boeing 777
Ryan Perkins, Christopher Aldridge,
Travis Johnson, Suzanne Holt
Case Study:
Boeing 777
Copyright 2010. Gatton Student Research Publication. Volume 2, Number 2.Gatton
College of Business & Economics, University of Kentucky
FIN 445
October 2010
Gatton Student Research Publication | 1
The purpose of this case study is to determine if Boeing should accept or reject the project of producing their new line of commercial aircraft, the Boeing 777. The aircraft will complete a family of Boeing airplanes that service a broad range of necessities within the commercial airline industry. Frank Shrontz, the CEO of Boeing, has stated that his goal is to increase the company’s return on equity (ROE) from the recent average of 12%; the 777 project, if accepted, should increase the ROE of the firm. By finding the net present of the projected future cash flows of the project we were able to determine the profitability of the
777.
The first step in determining if this is an acceptable project is to find the beta, the risk of the new project, of Boeing’s commercial component. The beta was calculated by unlevering (removing the financial risk) and averaging the betas of Grumman, Northrop, and Lockheed, which are three primarily defense-oriented benchmark companies, using the following formula:
(
. The average of these three Value Line betas equaled
)( )
0.5328. We then unlevered the total Boeing beta:
(
=0.9883, and with the
)
unlevered defense beta, we were able to isolate the unlevered Boeing commercial beta. We used the percentage of Boeing that is comprised of defense (26%), and with the following formula, determined the Boeing commercial beta:
(
)(
)
(
)
Our next step was to lever the unlevered commercial beta by using a debt to equity ratio of 14%. We chose to use analysts’ prediction of 14% due to future financing needs if the project were to be accepted. We then needed to find the cost of equity of the
Travis Johnson, Suzanne Holt
Case Study:
Boeing 777
Copyright 2010. Gatton Student Research Publication. Volume 2, Number 2.Gatton
College of Business & Economics, University of Kentucky
FIN 445
October 2010
Gatton Student Research Publication | 1
The purpose of this case study is to determine if Boeing should accept or reject the project of producing their new line of commercial aircraft, the Boeing 777. The aircraft will complete a family of Boeing airplanes that service a broad range of necessities within the commercial airline industry. Frank Shrontz, the CEO of Boeing, has stated that his goal is to increase the company’s return on equity (ROE) from the recent average of 12%; the 777 project, if accepted, should increase the ROE of the firm. By finding the net present of the projected future cash flows of the project we were able to determine the profitability of the
777.
The first step in determining if this is an acceptable project is to find the beta, the risk of the new project, of Boeing’s commercial component. The beta was calculated by unlevering (removing the financial risk) and averaging the betas of Grumman, Northrop, and Lockheed, which are three primarily defense-oriented benchmark companies, using the following formula:
(
. The average of these three Value Line betas equaled
)( )
0.5328. We then unlevered the total Boeing beta:
(
=0.9883, and with the
)
unlevered defense beta, we were able to isolate the unlevered Boeing commercial beta. We used the percentage of Boeing that is comprised of defense (26%), and with the following formula, determined the Boeing commercial beta:
(
)(
)
(
)
Our next step was to lever the unlevered commercial beta by using a debt to equity ratio of 14%. We chose to use analysts’ prediction of 14% due to future financing needs if the project were to be accepted. We then needed to find the cost of equity of the