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Lockheed Tristar Case Similar Solution
Lockheed Tristar Case Similar Solution
Lockheed Tristar Case Similar Solution
History
• Lockheed has been known for their extensive line of military
products. In 1966, Lockheed started working on what would
become their first commercial jetliner: the L-1011 TriStar.
• The TriStar was considered the world’s most
technologically-advanced airlner at the time of the
introduction.
• In 1966, more than four years before the venerable Boeing
747 inaugurated service, many airlines were already
showing interest in a smaller, medium-range widebody
jetliner.
• While Lockheed came to settle with the L-1011, McDonnell
Douglas were also finalizing their designs on what would
become the DC-10. The third competitor for a wide-bodied
commercial jet aircraft with a capacity of up to 400
passengers was the A-300B airbus.
Iwan Meier 3-218-04 Financial Management 3
1
History
• By the beginning of 1968, both Lockheed and McDonnell
Douglas had their designs refined, in anticipation of large
orders from major U.S. airlines.
• In an effort to attract orders, Lockheed agreed to sell under
favorable terms if Eastern Airlines and Trans World Airlines
(TWA) selected the L-1011.
• Finally, on the evening of March 28, TWA came to an
agreement with Lockheed, and it was only few hours later
when Eastern followed suit. On the morning of March 29,
letters of intent for a total of 144 commitments valued at
$2.16 billion were signed and the L-1011 program officially
came to a launch.
• Within a month of the launch date, the L-1011 had attracted
a total of 176 commitments (firm orders plus options-to-buy)
worth 2.74 billion.
Iwan Meier 3-218-04 Financial Management 4
Case Questions
2
Lockheed TriStar – Forecasts
3
Lockheed TriStar – Accounting Break-Even
4
Default-free Fixed Income Securities
Treasury Securities
5
How to Get Yields
In addition to T-bills, discount bonds in the form of U.S.
Treasury strips are traded. Prices of these strips are reported, for
example, in the Wall Street Journal. The convention is to report
these prices in price per 100 units of face value.
Strips stands for Separate Trading of Registered Interest and Principal of Securities, as
well as the fact that the coupon payment is effectively "stripped“ from the bond principal.
Iwan Meier 3-218-04 Financial Management 16
100
80
Ask Price
60
July 8, 2003
40
January 21, 2002
20
0
0 5 10 15 20 25 30
Maturity
6
Convert Prices into Yields
8.0%
4.0%
July 8, 2003
2.0%
0.0%
0 5 10 15 20 25 30
Maturity
Source: www.smartmoney.com
Iwan Meier 3-218-04 Financial Management 21
7
Forward Contract
Forward Contract
8
Term Structure of Forward Rates
8.0%
January 21, 2002
6.0%
Yield to Maturity
4.0%
July 8, 2003
2.0%
0.0%
0 5 10 15 20 25 30
Maturity
9
Valuing Cash Flows
10
Implied Yield Curve
• Suppose that there are no discount bonds trading
with exactly one and two years to maturity, but
there are coupon bonds with these maturities
trading.
• Data on coupon bonds with annual coupons:
Years to maturity 1 2
Face value 1,000 1,000
Coupon rate 5% 8%
Current price 997.5 1048.0
11
Synthetic Discount Bond
12