segment respectively‚ while Boeing only had 46%of revenues derived from this area; these four companies are not sufficiently similar. In addition‚ the commercial airline segment was depressed by the terrorism events and SARS‚ and the defense segment benefited from the Iraq war; as a result‚ it is too optimistic to use the beta of comparable companies. To take the crisis of the commercial airline market into account‚ it is more appropriate to use the estimated beta of Boeing according to past 60 trading
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The Boeing 7E7 Team 14 Constantine Brocoum Courtney Delia Stephanie Doherty David Dubois Radu Oprea October 15th‚ 2009 Contents Objectives 1 Management Summary 1 Cost of Equity 1 Equity Market Risk Premium 1 Beta 2 Risk Free Rate 2 Capital Structure Weights 2 Boeing 7E7 Project Evaluation 4 Circumstances for an economically attractive project 4 Market Demand 4 Market Share 4 Sensitivity Analysis 4 Conclusion 7 Board approval for the project? 7 Appendices 7 Appendix
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The Boeing 7E7 WACC Estimation In order to evaluate the prospective IRRs from the Boeing 7E7‚ we first try to estimate an appropriate required rate of return for accepting this project. The capital asset pricing model is applied to estimate the cost of equity of the commercial aircraft division: R_EC= β_EC*(R_M-R_f )+R_f where REC is the cost of equity capital of the commercial aircraft division. βEC is the beta for the commercial division of Boeing. This beta is used instead of the company’s
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Executive Summary A key factor in determining a project’s viability is its cost of capital [WACC]. The estimation of Boeing’s WACC must be consistent with the overall valuation approach and the definition of cash flows to be discounted. Note that this process is a forward looking focus and is laden with uncertainty. It is how the assumptions are modeled that many costly mistakes can be made. While finding a rate of return for an individual project‚ it is important to remember that WACC
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CHAPTER 9 THE COST OF CAPITAL (Difficulty: E = Easy‚ M = Medium‚ and T = Tough) Multiple Choice: Problems Easy: Cost of common stock Answer: d Diff: E [i]. Bouchard Company ’s stock sells for $20 per share‚ its last dividend (D0) was $1.00‚ and its growth rate is a constant 6 percent. What is its cost of common stock‚ rs? a. 5.0% b. 5.3% c. 11.0% d. 11.3% e. 11.6% Cost of common stock Answer: b Diff: E [ii]. Your company ’s stock
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NPV = $1‚228‚485 Discount rate = cost of equity (from CAPM) = 15.8% (see model for projected free cash flows) 2. Value the project using the Adjusted Present Value (APV) approach assuming the firm raises $750 thousand of debt to fund the project and keeps the level of debt constant in perpetuity. NPV of Levered Firm = $1‚528‚485 3. Value the project using the Weighted Average Cost of Capital (WACC) approach assuming the firm maintains a constant
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Chapter 9 Cost of Capital 1. What is the WACC? a. Weighted Average Cost of Capital- most firms employ different types of capital‚ and because of their differences in risk‚ the difference securities have different required rates of return. Typically=debt‚ preferred stock and common equity. 2. What precautions must we take when measuring the WACC to use for capital budgeting decisions (future investment)? b. The company’s current and recent past book and market value structures
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Butler Lumber Company 1. Why does Mr. Butler have to borrow so much money to support this profitable business? 2. Do you agree with his estimate of the company’s loan requirements? How much will he need to borrow to finance his expected expansion in sales (assume a 1991 sales volume of $3.6 million) 3. As Mr. Butler’s financial adviser‚ would you urge him to go ahead with‚ or to reconsider‚ his anticipated expansion and his plans for additional debt financing? As the banker‚ would you
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Q1: The Target Capital structure for Kaynat Manufacting is 50% common stock‚ 15% preferred stock‚ and 35% debt. If the cost of common equity for the firm is 19.6%‚ the cost of preferred stock is 12.9% and the before tax cost of debt is 9.5% what is the weighted average cost of capital? The firm’s tax rate is 35%. Answer: WACC = (50% x 19.6%) + (15% x 12.9%) + ( 35% x 9.5% x 65% = Q2: The following are the information of a company: |Type of capital |Book value (Tk) |Market
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THE BOEING 7E7 Teaching Note Synopsis and Objectives In 2003‚ the Boeing Company announced plans to build a new “super-efficient” commercial jet called the “7E7” or “Dreamliner.” This was a “bet the farm” gamble by Boeing‚ similar in magnitude to its earlier introductions of the 747 and 777 airliners. The technological superiority of the new airframe‚ as well as the fact that it would penetrate a rapidly growing market segment‚ were arguments for approval of the project. On the other hand‚ the
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