Shin Lee was a recent immigrant to Canada and current undergraduate student at the Telfer School of Management. He had some family money to invest and wanted to use the skills he was developing at Telfer wisely. He had heard a great deal about recent turmoil at Bombardier, and this news had piqued his interest. Lee knew often a company in trouble was a good buy, particularly if the future looked bright. Did Bombardier provide a good investment opportunity ? Lee started to do work on a DCF model for Bombardier. He made projections about the Free Cash Flow (FCF) and he was ready to take the present value of the FCF. To do that he realized that he needed to compute the company's Weighted Average Cost of Capital (WACC). Lee's research from Bloomberg indicated Bombardier's Beta was 1.347 and the Market Risk Premium was 5.96 per cent. He set out to calculate the weight of equity for Bombardier based on the closing share price as of December 29, 2017 (the last trading day of 2017). Share price information was available at Bombardier Investor Relations. By looking at the 2017 Annual Report (available as an additional resource), Lee could determine the number of shares outstanding of both preferred and common shares (see pages 201 and 203 of the Annual Report) and exchange rates (see page 149 of the Annual Report). The exchange rate is important because the values in the Annual Report are in USD whereas the share prices are in CAD. He will need then to convert the USD values to CAD. He assumed the company's effective tax rate was 19.13 per cent (an average of the last 4 years that Bombardier had a positive tax rate). For the same day, December 29, 2017, Lee researched the Canadian 10- year bond yield at the Bank of Canada, which would be necessary in calculating the cost of equity for Bombardier. He found that this yield was 2.04%. Lee expected to incorporate the range of preferred shares and their most recent dividend payouts (see page 204 of the Annual Report) into his cost of capital calculations. He assumes that the growth rate of the preferred shared dividends is zero. When calculating the cost of debt, he would include the company's long-term debt (see page 199 of the Annual Report). For the debt that has no value for December 31st, 2017 (it is represented as a dash) he assumes that the market value is 0 (i.e., it has been paid off). He further assumed that the amounts of long-term debt on page 199 of the Annual Report (the column with header December 31st, 2017) were the best estimates of the market values in USD. Finally, Lee's research on Bloomberg gave him the bond prices for all of Bombardier's long term debt (see Table 1; the face value is 100). The bond prices are necessary for the computation of the YTM of each bond with the exception of the "Other" entry, the cost of which for December 31st, 2017 was explained in a footnote (see page 199 of the Annual Report). One issue is how to handle fractional years for bond maturities. For simplicity, he decided to round the number of periods down when computing the YTM of each bond (for the December maturity it is assumed to be at the end of the month so there is no need to round down). So for example, for the March 2020 bond he assumed it has 4 semiannual periods to maturity. Using his knowledge of finance, he sat down to punch the numbers and calculate Bombardier's WACC. Table 1 - Bombardier Bond Prices as of December 31, 2017 Issue Price March, 2020 7.75% 103.64 May, 2021 6.13% 108.32 December, 2021 8.75% 107.90 March, 2022 5.75% 99.32 October, 2022 6% 98.75 January, 2023 6.13% 99.276 December, 2024 7.50% 101.73 March, 2025 7.50% 100.18 May, 2034 7.45% 101.33 December, 2026 7.35% 101.48 27. LONG-TERM DEBT Long-term debt was as follows, as at: December 31 December 31 January 1 2017 2016 2016 Interest rate Amount in currency of origin Currency Contractual (1) After effect of fair value hedges Maturity Amount Amount Amount Senior notes USD $ 850 780 1,400 500 EUR USD USD 7.75% 6.13% 8.75% 5.75% 885 1,019 1,373 506 899 $ 931 1,369 