i. Calculate BAE System’s Cost of Equity (Ke), Cost of Debt (Kd) and Weighted Average Cost of Capital (WACC) for each year for the last 5 years. Show your workings and state the sources for any of your assumptions

Corporate Financial Strategy

(a) Discount Rates & Capital Structure

i. Calculate BAE System’s Cost of Equity (Ke), Cost of Debt (Kd) and Weighted Average Cost of Capital (WACC) for each year for the last 5 years. Show your workings and state the sources for any of your assumptions

ii. Critically assess and discuss the capital structure that BAE Systems has and the impact that these choices have made on its Ke, Kd, and WACC. If BAE Systems has any debt funding, assess its ability to make the repayments required using a range of appropriate ratios.

(b) Dividend Policy:

i. What has the company paid out as dividends in each of the last 5 years? How is it changing? 5 marks

ii. Critically assess whether these pay-outs are affordable using a variety of measures. 5 marks

iii. Evaluate whether the dividends that have been paid are consistent with the company’s stated dividend policy. Provide appropriate academic theory on dividend policy where appropriate.

(c) Valuation Value the equity shares of BAE Systems using both

• Static valuation multiples 10 marks

• An absolute valuation technique of your choice 10 marks In both cases justify your choice of parameters used.

(d) Critically discuss where BAE Systems is in the Corporate Life Cycle discussed during the module, by analysing its:

• Revenue & profit growth

• Financing (proportions of debt and equity funding)

• Free Cash Flow

• Dividend Pay-out ratio

e. Using Rappaport’s Seven Value Drivers and together with a comparison against a leading competitor, critically analyse how BAE System’s has contributed to shareholder value over the last 5 years.