I.

Market Information
T.Bond Rate = 5.00% Maturity of Debt
Market Risk Premium = 5.50% Maturity Debt
1 311
Boeing 2 200
Market Price 32.25 3 252
Number of Shares 1010.7 4 417
5 799
Bottom-up Beta 0.88 7 648
II. Accounting Information 8 423
Tax Rate 35% 10 1129
14 348
Debt Details 23 398
Average Maturity of Debt 13.76 26 300
Rating approach used C (Current or Synthetic) 27 247
Current Rating AA 33 421
Current Interest rate 5.50% 44 100
45 298
Operating Lease Expense Boeing 6291
Current Year $ 215
Expected in
Year 1  $        205.00 
Year 2  $        167.00 
Year 3  $        120.00 
Year 4  $          86.00 
Year 5  $          61.00 
Years 6-> 0

Non-cash Interest Expens $ 28

turity of Debt
Weighted Maturity
0.05
0.06
0.12
0.27
0.64
0.72
0.54
1.79
0.77
1.46
1.24
1.06
2.21
0.70
2.13
13.76
 This year Last year
Assets
Fixed Assets $8,589
Goodwill $2,312
Investments and Notes Receivable
Deferred Income Taxes $411
Prepaid Pension Expense $3,513
Customer Financing $4,930
Other Assets $542
Current Assets
Cash $2,183 1955
Short-term Marketable Investments $279 246
Accounts Receivables $3,288
Current Portion of Customer Financin $781
Deferred Income Taxes $1,495
Inventories $8,349
Other Current Assets $0
Total Current Assets $16,375
Total Assets $36,672 38024

Liabilities and Equity

Current Liabilities
Accounts Payable & other liabilities $10,733
Accrued Salaries and Expenses
Advances in excess of costs $1,251
Taxes payable $569
Short term debt and Current LT debt $869 $731
Total Current Liabilities $13,422
Accrued Health Care Benefits $4,831
Other Long Term Liabilities
Deferred Income Taxes
Long-term Debt $6,103 $6,123
Minority Interests
Shareholder's Equity
Par Value $5,059
Additional Paid-in Capital $0
Retained Earnings $7,257
- Other Adjustments $0
- Trust Shares $0
- Treasury Stock $0
Total Shareholder's Equity $12,316 $12,953
Total Liabilities $36,672
Sales & Other Operating Revenues $56,154.00
- Operating Costs & Expenses $51,022.00
- Depreciation $1,517.00
- Research and Development Expenses $1,895.00
- Special Charges $0.00
Operating Income $1,720.00
+ Other Income (Includes Interest Incom $130.00
- Interest Expenses $453.00
+ Minority Interest
Earnings before Taxes $1,397.00
- Income Taxes $277.00
Net Earnings (Loss) $1,120.00
Number of Shares outstanding
Earnings Per Share
Basic $1.15
Diluted $1.15

Operating Income $1,720

+ Special and One-time Charges $0
+ Research and Development Expenses $1,895
- Amortization of Research Asset $1,382
+ Imputed Interest Expense on Operatin $ 31
= Adjusted Operating Income $2,264

Operating Income (1-t) $1,118

+ Special and One-time Charges (1-t) $0
+ Research and Development Expenses $1,895
- Amortization of Research Asset $1,382
+ Imputed Interest Expense (1- t) $20
= Adjusted Operating Income $1,651

Net Income $1,120

+ Special and One-time Charges (1-t) $0
+ R & D expenses $1,895
- Amortization of Research Asset $1,382
+ Operating Lease Expenses (1-t) $140
- Imputed Interest Expense (1-t) $20
- Depreciation (1-t) $120
= Adjusted Net Income $1,633

