Describe how you as an analyst would estimate the potential impact of the Huntington Ingalls Industries spin-off on the long-term value of Northrop Grumman's share price?

Question

Quizplus · Accepted Answer

The Answer is An important stated motivation for the spin-off by Northrop Grumman's management is to simplify the corporation, enable management to focus on those businesses it better understands, concentrate limited investment resources in businesses believed to grow more rapidly than shipbuilding, and to make the firm more easily understood by the investing public. Consequently, it would be necessary to estimate the present value of cash flows with and without Huntington Ingalls. While Northrop Grumman's cash flows would initially suffer from the loss of Huntington Ingall's cash flows, the rate of increase in future cash flows may accelerate. Furthermore, if investors find Northrop Grumman more transparent and less prone to enter the capital markets to finance its former capital intensive shipbuilding operations and hence less risk, the firm's weighted average cost of capital may decline.

Describe How You as an Analyst Would Estimate the Potential