507 916 985 510 1,200 USD 6.00% 1,223 1,228 1,234 1,250 USD 6.13% 1,281 1,280 1,290 1,000 1,500 600(5) n/a n/a n/a n/a2) Mar. 2020 $ n/a May 2021 n/a Dec. 2021 3-month Mar. 2022 Libor + 3.36(3) 3-month Oct. 2022 Libor + 3.57(3) 3-month Jan. 2023 Libor + 3.48(4) Dec. 2024 Mar. 2025 n/a n/a n/a n/a n/a n/a May 2034 n/a Dec. 2026 n/a 2018-2026 $ 990 1,490 USD USD USD USD USD USD 1,488 596 1,487 594 677 7.50% 7.50% 4.75% 7.50% 5.50% 7.45% 7.35% Various (8) 650(6) 740 7506) 250 248 248 Notes Debentures Other(7) 248 107 150 CAD 119 111 112 Various(8) Various 84 191 Of which current Of which non-current 9,218 $ 18 $ 9,200 9,218 $ 8,769 $ 31 $ 8,738 8,769 $ 8,979 71 8,908 8,979 Assets held for sale The major class of assets held for sale or liabilities directly associated with assets held for sale was as follows, as at: December 31, 2017 69 Cash and cash equivalents Other current assets (1) Non-current assets (2) Total assets 1,043 3,038 4,150 934 1,599 2,533 Current liabilities (3) Non-current liabilities (4) Total liabilities (1) Mainly comprised of inventories. (2) Mainly comprised of aerospace program tooling. (3) Mainly comprised of trade and other payables, supplier advances and advances on aerospace programs. (4) Mainly comprised of vendor non-recurring costs, provisions and advances on aerospace programs. In addition, CSALP have $32 million of accumulated OCI as at December 31, 2017. These assets and liabilities are reported in the Commercial aircraft reportable segment. 29. SHARE CAPITAL Preferred shares The preferred shares authorized were as follows, as at December 31, 2017, and 2016 and January 1, 2016: Series 2 Cumulative Redeemable Preferred Shares Series 3 Cumulative Redeemable Preferred Shares Series 4 Cumulative Redeemable Preferred Shares Authorized for the specific series 12,000,000 12,000,000 9,400,000 The preferred shares issued and fully paid were as follows, as at: Series 2 Cumulative Redeemable Preferred Shares Series 3 Cumulative Redeemable Preferred Shares Series 4 Cumulative Redeemable Preferred Shares 5,811,736 6,188,264 9,400,000 December 31, 2016 9,692,521 2,307,479 9,400,000 January 1, 2016 9,692,521 2,307,479 9,400,000 Common shares All common shares are without nominal or par value. Class A Shares (multiple voting) Voting rights: Ten votes each. Conversion: Convertible, at any time, at the option of the holder, into one Class B Share (subordinate voting). Dividend: After payment of the priority dividend on the Class B Shares (subordinate voting) mentioned below, the Class A Shares (multiple voting) shall share equally, share for share, with respect to any additional dividends which may be declared in respect of the Class A Shares (multiple voting) and Class B Shares (subordinate voting). These dividends, if declared, shall be payable quarterly on the last day of March, June, September and December of each year. Class B Shares (subordinate voting) Voting rights: One vote each. Conversion: Convertible, at the option of the holder, into one Class A Share (multiple voting): (i) if an offer made to Class A (multiple voting) shareholders is accepted by the present controlling shareholder (the Bombardier family); or (ii) if such controlling shareholder ceases to hold more than 50% of all outstanding Class A Shares (multiple voting) of the Corporation. Dividend: The holders of Class B Shares (subordinate voting) are entitled, in priority to the holders of Class A Shares (multiple voting) to non-cumulative dividends of $0.0015625 Cdn per share, payable quarterly on the last day of March, June, September and December of each year at a rate of $0.000390625 Cdn per share, if declared. After payment of said priority dividend, the Class B Shares (subordinate voting) shall share equally. share for share, with respect to any additional dividends which may be declared in respect of the Class A Shares (multiple voting) and the Class B Shares (subordinate voting). These dividends, if declared, shall be payable quarterly on the last day of March, June, September and December