Boeing 7e7

2582 Words May 2nd, 2011 11 Pages
The Boeing 7E7

Team 14
Constantine Brocoum
Courtney Delia
Stephanie Doherty
David Dubois
Radu Oprea
October 15th, 2009

Contents
Objectives 1
Management Summary 1 Cost of Equity 1 Equity Market Risk Premium 1 Beta 2 Risk Free Rate 2 Capital Structure Weights 2
Boeing 7E7 Project Evaluation 4 Circumstances for an economically attractive project 4 Market Demand 4 Market Share 4 Sensitivity Analysis 4 Conclusion 7
Board approval for the project? 7
Appendices 7 Appendix A 7

i.
Objectives
This report seeks to answer the following three questions about the Boeing 7E7 project: 1. What is an appropriate required rate of return against which to evaluate the prospective IRRs from the Boeing 7E7?
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In this case, the extended length of the regression period is a detriment to the calculation of future risk. Due to the large beta, investors should expect greater returns than the stock market is providing. See Appendix A.

Risk Free Rate
US government debt is considered risk free as there is a miniscule chance, very near zero, that the US government will become insolvent. This is therefore the risk free rate that we will use for our calculations. The case gives us the rates of the 3-month Treasury Bill and the 30 year Treasury Bond at 0.85% and 4.56% respectively, in June 2003. Since this project has a time horizon on the order of 20-30 years it would be very reasonable to use the 30-year Treasury Bond as the value for the risk free interest rate.

Capital Structure Weights
The following formula will be used for calculating WACC
WACC = (Wdebt)(rd)(1-tc) + (Wequity)(re)

* rd – pretax cost of capital, it is considered to be the Yield to Maturity rate for the outstanding 30 years bond that matures 2/15/2033, that being 5.850%.

The cost of equity capital will be calculated using CAPM
Risk free rate + Equity Beta * (Expected return on market - Risk free rate)
E(Ri) = Rf + βi[E(Rm) - Rf]

* Expected return on market rate Rm is provided at page 175 in Myers and it is the average nominal return on stocks for the last century, the value is 11.7% * The debt/equity ratio for Boeing is

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