Seminar Case Study

Question 3

Project Estimated WACC:

WACC = (Wdebt)(rd)(1-tc) + (Wequity)(re)

Historical Boeing debt to equity ratio = 0.525.

Effective marginal tax rate = 35%

For debt financing, we are assuming rd = 6.153%. This is in line with debt that matures in year 2038 as noted in exhibit 11. Also, this rate is higher than 30 year treasury bond rate of 4.56% as it should be. With Boeing’s A- Debt Rating, a premium of (6.153-4.53) = 1.623% is a bit high, but it is completely in line with the risks associated with such big investment.

Per CAPM, rs = rRF + (rM – rRF)*beta (beta = 1.05 per Value Line, exhibit 10)

=4.56 + (6.4)(1.05)

=11.28%

WACC = (0.525)(6.153%)(1-0.35) + (1 – 0.525)(11.28%)

= 7.54%

Question 4

Yes, board of directors must also consider the risk that may occur in this project, such inherent risks in this project resulting from the design and materials used. The 7E7 is the first plane to use a carbon body construction and employ wingtip extenders. This will add risk to the project since they have never been used on such a large scale project. Other than that, the supply chain is very large and spread over the globe. This will lead to challenges managing this network of contractors. There are many part of the plane that are being fully constructed in other countries and then shipped by sea to Boeing’s Seattle facility for final assembly. This will add to the inherent risk of the project if any of these contractors fail to deliver on time. Board of directors also must consider Airbus is a close competitor. They will be coming to market with their new A380 in 2005. This plane will be a formidable competitor to the 7E7. If Boeing falls behind regarding innovation, fuel efficiency and all the other attributes of a long haul airliner they will lose their market share. In order for Boeing to compete in the industry, they must take on some risk and develop this new plane. With the economy...