Part A Instructions: You can use the company of your choice if you want, otherwise, perform the analysis based on the data of Boeing Inc. Use the excel spreadsheet to ease your calculations. The Excel file can be submitted as final document, or you can copy the excel data in a word file and submit the word file as well. The Scenario You just started working for the finance division of Boeing Inc (symbol: BA) and your supervisor just gave you the assignment to review the capital structure of the company. Your boss think that the company should change its capital structure. Your boss is an old guy but still remembers something from his MBA lectures regarding irrelevance of the capital structure, but he is not quite sure what does that mean. You know from your lectures with Dr. Asad that capital structure is irrelevant under perfect markets and will try to make the same point to your supervisor by showing him that weighted average cost of capital is same under various debt levels. Based on perfect capital markets assumption, prepare your response. You decided to consider two scenarios: The company issues $1 Billion in new debt to repurchase stock, and The firm issues $1 Billion in new stock to repurchase debt. Use Excel to answer the following questions using Eqs. 1 and 2 below, and assuming a cost of unlevered equity (rU) of 12% Eq(1) Eq(2) 1. Next, Obtain the financial information you need for Boeing Inc. a. Go to https://finance.yahoo.com and note down the stock price of the Boeing mentioned at the top. Next, Click the balance sheet and note down the Ordinary Shares Number. b. Click the financials and go to balance sheet tab and note down the long-term debt and capital and current debt and capital, also note down the cash position of the company as well (click expand all to see the values). All these figures may be in thousands or millions, make sure to convert them in the real numbers in order to get accurate answer. c. To get the cost of debt for Boeing, go to NASD BondInfo (finramarkets.morningstar.com ). Under Market Data, select Bonds, then select the Search option, enter issuer name as Boeing, select the Corporate Bond Type and click Show Results. The next page will contain information for all of Boeings outstanding and recently matured bonds. Select the latest yield on an outstanding bond with the shortest remaining maturity (the maturity date is on the line describing each issue; sometimes the list also contains recently retired bonds, so make sure not to use one of those. I would advise to use the one with the maturity date of 15 August 2021 for Boeing, however, if you choose some other company, then you need to find the yield of the bond with the most recent maturity date). For simplicity, since you are just trying to illustrate the main concepts for your boss, you may use this yield on the outstanding bond as rD. 2. Compute the market D/E ratio for Boeing. Approximate the market value of debt by the book value of net debt; include both Long-Term Debt and Short-Term Debt/Current Portion of Long-Term Debt (it is sometimes mentioned as long-term debt and capital and current debt and capital on yahoo finance financial statements) from the balance sheet and subtract any cash, cash equivalents and short-term investments. Use the stock price and number of shares outstanding to calculate the market value of equity wherein market value of the equity is share price* shares outstanding. 3. Use equation (1) and compute the cost of levered equity (rE ) for Boeing by using its current market debt-to-equity ratio. 4. Compute the current weighted average cost of capital (WACC) for Boeing using Eq. (2) given their current debt-to-equity ratio 5. Repeat Steps 3 and 4 for the two scenarios you would like to analyze, issuing $1 Billion in debt to repurchase stock, and issuing $1 Billion in stock to repurchase debt. (Although you realize that the cost of debt capital rD may change with changes in leverage, for these modestly small changes you decide to assume that rD remains constant. What is the market D/E ratio in each of these cases? 6. Prepare a written explanation for your boss explaining the relationship between capital structure and the cost of capital in this exercis Part B Your boss was impressed with your presentation regarding the irrelevance of capital structure but, as expected, has realized that market imperfections like taxes must be accounted for. You have now been asked to include taxes in your analysis. Your boss knows that interest is deductible and has decided that the stock price of Boeing should increase if the firm increases its use of debt. Thus, your boss wants to propose a share repurchase program using the proceeds from a new debt issue and wants to present this plan to the CEO and perhaps to the Board of Directors. Your boss would like you to examine the impact of two different scenarios, adding a modest level of debt and adding a higher level of debt. In particular, your boss would like to consider issuing $1 billion in new debt or $5 billion in new debt. In either case, Boeing would use the proceeds to repurchase stock. 1. Using the financial statements for Boeing accessible through Yahoo finance as described earlier in part A, determine the average corporate tax rate for Boeing over the last four years by dividing Tax provision by Pretax Income for each of the last four years and taking the average of it. 2. Begin by analyzing the scenario with $1 billion in new debt. Assuming the firm plans to keep this new debt outstanding forever, determine the present value of the tax shield of the new debt. What additional assumptions did you need to make for this calculation? 3. Determine the new stock price if the $1 billion in debt is used to repurchase stock. a. Use the current market value of Boeing equity that you calculated in Part A. b. Determine the new market value of the equity if the repurchase occurs. c. Determine the new number of shares and the stock price after the repurchase is announced. 4. What will Boeings D/E ratio based on book values be after it issues new debt and repurchases stock? What will its market value D/E ratio be? 5. Repeat Steps 24 for the scenario in which Boeing issues $5 billion in debt and repurchases stock. 6. Based on the stock price, do the debt increase and stock repurchase appear to be a good idea? Why or why not? What issues might the executives of Boeing raise that arent considere