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 Boeing’s 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 2–4 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 aren’t considered in your analysis?