Boeing 777
Boeing 777
QUESTION 1:
The WACC that Boeing should use to discount the cash flows for the Boeing 777 investment is the WACC of the Boeing’s commercial division.
Step 1: We needed to calculate the Beta of the commercial division of Boeing.
We know that Beta of Boeing Corp. is the weighted average of the defense division Beta and the commercial division Beta.
We started by calculating the unlevered Beta of Boeing Corp. We did that by unlevering the long-term Boeing Betas i.e., more than 4 years. Then we took the average of the unlevered Betas.
We then moved to calculate Boeing’s defense division Beta. We assumed that the average Beta of the three comparable companies whose revenue is mainly derived from defense (85% and above) would be a good estimate. Here we assumed that the Beta of debt is zero for Boeing and the others. We also assumed that all have the same marginal tax rate of 34%.
For each of the three companies, we unlevered the long-term Betas i.e., more than 4 years. Then we averaged the Betas to obtain the Beta for each company. Then we calculated the Beta defense by averaging the Betas of the three companies.
Levered Beta | Boeing | Grumman | Northtrop | Lockheed | B/S | 0.018 | 1.756 | 1.288 | 1.182 | B/V | 0.018 | 0.637 | 0.563 | 0.542 | | | | | | Value Line | 1.00 | 0.95 | 1.00 | 1.10 | Data Stream | 1.06 | 0.53 | 0.94 | 0.97 | S&P 500 (58 Months) | 0.81 | 0.80 | 0.74 | 0.87 | S&P 500 (12 Months) | 1.37 | 0.73 | 0.72 | 0.69 | S&P 500 (60 Days) | 1.65 | 0.68 | 0.50 | 0.52 | NYSE (58 Months) | 0.87 | 0.86 | 0.79 | 0.95 | NYSE (12 Months) | 1.51 | 0.80 | 0.77 | 0.75 | NYSE (60 Days) | 1.79 | 0.73 | 0.53 | 0.57 | | | | | | | | Betas not considered for calculation |
| | | | | Unlevered Beta | Boeing | Grumman | Northtrop | Lockheed | B/S | 0.018 | 1.756 | 1.288 | 1.182 | B/V | 0.018 | 0.637 | 0.563 | 0.542 | | | | | | Value Line | 0.99 | 0.44 | 0.54
QUESTION 1:
The WACC that Boeing should use to discount the cash flows for the Boeing 777 investment is the WACC of the Boeing’s commercial division.
Step 1: We needed to calculate the Beta of the commercial division of Boeing.
We know that Beta of Boeing Corp. is the weighted average of the defense division Beta and the commercial division Beta.
We started by calculating the unlevered Beta of Boeing Corp. We did that by unlevering the long-term Boeing Betas i.e., more than 4 years. Then we took the average of the unlevered Betas.
We then moved to calculate Boeing’s defense division Beta. We assumed that the average Beta of the three comparable companies whose revenue is mainly derived from defense (85% and above) would be a good estimate. Here we assumed that the Beta of debt is zero for Boeing and the others. We also assumed that all have the same marginal tax rate of 34%.
For each of the three companies, we unlevered the long-term Betas i.e., more than 4 years. Then we averaged the Betas to obtain the Beta for each company. Then we calculated the Beta defense by averaging the Betas of the three companies.
Levered Beta | Boeing | Grumman | Northtrop | Lockheed | B/S | 0.018 | 1.756 | 1.288 | 1.182 | B/V | 0.018 | 0.637 | 0.563 | 0.542 | | | | | | Value Line | 1.00 | 0.95 | 1.00 | 1.10 | Data Stream | 1.06 | 0.53 | 0.94 | 0.97 | S&P 500 (58 Months) | 0.81 | 0.80 | 0.74 | 0.87 | S&P 500 (12 Months) | 1.37 | 0.73 | 0.72 | 0.69 | S&P 500 (60 Days) | 1.65 | 0.68 | 0.50 | 0.52 | NYSE (58 Months) | 0.87 | 0.86 | 0.79 | 0.95 | NYSE (12 Months) | 1.51 | 0.80 | 0.77 | 0.75 | NYSE (60 Days) | 1.79 | 0.73 | 0.53 | 0.57 | | | | | | | | Betas not considered for calculation |
| | | | | Unlevered Beta | Boeing | Grumman | Northtrop | Lockheed | B/S | 0.018 | 1.756 | 1.288 | 1.182 | B/V | 0.018 | 0.637 | 0.563 | 0.542 | | | | | | Value Line | 0.99 | 0.44 | 0.54