The Boeing Company was planning to build an efficient commercial plane that will be called the "7e7" or the "Dreamliner." With a rapidly-growing market segment, the approval for the Boeing 7E7 project needed approval, taking into consideration the current market for commercial airplanes. This case study provides the opportunity for students to assess the feasibility of the said project.
Robert F. Bruner and James Tompkins
Harvard Business Review (UV0281-PDF-ENG)
July 29, 2004
Case questions answered:
- In assigning a cost of debt from which to construct the project’s WACC, which benchmark debt did you use?
- At the end of the day, should the project be undertaken, matching WACC against IRR?
- Construct a CAPM for Boeing. What estimation period? What Equity Risk Premium (arithmetic or geometric)
- Construct a corporate cost of capital for Boeing. What cost of debt should be used?
- Construct a CAPM for Commercial Airframe Segment. How to allocate between Defense and Commercial Airframe? What estimation period? What Equity Risk Premium (arithmetic or geometric)?
- Construct a divisional cost of capital for Commercial Airframe. What cost of debt should be used?
- Match Commercial Airframe WACC against IRR. Create sensitivity analyses against R&D; Price; Overhead; Revenue estimates
- Construct a Sensitivity Analysis around Beta Estimation Periods to defend your contention.
- Identify contingent/qualitative options for undertaking the project.
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The Boeing 7E7 Case Answers
This case solution includes an Excel file with calculations.
Date: March 13, 2022
To: The Boeing Company
Subject: New Project – The Boeing 7E7
Background – The Boeing Company
The Boeing Company is currently reviewing the feasibility and profitability of investing in a new project, The Boeing 7E7, a new product line in Boeing’s commercial plane family.
The project aims to make the 7E7 cover more flight ranges with less operating and manufacturing costs and more safety.
However, the project faces many obstacles such as technical issues, financial awareness from the Board, and competition from its competitor.
Therefore, this financial analysis provides more information and advice on whether the company needs to invest in this new project.
The primary part of this analysis is to calculate the WACC for the commercial segment of Boeing. The analysis starts with calculating the unlevered beta for the defense segment of Boeing.
The financial data of Lockheed and Northrop are applied as proxies. Raytheon is not included as a proxy because only 73% of its revenues are derived from the defense segment. However, over 90% of the revenues are from the defense segment for the other two companies.
The S&P 500 index is applied in the estimation because S&P 500 is Boeing’s index membership. The timeframe is from June 16, 1998, to June 16, 2003.
The unlevered betas for Lockheed and Northrop are 0.284 and 0.240, respectively, based on the D/E ratio. The unlevered beta for the defense segment of Boeing is estimated to be 0.262, which is the average of the unlevered betas for the proxies.
The beta of the entire company needs to be considered to calculate the unlevered beta for the commercial segment. The beta against the S&P 500 in the timeframe from June 16 of the year 1998 to June 16 of 2003 is applied to be consistent with the proxies. The unlevered beta for the entire company is 0.596.
The allocations of defense and commercial segments are 46% and 54%. The unlevered beta for the commercial segment is estimated to be 0.881, which is calculated based on the weights of the commercial and defense segments.
After levering the beta, the levered beta for the commercial segment is 1.182. The risk-free rate and risk premia are 4.56% and 5%, respectively.
According to CAPM, the cost of equity is estimated to be 10.47%. The cost of debt is expected as 5.31%, which is the ratio of total interest to total debt. WACC for the project is 8.05%.
For the entire company, the levered beta is 0.8. The cost of equity is 8.56% based on CAPM. The WACC of Boeing is 6.80%.
The projected IRR for The Boeing 7E7 project is…
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