WELCOME TO OUR

PRESENTATION
On
B/E Aerospace, Inc.
(Case 2)

We are Group 36
Serial
no

Name

MBA ID

Faruk Ahmed

15-534

Md. Mahmudul Hasan Rasel

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)

Provides manufacturing facilities in the United States , Europe and

Asia
Employed approximately 3,400 people.
Achieved leading global market position in each category of
business

Analysis of the Economy

There were Downturn in airplane business
in Post 9/11
Then, there started Growing international
airplane passengers from 2004
Increased GDP
Opportunity for acquisition without ant
strict legal complexities
No bindings in Business Expansion

Industry Analysis (Porters Five forces

Model)
Rivalry among competitors:
High

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

Threat of backward High

integration

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

Company Analysis (SWOT)

Strength

Weakness

40 percent of the global airplane

seat business
Acquisition of 26 Business
Different line of business
Upgrade
services
and
maintenance
leading global market position in
each category of business
Large installed and engineering
Strong selling points
Offering the broadest and most
innovative products

Use of large debt in capital mix

Production problem in commercial
manufacturing
Delayed deliver to customer
Increase rework of seat products

Opportunities

Threats

Significant barrier to entry by others

Slumping airlines industry
Update technology and reconfiguration Significant competitors
Worldwide demand increasing of
Airlines services
Integration of different line ob
business

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.

Company Analysis (Ratio)

Profitability Ratio
Profitibality Ratios
50.00%
0.00%
2001

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

Company Analysis (Ratio)

Efficiency Ratio
2.50
2.00
1.50

Interest Coverage Ratio

Total Asset Turnover

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.

Company Analysis (Ratio)

Leverage

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.

Company Analysis (Ratio)

Dupont Analysis

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

0.1151 -0.0485 0.0319 0.0793

0.7120 0.6027 0.5929 0.6861
0.2934 2.8333 -2.5477 -0.3566
0.9022 1.0193 1.0394 1.0611
32.993 44.712
6.9180 9.3171
7
5

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

Company Analysis (Ratio)

Dupont Analysis
DuPont Analysis
50.0000

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

Company Analysis (Risk Analysis)

Z- score model

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 2003 Year 2003

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.

Company Analysis (Risk Analysis)

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.

Company Analysis (Risk Analysis)

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

Determining Optimum Capital

Structure
WACC

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

How to achieve optimum capital

structure
To achieve the desired capital structure four
alternatives are available for the company. These
are:
Use 50 m cash to reduce the debt level at 78%
although it is suboptimal.
Issue 378.35 M equity at 8.5 per share to retire
debt and achieve 35% debt level.
Use 50 million cash and issue 328.35 M equity at
8.5 per share to retire debt and achieve 35% debt
level.
Use retained earnings of the company to achieve
desired capital structure.

Scenario 1:Use 50 million

cash
Base sales

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

Scenario 2: Issue Equity of 378.35

million @ 8.5 per share
Base sales

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

Scenario 3: Using 50M cash and issue

328.35 M equity @ 8.5 per share
Base sales

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

Scenario 4: Use of retained

earnings
Net profit
100.00

50.00

0.00
2001

2002

2003

2004 E

2005E

2006 E

2007 E

2008E

2009E

(50.00)

(100.00)

(150.00)

The expected net profit position indicates that enough

retained earnings are not generated in recent year to achieve
desired debt equity ratio. So, it is not a feasible option

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

EBIT in 2003 was 19.90

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

EBIT in 2003 was 19.90

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?