Boeing Case Solution
F523 - SPRING 2013 BOEING CASE
1. What is the appropriate required rate of return against which to evaluate the prospective IRR 's from the B ANSWER:The appropriate rate of return against which to evaluate the IRR is the risk-free rate, plus the market risk
1a. Please use the capital asset pricing model to estimate the cost of equity. At the date of the case, the 74 over T-bonds. Which beta, risk-free rate, and risk premium did you use? Why? Financing Components Debt Equity Market Values Weight Cost of Capital (After Tax) $ 6,823,736,197 0.85 3.72% $ 1,176,263,803 0.15 28.18% Total: $ 8,000,000,000 1.00 WACC WACC Inputs: Beta: Risk-Free Rate: Market Risk Premium: Pre-tax Cost of Debt: Income Tax Rate:
Exhibit 2 - 2002 Balance Sheet Information: Debt (Current+Long-Term Liabilities): Shareholders Equity: Boeing Debt/Equity Ratio:
$ $
44,646,000,000 7,696,000,000 5.80
ANSWER:We 've used a beta of 2.72, a risk-free rate of 5.33%, and a risk premium of 8.4%. The Beta is the Comm duration of Boeing bond) as of July 29, 2004, which is the date of the case according to the intro tab. The Market R
1b. Which capital-structure weights did you use? Why? ANSWER:We used a capital structure that consists of 85% debt, and 15% equity. This was done to maintain the d metrics such as Beta.
2. Under what circumstances is the project economically unattractive? ANSWER:There are many circumstances which would render the project economically unattractive. Of those repre development costs would be the largest deterrants. Additional economically unattractive situations would be 20-yea
2a. What does sensitivity analysis reveal about the nature of Boeing 's gamble on the 7E7? ANSWER:The sensitivity analysis reveals that there are many, many levers that could ultimately make this project u significant cause for concern with the data representing so many posssible points of failure. History has obviously p eventually unit volume degredation because of mechanical
1. What is the appropriate required rate of return against which to evaluate the prospective IRR 's from the B ANSWER:The appropriate rate of return against which to evaluate the IRR is the risk-free rate, plus the market risk
1a. Please use the capital asset pricing model to estimate the cost of equity. At the date of the case, the 74 over T-bonds. Which beta, risk-free rate, and risk premium did you use? Why? Financing Components Debt Equity Market Values Weight Cost of Capital (After Tax) $ 6,823,736,197 0.85 3.72% $ 1,176,263,803 0.15 28.18% Total: $ 8,000,000,000 1.00 WACC WACC Inputs: Beta: Risk-Free Rate: Market Risk Premium: Pre-tax Cost of Debt: Income Tax Rate:
Exhibit 2 - 2002 Balance Sheet Information: Debt (Current+Long-Term Liabilities): Shareholders Equity: Boeing Debt/Equity Ratio:
$ $
44,646,000,000 7,696,000,000 5.80
ANSWER:We 've used a beta of 2.72, a risk-free rate of 5.33%, and a risk premium of 8.4%. The Beta is the Comm duration of Boeing bond) as of July 29, 2004, which is the date of the case according to the intro tab. The Market R
1b. Which capital-structure weights did you use? Why? ANSWER:We used a capital structure that consists of 85% debt, and 15% equity. This was done to maintain the d metrics such as Beta.
2. Under what circumstances is the project economically unattractive? ANSWER:There are many circumstances which would render the project economically unattractive. Of those repre development costs would be the largest deterrants. Additional economically unattractive situations would be 20-yea
2a. What does sensitivity analysis reveal about the nature of Boeing 's gamble on the 7E7? ANSWER:The sensitivity analysis reveals that there are many, many levers that could ultimately make this project u significant cause for concern with the data representing so many posssible points of failure. History has obviously p eventually unit volume degredation because of mechanical