of each year. The change in the number of common shares issued and fully paid and in the number of common shares authorized was as follows as at: Class A Shares (multiple voting) December 31, 2017 December 31, 2016 313,900,550 Issued and fully paid Balance at beginning of year Converted to Class B Balance at end of year Authorized 313,900,550 (2,001) 313,898,549 3,592,000,000 313,900,550 3,592,000,000 Class B Shares (subordinate voting) December 31, 2017 December 31, 2016 Issued and fully paid Balance at beginning of year Issuance of shares Converted from Class A 1,932,511,397 164,466 1,932,675,863 104,900 2,001 1,932.782,764 1,932,675,863 (53,533,118) Held in trust under the PSU and RSU plans Balance at beginning of year Purchased Distributed (26,194,908) (27,338,210) 550,067 (52,983,051) 1,879,799,713 3,592,000,000 Balance at end of year Authorized 1,879,142,745 3,592,000,000 The change in the number of warrants exercisable was as follows as at: December 31, 2016 December 31, 2017 205,851,872 Balance at beginning of year Issuance of warrants Balance at end of year 205,851,872 205,851,872 205,851,872 BOMBARDIER INC. FINANCIAL REPORT - FISCAL YEAR ENDED DECEMBER 31, 2017 - NOTES 203 In February 2016, the Corporation issued, in the name of CDPQ, warrants exercisable for a total number of 105,851,872 Class B Shares (subordinate voting) in the capital of Bombardier Inc. (Class B Subordinate Voting Shares), exercisable for a period of seven years at an exercise price per share equal to $1.66 U.S. dollars, being the equivalent of $2.21 Canadian dollars using the exchange rate at the date of execution of the subscription agreement. Also on June 30 and September 1, 2016 Bombardier issued, in the name of Investissement Qubec, warrants exercisable for a total number of 100,000,000 Class B Subordinate Voting Shares in the capital of Bombardier Inc., exercisable for a period of five years at an exercise price per share equal to $1.72 U.S. dollars, being the equivalent of $2.21 Canadian dollars using the exchange rate at the date of execution of the subscription agreement. Dividends Dividends declared were as follows: Dividends declared for fiscal years December 31, 2017 December 31, 2016 Total Total Per share (in millions Per share (in millions (Cdn$) of U.S.$) (Cdn$) of U.S.$) 0.00 $ - 0.00 $ 0.00 0.00 Dividends declared after December 31, 2017 Total Per share in millions (Cdn$) of U.S.$) 0.00 $ 0.00 Class A common shares Class B common shares Series 2 Preferred Shares Series 3 Preferred Shares Series 4 Preferred Shares 0.72 0.89 1.56 3 0 0.68 .78 1.56 0.13 0.25 0.39 18 18 17 17 low $ 30. SHARE-BASED PLANS PSU, DSU and RSU plans The Board of Directors of the Corporation approved a PSU and a RSU plan under which PSUs and RSUS may be granted to executives and other designated employees. The PSUs and the RSUs give recipients the right, upon vesting, to receive a certain number of the Corporation's Class B Shares (subordinate voting). The RSUs also give certain recipients the right to receive a cash payment equal to the value of the RSUs. The Board of Directors of the Corporation has also approved a DSU plan under which DSUs may be granted to senior officers. The DSU plan is similar to the PSU plan, except that their exercise can only occur upon retirement or termination of employment. During fiscal year 2017, a combined value of $47 million of DSUs, PSUs and RSUs were authorized for issuance ($50 million during fiscal year 2016). The number of PSUs, DSUs and RSUS has varied as follows, for fiscal years: 2016 RSU 22,332,682 1,659,631 2017 PSU DSU RSU PSU DSU Balance at beginning of year 39,324,712 2,677,843 22,058,924 15,627,2174,883,829 Granted 38,540,340 439 31,233,004 Exercised (495,307) (151,671) (65,790) (351,061) Forfeited (10,238,393) (1,372,230) (1,260,823) (7,469,719) (1,854,925) Balance at end of year 67,131,352 1,154,381 (1) 20,798,101 39,324,712 2,677,843 (1) (of which 1,154,381 DSUs are vested as at December 31, 2017 (1,260,639 as at December 31, 2016). (1,933,389) 22,058,924 