Boeing Case

Boeing Case

1. Provide a brief overview of the relevant issues and summarize your recommendations.

In 2003, with wars in full swing in Iraq and Afghanistan, Boeing’s Defense Division was benefiting from the lucrative environment of the United States Military spending billions of dollars to address the conflicts abroad. However, Boeing’s Commercial Division was recently dropped to number two in the Airplane industry behind Airbus. In addition, the travel industry was still feeling the impacts from the September 11, 2001 terrorists’ attacks and China had announced the outbreak of the SARS virus, prompting various countries to issue travel warnings. With all the impediments, the question became, “should Boeing play it safe while economic times were uncertain, or should they plan for the long term business cycle by developing a product to challenge Airbus?” Boeing Senior Vice President, Michael Bair, made a strong case for developing an airplane that would answer the customers’ needs of the time. With the world undergoing drastic changes, Boeing re-surveyed their customers. Their customers’ needs had shifted from a fast, expensive sub-sonic aircraft toward the need for fuel efficiency and lower operating costs. With an analysis of the data in the case file and the exhibits, it is recommended that Boeing move forward with the development of the fuel-efficient 7E7 aircraft.

2. What is the project’s estimated WACC? Put together a table that details how you arrived at your cost of capital estimate. In making your calculations, you can assume the following:

• The risk-free rate is 4.56%. (This is the long-term Treasury bond rate listed on page 7 of the case.)

• The market risk premium (rM − rRF) is 6.40%.

• Boeing is currently following its target capital structure, and the project’s capital structure is equal to the firm’s target capital structure. In other words, you can assume that the firm is going to finance the project with the capital...