To evaluate the spin-off, we made the following assumptions: We assumed that

To evaluate the spin-off, we made the following assumptions:

We assumed that the HII’s beta was the same as NOC before the spin-off.

The projection of HII’s performance was reliable.

The time of valuation was March 1st, 2011.

The risk-free rate was 3.47% (based on the 2011 February risk-free rate (U.S. 10 Year Treasury, n.d.))

The market risk premium was 5.50% (based on the 2011 market risk premium ( (Average market risk premium in the United States from 2011 to 2023, n.d.))

We used the WACC of NOC as the discount rate for HII if the spin-off occurred.

We assumed the beta of NOC before the spin-off would apply to HII for the period after the spin-off (there is no way for us to know the actual beta of HII separately if the spin-off didn’t occur).

We made the above assumptions because it is difficult to determine the exact value for metrics used in the valuation process due to a lack of precise data to separate HII’s performance from NOC before the spin-off.

WACC

Cost of Equity

Market risk-free rate

3.47%

Beta

1.12

Market risk premium

5.50%

Re

9.63%

Cost of Debt

Rd

6.9%

Tax rate

35.0%

After tax Rd

4.5%

Weights

Market Value of Equity

13,557

Book value of Debt

17,864

Total

31,421

We

43.1%

Wd

56.9%

WACC

6.7%

Above is our WACC calculation result of HII. The beta was calculated using the average of the monthly adjusted NOC’s stock price and the average of the monthly adjusted SP500 index value from Jan 2007 to Feb 2011.

The Rd (Cost of debt) used in the calculation was based on HII’s debt in the projection included in the case pdf if the spin-off would occur. For everything below the weight, we assumed that NOC’s weight of equity and weight of debt would apply to HII. Thus, we calculated this based on NOC’s equity market and debt book values.

Using the projection data, we estimated HII’s equity value. The results are shown below.