Boeing

1 Objectives

This report seeks answers and suggestions to the following of our case study on the Boeing 7E7 project:

(1) Estimation of the cost of capital for the 7E7 project (commercial segment).

• Evaluation and deriving of Beta used in the calculation isolating the commercial segment.

• Selection of Risk Free Rate and Market Risk Premium applied in capital asset pricing model (“CAPM”) in calculation of Cost of Equity.

• Estimation of capital structure weights in deriving of weighted average cost of capital (“WACC”).

(2) Discussion of the attractiveness of the Boeing 7E7 project based on judgment against the estimated WACC.

• Suggest the circumstances where the project would be economically attractive.

• Reveal about the nature of Boeing’s gamble on 7E7 project based on sensitivity analysis.

(3) Discussion on whether the board should approve 7E7 project.

• Economic profitability of 7E7 project.

• Compensation for the shareholders of Boeing for the risks and use of their capital with organizational and strategic considerations.

• Leadership role of the commercial aircraft business for Boeing versus Airbus.

2 Case summary

Company background

Boeing is the world’s leading aerospace company and is the largest manufacturer of satellites, commercial jetliners and military aircraft. Being the major service provider to National Aeronautics and Space Administration (“NASA”), Boeing operates the Space shuttle and International Space Station. Also, it provides numerous military and commercial airline support services. There are more than 90 countries of customers around the world (such as British Airways and American Airways) and Boeing is one of the largest US exporters in terms of sales. Table 1 shows the last 10 years’ sales and operating profits in its two major segments: Commercial Airplanes and Integrated Defense Systems.

Boeing 7E7 project

In early 2003, Boeing announced plans for a new super-efficient jet dubbed the 7E7, subsequently called the...