Shin Lee was a recent immigrant to Canada and current undergraduate student at the Telfer School of Management. He had some family money to invest and wanted to use the skills he was developing at Telfer wisely. He had heard a great deal about recent turmoil at Bombardier, and this news had piqued his interest. Lee knew often a company in trouble was a good buy, particularly if the future looked bright. Did Bombardier provide a good investment opportunity ? Lee started to do work on a DCF model for Bombardier. He made projections about the Free Cash Flow (FCF) and he was ready to take the present value of the FCF. To do that he realized that he needed to compute the company's Weighted Average Cost of Capital (WACC). Lee's research from Bloomberg indicated Bombardier's Beta was 1.347 and the Market Risk Premium was 5.96 per cent. He set out to calculate the weight of equity for Bombardier based on the closing share price as of December 29, 2017 (the last trading day of 2017). Share price information was available at Bombardier Investor Relations. By looking at the 2017 Annual Report (available as an additional resource), Lee could determine the number of shares outstanding of both preferred and common shares (see pages 201 and 203 of the Annual Report) and exchange rates (see page 149 of the Annual Report). The exchange rate is important because the values in the Annual Report are in USD whereas the share prices are in CAD. He will need then to convert the USD values to CAD. He assumed the company's effective tax rate was 19.13 per cent (an average of the last 4 years that Bombardier had a positive tax rate). For the same day, December 29, 2017, Lee researched the Canadian 10- year bond yield at the Bank of Canada, which would be necessary in calculating the cost of equity for Bombardier. He found that this yield was 2.04%. Lee expected to incorporate the range of preferred shares and their most recent dividend payouts (see page 204 of the Annual Report) into his cost of capital calculations. He assumes that the growth rate of the preferred shared dividends is zero. When calculating the cost of debt, he would include the company's long-term debt (see page 199 of the Annual Report). For the debt that has no value for December 31st, 2017 (it is represented as a dash) he assumes that the market value is 0 (i.e., it has been paid off). He further assumed that the amounts of long-term debt on page 199 of the Annual Report (the column with header December 31st, 2017) were the best estimates of the market values in USD. Finally, Lee's research on Bloomberg gave him the bond prices for all of Bombardier's long term debt (see Table 1; the face value is 100). The bond prices are necessary for the computation of the YTM of each bond with the exception of the "Other" entry, the cost of which for December 31st, 2017 was explained in a footnote (see page 199 of the Annual Report). One issue is how to handle fractional years for bond maturities. For simplicity, he decided to round the number of periods down when computing the YTM of each bond (for the December maturity it is assumed to be at the end of the month so there is no need to round down). So for example, for the March 2020 bond he assumed it has 4 semiannual periods to maturity. Using his knowledge of finance, he sat down to punch the numbers and calculate Bombardier's WACC. Table 1 - Bombardier Bond Prices as of December 31, 2017 Issue Price March, 2020 7.75% 103.64 May, 2021 6.13% 108.32 December, 2021 8.75% 107.90 March, 2022 5.75% 99.32 October, 2022 6% 98.75 January, 2023 6.13% 99.276 December, 2024 7.50% 101.73 March, 2025 7.50% 100.18 May, 2034 7.45% 101.33 December, 2026 7.35% 101.48 27. LONG-TERM DEBT Long-term debt was as follows, as at: December 31 December 31 January 1 2017 2016 2016 Interest rate Amount in currency of origin Currency Contractual (1) After effect of fair value hedges Maturity Amount Amount Amount Senior notes USD $ 850 780 1,400 500 EUR USD USD 7.75% 6.13% 8.75% 5.75% 885 1,019 1,373 506 899 $ 931 1,369 