The Boeing 777
Darden Case Study UVA-F-1017
Case Study Assignment
Subject: Cost of capital − cost of equity and cost of debt; beta risk; estimation; capital structure. The task for students is to evaluate the 777 against a financial standard, the investors’ required rate of return. The general objective of this case is to exercise students’ skills in estimating corporate (divisional/project) costs of capital – cost of equity and WACC. Case Questions, Analysis, and Directions: Read and analyze the case, and prepare an “Executive Summary” of this case. Write it as if you were writing it to the members of Boeing’s Board of Directors, who may not know much about the project or finance. Your Executive Summary will include: (1) A brief…show more content… Search for any recent stories about the 777 project and discuss briefly the project’s progress and success.
Notes and Hints: The WACC is equal to the weighted average of the component capital costs, e.g., the weight in debt times the after-tax cost of debt financing plus the weight in equity times the after-tax cost of equity financing corresponding to the leverage: WACC = (D/V)*Rd*(1− tax rate) + Re*(E/V), where “tax rate” = marginal corporate tax rate (assume 34%), Rd = the before-tax cost of debt (info about the premium above long-term government rates is provided in tables), Re is the cost of equity, D and E are the market values of debt and equity. V = (E + D). Remember that the higher leverage means the higher equity risk (and cost of equity Re) and that you will have to “un-lever” and “re-lever” your firm’s cost of equity and any other firm (pure-plays) when evaluating a project in a specific division. Note that your firm (and comparable “pure-play” firms) may have different leverage (capital structures) than the target leverage of your firm and estimated equity ‘betas’ will reflect the past leverage!! Also, your firm may have several divisions and the individual divisional projects may have different risks and thus different costs of capital!! Pay special attention to the information and questions under the “The 777” case segment (pages 6-9). State your parameters & assumptions very clearly. Someone looking at your analysis should be