Boeing 777 Project

Corporate Finance Group E4

The Boeing 777

1. Boeing consists of two separate businesses, the defense business which is considered to the more stable since it does not depend on the actual condition of the economy, and the commercial-aircraft business which is more volatile and correlates strongly with the state of the economy. Since we are trying to evaluate the viability of the Boeing 777 project, we are going to estimate de required rate of return incorporating only the risk associated with the commercial-aircraft business and exclude any effect the defense business can have on our calculations. To incorporate the risk factor of this business in the required rate of return calculation, we are going to estimate the Beta of the asset (commercial-aircraft business) by using the method of comparables or pure play. Having been convinced that we must have a divisional Beta for determining the separate costs of capital for the two businesses, we need to identify companies that reasonably resemble the project for which the Beta is to be estimated. From the case, we have a sample of 4 companies that could potentially be used in this approach. These 4 companies also have a defense and commercial-aircraft business combination. From these 4 companies, only Grumman, Northrop and Lockheed can be considered pure-plays in defense. Since we are looking for pure-plays in the commercial-aircraft industry, and these companies although not large, have participation in this industry, we will be using the method to estimate the asset Beta of their commercial industry business. After adjusting for their leverage position (deleveraging their equity Beta) and their different percentage of revenues derived from each business, we have estimated the asset Beta of the commercial-aircraft industry. The next logical step would be to re-leverage the industry’s asset Beta to Boeing’s projected leverage which is 14%. Finally we have estimated that Boeing’s Beta for the Boeing 777 project is...