Tax Benefit of Expensing

Adjusted After-tax Operating Income $1,651
Adjusted Operating Income (1 - t) $1,472
Tax Benefit of Expensing $180
Cash Flows - Operations
Net Income $ 1,120
+ Non-cash Charges
Depreciation $ 1,517
Deferred Income Tax Expense
Amortization of Goodwill $ 104
Special Charges $ -
Share Value Trust $ (99)
- Changes in assets and liabilities
Short-term investments $ 154
Accounts Receivable $ (251)
Inventories $ (1,008)
Accounts Payable $ 1,490
Advances in excess of costs $ (139)
Taxes Payable $ (451)
Other assets $ (272)
Accrued Health Care Benefits $ (4)
Net Cash from Operations $ 2,161

Cash Flows - Investing

Customer and Commercial Financ $ (859)
Property, Plant & Equipment $ (1,584)
Investments
Other $ -
Net Cash From Investing $ (2,443)

Cash Flows - Financing

New Borrowings $ 232
Debt Repayments $ (867)
Common Shares purchased $ (141)
Common Shares issued $ 268
Stock Options Exercised $ 166
Dividends Paid $ (557)
Minority Interest Contribution
Net Cash from Financing $ (899)

Net Increase in Cash and Equival $ (1,181)

Cost of Capital Computations
I. Estimated Market Value of Equity
Number of Shares Outstanding 1010.7
Current Stock Price (9/30/98) $ 32.25
Market Value of Equity $ 32,595

II. Estimated Market Value of Debt

Book Value of Debt $6,972
Interest Expenses $453.00
Average Maturity 13.76
Market Interest Rate (based on rating 5.50%
Market Value of Debt $ 7,631
Present Value of Operating Leases $ 563
Total Market Value of Debt $ 8,194

III. Debt Ratios

Debt/Equity 25.14%
Debt/Equity (w/o operating leases) 23.41%
Debt/ (Debt + Equity) 20.09%

IV. Cost of Equity

Bottom-up Unlevered Beta 0.88
Bottom-up Beta 1.014
Riskfree Rate 5.00%
Risk Premium 5.50%
Cost of Equity 10.58%

V. Cost of Debt
Bond Rating AA
Default Spread over treasury 0.50%
Market Interest Rate 5.50%
Marginal tax rate 35%
Cost of Debt 3.58%

VI.
Cost of Equity 10.58%
Equity/(Debt + Equity) 79.91%
Cost of Debt 3.58%
Debt/(Debt + Equity) 20.09%
Cost of Capital 9.17%
 Boeing
EBIT $ 1,720
Interest Expense $ 453
Interest Coverage Ratio 3.80

EBIT $ 1,720
Operating Lease Expenses $ 215
Interest Expenses $ 453
Fixed Charge Coverage Ratio 2.90

EBITDA $ 3,341
Cash Fixed Charges $ 640
Cash Fixed Charge Coverage 5.22

Cash Flows from Operations $ 2,161

Capital Expenditures $ 1,584
CF/Cap Ex 1.36
Current Assets $ 16,375
Current Liabilities $ 13,422
Current Ratio 1.22

Cash & Marketable Securities $ 2,462

Current Liabilities $ 13,422
Quick Ratio 0.18

Sales $ 56,154
Accounts Receivable $ 3,288
Accounts Receivable Turnover 17.08
Days Receivable 21.37

Cost of Goods Sold $ 51,022

Inventory $ 8,349
Inventory Turnover 6.11
Days Inventory Held 59.73

Purchases $ 51,022
Accounts Payable $ 10,733
Accounts Payable Turnover 4.75
Days Accounts Payable 76.78

Required Financing Period 4.32

Return on Capital 6.96%
Cost of Capital 9.17%
ROC - Cost of Capital -2.21%
Book Value of Capital $23,731
EVA ($525)

Return on Equity 7.58%

Cost of Equity 10.58%
ROE - Cost of Equity -2.99%
Book Value of Equity $21,540
Equity EVA ($645)
 Operating Lease Converter
Inputs
Operating lease expense in current year =  $         215.00 
Operating Lease Commitments (From footnote to financials)
Year Commitment ! Year 1 is next year, ….
1  $         205.00 
2  $         167.00 
3  $         120.00 
4  $           86.00 
5  $           61.00 
6 and beyond  $                 ­   

