In early 2003, Boeing released plans to build a new “super efficient” jet called the 7E7. The jet subsequently gained the nickname the “Dreamliner.” In the six months following the announcement news depressed the market for aircraft, which was already shrinking. This news included the United States going to war with Iraq, global terrorist attacks, and SARS putting travelers in fear. This all contributed to the worst airline profits in a generation. From Boeing’s perspective this meant for a promising market to introduce a major new product. Boeing moved forward with this concept and planned to release the 7E7 in 2008. It is Michael Bair’s job to make a recommendation to the board of directors for a final decision on the project. In order to do this he will need to complete a valuation of the 7E7 project in order to convince Boeing’s CEO and other upper management that the project would be financially profitable for Boeing’s shareholders.

In order to complete this financial analysis, Bair will need to calculate Boeing’s WACC along with IRR to determine whether this is a financially worthwhile project. In order to calculate the WACC, Bair must consider the betas from Boeing’s commercial sector as well as the defense sector. One beta cannot be used for the whole company due to the vast difference in volatility between the two sectors. Once these two separate betas are calculated, they can be weighted based on the % revenue which each industry contributes to the company and then a WACC can be calculated for Boeing as a whole. This number is then compared with the IRR of the 7E7 project to determine whether the project should continue. Based on the results of this analysis, I determined that Boeing should take on the 7E7 project. All calculations are provided below. Appendix #1

Why is Boeing contemplating the launch of the 7E7 project? Is this a good time to do so?
Boeing is contemplating launching the 7E7 for a few reasons. The first reason is...

...CAPITAL BUDGETING
Cost of Capital Evaluating Cash Flows
Payback, discounted payback NPV IRR, MIRR
The Cost of Capital
• Cost of Capital Components
– Debt – Common Equity
• WACC
Should we focus on historical (embedded) costs or new (marginal) costs?
The cost of capital is used primarily to make decisions which involve raising and investing new capital. So, we should focus on marginal costs.
What types of long-term capital do organizations use?
nLong-term...

...ratio reflects the Boeing’s capital structure and using only debt and equity as finance the 7E7 commercial aircraft project in this case. There are two formulas to calculate the weight of debt and equity as show below:
Debt/Equity=0.525 (D/E=0.525)
Debt+Equity=1 (D+E=1); D=1-E
Using the second formula substituting back into the first equation and the result is 1-E/E=0.525, so through calculating this equation, it can indicate that E is 0.656 and D is 1-0.656=0.344. The...

...9 Calculating WACC
Mullineaux Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and a 35 percent debt. Its cost of equity is 12.5 percent, the cost of preferred stock is 5.5 percent, and the cost of debt is 7.2 percent. The relevant tax rate is 35 percent.
a. What is Mullineaux’s WACC?
b. The company president has approached you about Mullineax’s capital structure. He wants to know why the company...

...1. Why do think Larry Stone wants to estimate the firm’s hurdle rate? Is it justifiable to use the firm’s weighted average cost of capital as the divisional cost of capital? Please explain.
(10% weighting)
Answer
The hurdle rate is the rate of return a firm has to offer finance providers to induce them to buy and hold financial security. (Arnold,2007). This is also known as cost of capital or weighted average cost of capital. The returns offered by alternative securities with the same...

...as the discount rate in net present value (NPV) project appraisal techniques.1
The weighted-average cost of capital (WACC) represents the overall cost of capital for a company, including the costs of equity and cost of debt, weighted according to the proportion of each source of finance within the business. In easy words WACC measures a company’s cost to borrow money.
The WACC equation is the cost of each capital component multiplied by its...

...at 4.5%
* JP Morgan has issued an estimate for Expected Market Return at 8.5%
* Euribor is 2%
* Before tax cost of debt = 5%
* Tax rate = 30%
Please calculate the weighted average cost of capital (WACC) for this firm.
2. You are now asked to calculate the WACC for a toothpaste manufacturer with the following data:
* Average share price for last 6 months = €34/ share
* Current year’s dividend = €3/ share
* Applicable...

...Weighted Average Cost of Capital
Introduction and objectives
This paper aims at describing a way to compute the Weighted Average Cost of Capital (WACC). This method is often used by company management to determine the economic feasibility of different projects and thus to compute the NPV of a specific project by discounting cash-flows. The WACC determines the return that the company should generate to satisfy its debt-holders. For the company, it consists in a...

...What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not?
1.1 The definition of WACC Weighted average cost of capital(WACC), is a weighted-computational method of analyzing the cost of capital based on the whole capital structure of a firm. The result of WACC is the rate a firm use to monitor the application of the current assets...

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