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PRESENTATION
On
B/E Aerospace, Inc.
(Case 2)
We are Group 36
Serial
no
Name
MBA ID
Faruk Ahmed
15-534
15-542
Muntasir Ahmed
15-614
Introduction
B/E Aerospace, Inc. (BEAV) was founded in 1987.
The manufacture of airline seats, galley equipment, oxygen
equipment and other interior products.
The company went public in 1989.
BEAV entered the aftermarket aerospace fastener distribution
business In September 2001.
Three business segments :
Commercial Aircraft (70% revenue)
Business Jets (10% revenue)
Fastener Distribution (20% revenue)
Threat of New
Entrance: Low
Point of
Analysis
Condition
Point of
Analysis
Condition
Number of
Companies
05 (Significant)
Economics of
scale
High
Type of
industry
Competitive
Capital
Requirement
High
Demand
Condition
Increasing
Demand
Loyal customer
Loyal to BEAV
Exit barrier
High
Government
Restriction
High
Industry Analysis(Contd)
Bargaining power of
buyer: High
Point of Analysis
Condition
Number of buyer
Low
Quantity bought
each buyer
Frequent
and
increasing
demand
Switching cost
High
Bargaining power of
Supplier: Low
Point of
Analysis
Condition
Number of
supplier
Low
Quantity
bought from
each supplier
Low
Swathing Cost
High
Threat forward
integration
Low
Industry Analysis(Contd)
Threat of Substitutes: Low
Point of Analysis
Number of Substitutes
Quality of Substitutes
Switching cost
Condition
Low
Average
High
Weakness
Opportunities
Threats
Strategy Analysis
B/E Aerospace, Inc. serves the market with differentiating the products
and services which includes:
Offering the broadest and most innovative products and services;
Offering the broadest range of engineering services including aircraft reconfiguration,
passenger-to-freighter conversion capabilities and design, integration, installation and
certification services;
Pursuing the highest level of quality in every facet of its operations, from the factory floor
to customer support;
Aggressively pursuing initiatives of continuous improvement of manufacturing operations
to reduce cycle time, lower costs, improve quality and expand margins; and
Pursuing a worldwide marketing and product support approach focused by airline and
general aviation airframe manufacturers, encompassing the entire product line.
2002
2003
-50.00%
-100.00%
-150.00%
-200.00%
The ROE is negative for the years when the net profit Margin of the
company is negative.
2004 p
1.00
0.50
0.00
2001
2002
2003
2004 p
Here the total asset turnover ratio is very low and the interest
coverage ratio is negative for the year 2002 because of the negative
EBIT.
Ratio
Leverege Ratio
40.0000
35.0000
30.0000
25.0000
20.0000
15.0000
10.0000
5.0000
0.0000
2001
2002
2003
2004 p
The leverage ratio is very high for both the debt to Equity ratio and the
debt to asset ratio as the company is largely dependent on the debt
capital.
Year
ROE =
Sales Margin
Asset Turnover
Interest burden
Tax burden
Financial
Leverage
2004
2001 2002 2003
p
0.1500 -0.7870 -1.6520 -0.9206
From the DuPont analysis we can see that the return on equity is very
low because of net loss and the financial leverage is very high for
40.0000
Financial Leverege
Tax burden
30.0000
Interest burden
Asset Turnover
20.0000
Sales Margin
ROE
10.0000
0.0000
2001
2002
2003
2004 p
-10.0000
From the graphical analysis we can see that the return on equity is
very low because of net loss and the financial leverage is very high for
1.60
1.40
1.20
1.00
0.80
0.60
0.40
1.60
Z Score
Z Score
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.20
0.00
Year 2001
0.00
Year 2001 Year 2002
Year 2002
Year
2004
Year
2004
From the risk analysis of the z score model we can see that the
company is on the possibility of default for almost all the years as the
z score is very low for the company.
Volatility
Standerd
Mean Deviation
Sale
s
EBIT
677
30
46
48
Volatilit
y
0.07
1.59
From the volatility analysis we can see that the companys EBIT is
more volatile than the sales revenue. It indicates that the profit
earning is very uncertain.
Leverage
40.00
20.00
0.00
2002
Leverege
2003
2004 p
-20.00
-40.00
-60.00
-80.00
From the leverage analysis we can see that the companys operating
leverage is more volatile than the companys financial leverage.
Problem Statement
B/E Arospace has very high debt ratio in
current situation. The management wants
to reduce it to a reasonable level. So, the
management has to determine:
What could be the optimum capital
structure for the company?
How the company achieve the optimum
capital structure?
The debt level should be such that it
could withstand in another 2001 situation
Axis Title
9.2000%
9.0000%
8.8000%
8.6000%
8.4000%
8.2000%
8.0000%
7.8000%
7.6000%
7.4000%
Zodiac
Boein
g
B/E
At 35% debt level the WACC of the company is lowest. So, the
optimum capital structure of the company is 35% debt and 65%
equity
676.65
Sales Growth
10%
Tax Rate
35%
WACC
8.90%
Terminal Growth
2.00%
Debt Ratio
Adjusted enterprise
value
78%
1586.75
Simulation: Secenrio-1
Forecast: Adjusted
enterprise value
Statistic
Forecast values
Trials
10,000
Mean
1435.89
Median
1363.68
Mode
Standard Deviation
Variance
Skewness
Kurtosis
'--545.88
297986.56
0.8222
4.4
Coeff. of Variability
0.3802
Minimum
-98.82
Maximum
Mean Std. Error
5056.19
5.46
676.65
Sales Growth
10%
Tax Rate
35%
WACC
8.01%
Terminal Growth
2.00%
Debt Ratio
Adjusted enterprise
value
35%
1594.08
Simulation: Secenrio-2
Forecast: Adjusted
Enterprise Value
Statistic
Forecast values
Trials
10,000
Mean
1450.53
Median
1385.84
Mode
Standard Deviation
Variance
Skewness
Kurtosis
Coeff. of Variability
Minimum
Maximum
Mean Std. Error
'--538.36
289827.72
0.7064
3.82
0.3711
83.68
4212.47
5.38
676.65
Sales Growth
10%
Tax Rate
35%
WACC
8.01%
Terminal Growth
2.00%
Debt Ratio
Adjusted enterprise
value
35%
1594.08
Simulation: Secenrio-3
Forecast:
AdjustedEnterprise Value
Statistic
Forecast values
Trials
10,000
Mean
1456.81
Median
1404.04
Mode
Standard Deviation
Variance
Skewness
Kurtosis
Coeff. of Variability
Minimum
Maximum
Mean Std. Error
'--546.16
298288.68
0.7048
3.81
0.3749
58.52
4714.76
5.46
50.00
0.00
2001
2002
2003
2004 E
2005E
2006 E
2007 E
2008E
2009E
(50.00)
(100.00)
(150.00)
Use Cash
Use equity
Use
cash+Equity
Enterprise
value
1586.75
1594.08
1594.08
EPS
0.98
0.73
0.78
TIER
2.03x
5.70x
5.70x
Interest
expense
58.75
19.12
19.12
Comparison of different
alternatives
Particular
Use Cash
Use equity
Use
cash+Equity
Enterprise
value
1586.75
1594.08
1594.08
EPS
0.98
0.73
0.78
TIER
2.03x
5.70x
5.70x
Interest
expense
58.75
19.12
19.12
Recommendation
Although the second and third
alternatives provide same enterprise
value the interest of the equity holders
has become more diluted in second
alternative. So, it would be optimal for
the firm to use both cash and equity to
achieve desired debt level.
Any query?