Pre­tax Cost of Debt = 5.50% ! This number comes from your ratinges estimator worksheet 

From the current financial statements, enter the following
Reported Operating Income (EBIT) = $1,720.00  ! This is the EBIT reported in the current income statement
Reported Depreciation = $1,517.00  ! This is the depreciation reported in the statement of cash flows
Reported Interest Expense = $453.00  ! This is the total interest expense reported in the income statement
Reported Debt = $6,972  ! This is the interest­bearing debt reported on the balance sheet

Output
Number of years embedded in yr 6 estimate = 0 ! I use the average lease expense over the first five years
to estimate the number of years of expenses in yr 6
Year Present Value
1  $         194.31 
2  $         150.04 
3  $         102.19 
4  $           69.42 
5  $           46.67 
6 and beyond  $                 ­    ! Commitment beyond year 6 converted into an annuity for ten years
Debt Value  =  $         562.64 

Restated Financials
Operating Income with Operating leases reclassified as debt =  $      1,750.95 
Debt with Operating leases reclassified as debt =  $      7,534.64 
Interest Expense with Operating Lease reclassified as debt =  $         483.95 
Imputed Interest Expense on Operating Lease debt $ 30.95
 Unadjusted Adjusted
Long Term Debt $6,103 $6,666
Short Term Debt $869 $869
BV of Equity $12,316 $21,416

LT Debt/Equity 49.55% 31.12%

LT Debt / (LT Debt + Equity) 33.13% 23.74%

Debt/Equity 56.61% 35.18%

Debt/ (Debt + Equity) 36.15% 26.03%

Estimated Market Value

Debt (not operating leases) $7,631
PV of operating leases $ 562.64
Market Value of Debt $8,194
Market Value of Equity $32,595
Debt/Equity (MV) 25.14%
Market Debt/Capital 20.09%

Interest Expense $453.00

Maturity 13.76
Market Interest Rate 5.50%
 R & D Converter
This spreadsheet converts R&D expenses from operating to capital expenses. It makes the appropriate adjustments to operating income, net
income, the book value of assets and the book value of equity.

Inputs
Over how many years do you want to amortize R&D expenses 10 ! If in doubt, use the lookup table below
The maximum allowed is ten years
Enter R& D expenses for past years: the number of years that you will need to enter will be determined by the amortization period
Do not input numbers in the first column (Year). It will get automatically updated  based on the input above.

Year R& D Expenses
­1 1895.00 ! Year ­1 is the most recent financial year
­2 1924.00 ! Year ­2 is the year before the most recent fin
­3 1633.00
­4 1300.00
­5 1704.00
­6 1661.00
­7 1846.00
­8 1417.00
­9 827.00
­10 754.00
­11 751.00

Output Reseach Asset this year Reseach Asset last year

Year R&D Expense Unamortized portion R&D Expense Unamortized portion
­1 1895.00 1.00 1895.00 1924.00 1.00 1924.00
­2 1924.00 0.90 1731.60 1633.00 0.90 1469.70
­3 1633.00 0.80 1306.40 1300.00 0.80 1040.00
­4 1300.00 0.70 910.00 1704.00 0.70 1192.80
­5 1704.00 0.60 1022.40 1661.00 0.60 996.60
­6 1661.00 0.50 830.50 1846.00 0.50 923.00
­7 1846.00 0.40 738.40 1417.00 0.40 566.80
­8 1417.00 0.30 425.10 827.00 0.30 248.10
­9 827.00 0.20 165.40 754.00 0.20 150.80
­10 754.00 0.10 75.40 751.00 0.10 75.10
Value of Research Asset = $9,100.20 $8,586.90

Boeing
Amortization of asset for current year = $1,381.70

Adjustment to Operating Income = $513.30 ! A positive number indicates an increase in operating income (add to repo