507 916 985 510 1,200 USD 6.00% 1,223 1,228 1,234 1,250 USD 6.13% 1,281 1,280 1,290 1,000 1,500 600(5) n/a n/a n/a n/a2) Mar. 2020 $ n/a May 2021 n/a Dec. 2021 3-month Mar. 2022 Libor + 3.36(3) 3-month Oct. 2022 Libor + 3.57(3) 3-month Jan. 2023 Libor + 3.48(4) Dec. 2024 Mar. 2025 n/a n/a n/a n/a n/a n/a May 2034 n/a Dec. 2026 n/a 2018-2026 $ 990 1,490 USD USD USD USD USD USD 1,488 596 1,487 594 677 7.50% 7.50% 4.75% 7.50% 5.50% 7.45% 7.35% Various (8) 650(6) 740 7506) 250 248 248 Notes Debentures Other(7) 248 107 150 CAD 119 111 112 Various(8) Various 84 191 Of which current Of which non-current 9,218 $ 18 $ 9,200 9,218 $ 8,769 $ 31 $ 8,738 8,769 $ 8,979 71 8,908 8,979 Assets held for sale The major class of assets held for sale or liabilities directly associated with assets held for sale was as follows, as at: December 31, 2017 69 Cash and cash equivalents Other current assets (1) Non-current assets (2) Total assets 1,043 3,038 4,150 934 1,599 2,533 Current liabilities (3) Non-current liabilities (4) Total liabilities (1) Mainly comprised of inventories. (2) Mainly comprised of aerospace program tooling. (3) Mainly comprised of trade and other payables, supplier advances and advances on aerospace programs. (4) Mainly comprised of vendor non-recurring costs, provisions and advances on aerospace programs. In addition, CSALP have $32 million of accumulated OCI as at December 31, 2017. These assets and liabilities are reported in the Commercial aircraft reportable segment. 29. SHARE CAPITAL Preferred shares The preferred shares authorized were as follows, as at December 31, 2017, and 2016 and January 1, 2016: Series 2 Cumulative Redeemable Preferred Shares Series 3 Cumulative Redeemable Preferred Shares Series 4 Cumulative Redeemable Preferred Shares Authorized for the specific series 12,000,000 12,000,000 9,400,000 The preferred shares issued and fully paid were as follows, as at: Series 2 Cumulative Redeemable Preferred Shares Series 3 Cumulative Redeemable Preferred Shares Series 4 Cumulative Redeemable Preferred Shares 5,811,736 6,188,264 9,400,000 December 31, 2016 9,692,521 2,307,479 9,400,000 January 1, 2016 9,692,521 2,307,479 9,400,000 Common shares All common shares are without nominal or par value. Class A Shares (multiple voting) Voting rights: Ten votes each. Conversion: Convertible, at any time, at the option of the holder, into one Class B Share (subordinate voting). Dividend: After payment of the priority dividend on the Class B Shares (subordinate voting) mentioned below, the Class A Shares (multiple voting) shall share equally, share for share, with respect to any additional dividends which may be declared in respect of the Class A Shares (multiple voting) and Class B Shares (subordinate voting). These dividends, if declared, shall be payable quarterly on the last day of March, June, September and December of each year. Class B Shares (subordinate voting) Voting rights: One vote each. Conversion: Convertible, at the option of the holder, into one Class A Share (multiple voting): (i) if an offer made to Class A (multiple voting) shareholders is accepted by the present controlling shareholder (the Bombardier family); or (ii) if such controlling shareholder ceases to hold more than 50% of all outstanding Class A Shares (multiple voting) of the Corporation. Dividend: The holders of Class B Shares (subordinate voting) are entitled, in priority to the holders of Class A Shares (multiple voting) to non-cumulative dividends of $0.0015625 Cdn per share, payable quarterly on the last day of March, June, September and December of each year at a rate of $0.000390625 Cdn per share, if declared. After payment of said priority dividend, the Class B Shares (subordinate voting) shall share equally. share for share, with respect to any additional dividends which may be declared in respect of the Class A Shares (multiple voting) and the Class B Shares (subordinate voting). These dividends, if declared, shall be payable quarterly on the last day of March, June, September and December