Question

Please use the KMV Model(Moody's Prop Model) to rate Boeing's(BA) credit. Why is this the model to utilize?

Thank you for the help!

Answer 1

Ans ) KMV model is used to find the risk of default of an organisation basis on the market information of the stock price and

the items of the balance sheet.It is mainly applied in the case of public companies , in which the value of the equity is determined by the market.The steps involved in this are first , the market value and the assets volatility is assertained.Secondly the probabilities of default are calculated by using a model by using the database.The share price of Boeing reveals a good amount of information as for the last 3 years the growth in EPS or earning per share is 0 %.And there is substantial downfall in the stock price of Boeing , the reasons are the fact that the company has suffered because of 747 Max and it has failed in space as well as military delevery.The problem with military supply mainly related to the quality lead to impact hugely on Boeing overhead costs and the failure of its space vehicle to connect to the international space station has also results in piling of overheads .Hence all these facts have resulted in somehow poor performance of the BA stock , recently the COVID 19 will impact the airline business growth as there was lack of airflight that will results in mintenence costs.The cash and short term investment growth is -8.09 % indicating inadequate cash reserves.The revenues of the company are declining to 74 billion dollers in 2019 as compared to 2018 and the share of profit is contantly low out of the revenue which is 10 billion doller in 2018 and managing a few positive digits above zero in 2019.Boeing company total debt have peaked to 28 billion doller in 2019 from 10 billion doller in 2016.Keeping all these facts the rating have been downgraded from A to BBB.