Boeing 777 Finance Case Study
Boeing 777 Project: Summary for the Board of Directors Boeing is currently operating with the majority market share of the commercial sector of aircraft manufacturing. Frank Shrontz, our CEO, has recently stated his goal to increase the company’s return on equity from its current average of 12%. The following summary will delve into the most appealing project for the future of this firm: the 777 aircraft. The purpose of this new product is to maintain our competitive advantage in commercial airline production by completing a family of Boeing airplanes. The following net present value analysis will be used to determine the potential profitability of the 777 project.
Our analysts concluded that a levered equity beta of 1.2939 was appropriate for the commercial division of Boeing. The levered equity beta was important to use due to its representation of the capital structure of Boeing and its value to the WACC calculation. This equity beta was calculated by removing the financial risk of four similar defense-oriented benchmark companies (over half of all revenues from their respective defense divisions). The Value Line betas of Lockheed, Northrop, Grumman, and McDonnell-Douglas were unlevered using the following formula U = (L) / (1+(1-t)(D/E)). The betas of these firms are important because by using the pure play approach, we can calculate an accurate equity beta for Boeing. Several adjustments must be made however, and those are discussed in the remainder of this paragraph. Once averaged, the Value Line betas equaled 0.4758. The next step required unlevering the total Boeing beta, which was found at 1.00. The formula used to unlever Boeing’s beta U = (1.00) / (1+(.66*.018)) = 0.9883. With the two betas we have calculated, Boeing’s unlevered commercial beta could be found. We found that the percentage of revenues derived from the defense division was 26%. The following formula provided the answer to Boeing’s commercial beta: U = (U-Boeing – (%
Our analysts concluded that a levered equity beta of 1.2939 was appropriate for the commercial division of Boeing. The levered equity beta was important to use due to its representation of the capital structure of Boeing and its value to the WACC calculation. This equity beta was calculated by removing the financial risk of four similar defense-oriented benchmark companies (over half of all revenues from their respective defense divisions). The Value Line betas of Lockheed, Northrop, Grumman, and McDonnell-Douglas were unlevered using the following formula U = (L) / (1+(1-t)(D/E)). The betas of these firms are important because by using the pure play approach, we can calculate an accurate equity beta for Boeing. Several adjustments must be made however, and those are discussed in the remainder of this paragraph. Once averaged, the Value Line betas equaled 0.4758. The next step required unlevering the total Boeing beta, which was found at 1.00. The formula used to unlever Boeing’s beta U = (1.00) / (1+(.66*.018)) = 0.9883. With the two betas we have calculated, Boeing’s unlevered commercial beta could be found. We found that the percentage of revenues derived from the defense division was 26%. The following formula provided the answer to Boeing’s commercial beta: U = (U-Boeing – (%