of each year. The change in the number of common shares issued and fully paid and in the number of common shares authorized was as follows as at: Class A Shares (multiple voting) December 31, 2017 December 31, 2016 313,900,550 Issued and fully paid Balance at beginning of year Converted to Class B Balance at end of year Authorized 313,900,550 (2,001) 313,898,549 3,592,000,000 313,900,550 3,592,000,000 Class B Shares (subordinate voting) December 31, 2017 December 31, 2016 Issued and fully paid Balance at beginning of year Issuance of shares Converted from Class A 1,932,511,397 164,466 1,932,675,863 104,900 2,001 1,932.782,764 1,932,675,863 (53,533,118) Held in trust under the PSU and RSU plans Balance at beginning of year Purchased Distributed (26,194,908) (27,338,210) 550,067 (52,983,051) 1,879,799,713 3,592,000,000 Balance at end of year Authorized 1,879,142,745 3,592,000,000 The change in the number of warrants exercisable was as follows as at: December 31, 2016 December 31, 2017 205,851,872 Balance at beginning of year Issuance of warrants Balance at end of year 205,851,872 205,851,872 205,851,872 BOMBARDIER INC. FINANCIAL REPORT - FISCAL YEAR ENDED DECEMBER 31, 2017 - NOTES 203 In February 2016, the Corporation issued, in the name of CDPQ, warrants exercisable for a total number of 105,851,872 Class B Shares (subordinate voting) in the capital of Bombardier Inc. (Class B Subordinate Voting Shares), exercisable for a period of seven years at an exercise price per share equal to $1.66 U.S. dollars, being the equivalent of $2.21 Canadian dollars using the exchange rate at the date of execution of the subscription agreement. Also on June 30 and September 1, 2016 Bombardier issued, in the name of Investissement Qubec, warrants exercisable for a total number of 100,000,000 Class B Subordinate Voting Shares in the capital of Bombardier Inc., exercisable for a period of five years at an exercise price per share equal to $1.72 U.S. dollars, being the equivalent of $2.21 Canadian dollars using the exchange rate at the date of execution of the subscription agreement. Dividends Dividends declared were as follows: Dividends declared for fiscal years December 31, 2017 December 31, 2016 Total Total Per share (in millions Per share (in millions (Cdn$) of U.S.$) (Cdn$) of U.S.$) 0.00 $ - 0.00 $ 0.00 0.00 Dividends declared after December 31, 2017 Total Per share in millions (Cdn$) of U.S.$) 0.00 $ 0.00 Class A common shares Class B common shares Series 2 Preferred Shares Series 3 Preferred Shares Series 4 Preferred Shares 0.72 0.89 1.56 3 0 0.68 .78 1.56 0.13 0.25 0.39 18 18 17 17 low $ 30. SHARE-BASED PLANS PSU, DSU and RSU plans The Board of Directors of the Corporation approved a PSU and a RSU plan under which PSUs and RSUS may be granted to executives and other designated employees. The PSUs and the RSUs give recipients the right, upon vesting, to receive a certain number of the Corporation's Class B Shares (subordinate voting). The RSUs also give certain recipients the right to receive a cash payment equal to the value of the RSUs. The Board of Directors of the Corporation has also approved a DSU plan under which DSUs may be granted to senior officers. The DSU plan is similar to the PSU plan, except that their exercise can only occur upon retirement or termination of employment. During fiscal year 2017, a combined value of $47 million of DSUs, PSUs and RSUs were authorized for issuance ($50 million during fiscal year 2016). The number of PSUs, DSUs and RSUS has varied as follows, for fiscal years: 2016 RSU 22,332,682 1,659,631 2017 PSU DSU RSU PSU DSU Balance at beginning of year 39,324,712 2,677,843 22,058,924 15,627,2174,883,829 Granted 38,540,340 439 31,233,004 Exercised (495,307) (151,671) (65,790) (351,061) Forfeited (10,238,393) (1,372,230) (1,260,823) (7,469,719) (1,854,925) Balance at end of year 67,131,352 1,154,381 (1) 20,798,101 39,324,712 2,677,843 (1) (of which 1,154,381 DSUs are vested as at December 31, 2017 (1,260,639 as at December 31, 2016). (1,933,389) 22,058,924