A negative number indicates a decrease in operating income (su

Look Up Table for Amortization Periods

Industry Name Amortization Period
Advertising 2
Aerospace/Defe 10 Non­technological Service 2 years
Air Transport 10 Retail, Tech Service 3 years
Aluminum 5 Light Manufacturing 5 years
Apparel 3 Heavy  Manufacturing 10 years
Auto & Truck 10 Research, with Patenting 10 years
Auto Parts (OE 5 Long Gestation Period 10 years
Auto Parts (Rep 5
Bank 2
Bank (Canadian 2
Bank (Foreign) 2
Bank (Midwest) 2
Beverage (Alcoh 3
Beverage (Soft  3
Building Materi 5
Cable TV 10
Canadian Energ 10
Cement & Aggre 10
Chemical (Basic 10
Chemical (Diver 10
Chemical (Speci 10
Coal/Alternate  5
Computer & Per 5
Computer Softw 3
Copper 5
Diversified Co. 5
Drug 10
Drugstore 3
Educational Ser 3
Electric Util. (C 10
Electric Utility  10
Electric Utility 10
Electrical Equi 10
Electronics 5
Entertainment 3
Environmental 5
Financial Servi 2
Food Processin 3
Food Wholesale 3
Foreign Electro 5
Foreign Teleco 10
Furn./Home Fur 3
Gold/Silver Mi 5
Grocery 2
Healthcare Info 3
Home Applianc 5
Homebuilding 5
Hotel/Gaming 3
Household Prod 3
Industrial Servi 3
Insurance (Diver 3
Insurance (Life) 3
Insurance (Prop 3
Internet 3
Investment Co.  3
Investment Co.  3
Investment Co.  3
Machinery 10
Manuf. Housing 5
Maritime 10
Medical Service 3
Medical Supplie 5
Metal Fabricati 10
Metals & Minin 5
Natural Gas (Dis 10
Natural Gas (Div 10
Newspaper 3
Office Equip &  5
Oilfield Service 5
Packaging & Co 5
Paper & Forest  10
Petroleum (Inte 5
Petroleum (Prod 5
Precision Instr 5
Publishing 3
R.E.I.T. 3
Railroad 5
Recreation 5
Restaurant 2
Retail (Special  2
Retail Building 2
Retail Store 2
Securities Brok 2
Semiconductor 5
Semiconductor  5
Shoe 3
Steel (General) 5
Steel (Integrate 5
Telecom. Equip 10
Telecom. Servic 5
Textile 5
Thrift 2
Tire & Rubber 5
Tobacco 5
Toiletries/Cosm 3
Trucking/Transp 5
Utility (Foreign 10
Water Utility 10
ate adjustments to operating income, net

f in doubt, use the lookup table below
he maximum allowed is ten years
ned by the amortization period

Year ­1 is the most recent financial year
Year ­2 is the year before the most recent financial year

Amortization

192.40
163.30
130.00
170.40
166.10
184.60
141.70
82.70
75.40
75.10
1381.70

ncrease in operating income (add to reported EBIT)
a decrease in operating income (subtract from reported EBIT)

$751
$754
$827
$1,417
$1,846
$1,661
$1,704
$1,300
$1,633
$1,924
$1,895
Margins
Net Income 1120
Sales $ 56,154
Net Margin 1.99%

Operating Income $ 1,720

Sales $ 56,154
Operating Margin 3.06%

After-tax Operating Income $ 1,118

Sales $ 56,154
After-tax Operating Margin 1.99%

Return Ratios Unadjusted Adjusted

Net Income $1,120 $1,633
BV of Equity- Beginning $12,953 $21,540
BV of Equity- Ending $12,316 $21,416
BV of Equity - Average $12,635 $21,478
ROE (based on average) 8.86% 7.60%
ROE (based on beginning) 8.65% 7.58%
Ratios
After-tax ROC 6.96%
Debt/Equity Ratio 35.18%
Book Interest Rate (1-tax rate) 4.22%
ROE 7.92%
Unadjusted Adjusted
After-tax Operating Income $1,118 $1,651
BV of Capital - Beginning $17,345 $23,731
BV of Capital - Ending $19,288 $28,951
BV of Capital - Average $18,317 $26,341
ROC (based on average) 6.10% 6.27%
ROC (based on beginning) 6.45% 6.96%
Unadjusted Adjusted
Operating Income $ 1,118 $ 1,651
BV of Assets - Beginning $ 38,024 $ 38,024
BV of Assets - Ending $ 36,672 $ 36,672
BV of Assets - Average $ 37,348 $ 37,348
ROA (based on average) 2.99% 4.42%
ROA (based on beginning) 2.94% 4.34%

