  (but, you have to give me the components of A & B listed above, and WHY.

 

Question 4)  You are named CEO of Boeing.  Look at the balance sheet first; then the income statement and cash flow and tell me how you will allocate the incremental free cash flow generated in 2015 & 2016.    20 points

User hint:  See page xii of the Preface to The Outsiders text book for the five choices for use of cash flow, then read Chapter 8 about Warren Buffet for some ideas.  There is no single right answer; I am looking for your depth of thought.

This is the largest point value on the test, so spend some time here.  Again, look at all three financial statements as they stand; then use Bloomberg to estimate the free cash flow in 2015 and 2016.  What is your short and long term plan.

You probably want to the dividend and then …….

Question 5) (not related to Boeing or any specific company)   15 points

Describe the difference between evaluating a stock’s value based on a goal of exceeding Weighted Average Cost of Capital (WACC) and a specific desired return such as 10%.  This class used a 10% desired return to beat the historical total return of the S&P 500 Index.  Would using a 15% desired return hurdle rate create even better results?

 

 

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