Capital Adjustment
Book Value of Capital $19,288
+ One-time Charge $0
+ Present Value of Operating Lease $ 562.64
+ Capitalized value of research asse $9,100
= Adjusted Book Value of Capital $28,951

EBITDA/Firm Value 7.94%

Current Assets $16,375
Current Liabilities $13,422
Working Capital $2,953

Non-cash Current Assets

Inventory $8,349
Accounts Receivable $5,564
Non-cash Current Liabilities
Accounts Payables $10,733
Other Current Liabilities $1,820
Non-cash Working Capital $1,360
Inputs for synthetic rating estimation Boeing Home Depot
Enter the type of firm = 1 (Enter 1 if large manufacturing firm, 2 if s
Enter current Earnings before interest and taxes (EBIT) = $1,935.00  ( For initial estimate, I added back all ope
Enter current interest expenses = $668.00  (For initial estimate, I added back all oper
Output
Interest  coverage ratio = 2.90
Estimated Bond Rating = BBB
Estimated Default Spread = 2.25%
Estimated Cost of Debt = 7.25%

For large manufacturing firms For financial service firms
If interest coverage ratio is If long term interest coverage ratio is
> ≤ to Rating is Spread is greater than ≤ to
­100000 0.199999 D 14.00% ­100000 0.049999
0.2 0.649999 C 12.70% 0.05 0.099999
0.65 0.799999 CC 11.50% 0.1 0.199999
0.8 1.249999 CCC 10.00% 0.2 0.299999
1.25 1.499999 B­ 8.00% 0.3 0.399999
1.5 1.749999 B 6.50% 0.4 0.499999
1.75 1.999999 B+ 4.75% 0.5 0.599999
2 2.499999 BB 3.50% 0.6 0.799999
2.5 2.999999 BBB 2.25% 0.8 0.999999
3 4.249999 A­ 2.00% 1 1.49999
4.25 5.499999 A 1.80% 1.5 1.99999
5.5 6.499999 A+ 1.50% 2 2.49999
6.5 8.499999 AA 1.00% 2.5 2.99999
8.50 100000 AAA 0.75% 3 100000

For smaller and riskier firms
If interest coverage ratio is
greater than ≤ to Rating is Spread is
­100000 0.499999 D 14.00%
0.5 0.799999 C 12.70%
0.8 1.249999 CC 11.50%
1.25 1.499999 CCC 10.00%
1.5 1.999999 B­ 8.00%
2 2.499999 B 6.50%
2.5 2.999999 B+ 4.75%
3 3.499999 BB 3.50%
3.5 4.499999 BBB 2.25%
4.5 5.999999 A­ 2.00%
6 7.499999 A 1.80%
7.5 9.499999 A+ 1.50%
9.5 12.499999 AA 1.00%
12.5 100000 AAA 0.75%
 Infosoft
Enter 1 if large manufacturing firm, 2 if smaller or riskier firm, 3 if financial service firm)
For initial estimate, I added back all operating lease expenses)
or initial estimate, I added back all operating lease expenses to interest expense)

st coverage ratio is
Rating is Spread is
Operating Income Decline
D 14.00% ­50.00%
C 12.70% ­40.00%
CC 11.50% ­40.00%
CCC 10.00% ­40.00%
B­ 8.00% ­25.00%
B 6.50% ­20.00%
B+ 4.75% ­20.00%
BB 3.50% ­20.00%
BBB 2.25% ­20.00%
A­ 2.00% ­17.50%
A 1.80% ­15.00%
A+ 1.50% ­10.00%
AA 1.00% ­5.00%
AAA 0.75% 0.00%