... sensitivity analysis around the WACC values and consideration of other Economic Factors. It did not quite all come together perfectly at the end. See the detailed comments that I have made in the RHS margin. The Boeing 7E7 Team 14 Constantine Brocoum Courtney Delia Stephanie Doherty David Dubois Radu Oprea October 15th, 2009 Contents Objectives 1 Management Summary 1 Cost of Equity 1 Equity Market Risk Premium 1 Beta 2 Risk Free Rate 2 Capital Structure Weights 2 Boeing 7E7 Project Evaluation 4 Circumstances for an economically attractive project 4 Market Demand 4 Market Share 4 Sensitivity Analysis 4 Conclusion 7 Board approval for the project? 7 Appendices 7 Appendix A 7 Objectives This report seeks to answer the following three questions about the Boeing 7E7 project: 1. What is an appropriate required rate of return against which to evaluate the prospective IRRs from the Boeing 7E7? a. Please use the capital asset pricing model to estimate the cost of equity. b. Which equity market risk premium (EMRP) did you use? Why? c. What Beta did you use and how did you derive it? d. Which risk-free rate did you use? Why? e. Which capital-structure weights did you use? Why? 2. Judged against your WACC, how attractive is the Boeing 7E7 project? ...
Words: 2629 - Pages: 11
...Case #16 The Boeing 7E7 Synopsis and Objectives In 2003, the Boeing Company announced plans to build a new “super-efficient” commercial jet called the “7E7” or “Dreamliner.” This was a “bet the farm” gamble by Boeing, similar in magnitude to its earlier introductions of the 747 and 777 airliners. The technological superiority of the new airframe, as well as the fact that it would penetrate a rapidly growing market segment, were arguments for approval of the project. On the other hand, the current market for commercial airplanes was depressed because of terrorism risks, war, and SARS, a contagious illness that resulted in global travel warnings. Boeing’s board of directors would need to weigh those considerations before granting final approval to proceed with the project. The task is to evaluate the 7E7 project against a financial standard, the investors’ required returns. The case gives internal rates of return (IRR) for the 7E7 project under base-case and alternative forecasts. We must estimate a weighted-average cost of capital (WACC) for Boeing’s commercial-aircraft business segment in order to evaluate the IRRs. As a result of that analysis, we will identify the key value drivers and distinguish, on a qualitative basis, the key gambles that Boeing is making. The need to estimate a segment WACC draws out our abilities to critique different estimates of beta and to manipulate the levered-beta formulas. Boeing competes in both the commercial aircraft and the defense...
Words: 441 - Pages: 2
...Management Summary The analysis identifies both risks and benefits associated with undertaking the 7E7 project. Giving a calculated WAAC of 15.44% for the commercial division of Boeing, the project is feasible and profitable. As you will find, the financial calculations provided in this report show that the project will increase the wealth of the shareholders, also identifying the associated risks and how those could be minimized. Assuming the development costs are correctly estimated and the market response is properly gauged, the reasons to go forward with the project outweigh those against it. The market competition corroborated with the unfavorable economic conditions prompt a swift and decisive answer from Boeing. The new 7E7 will have lower operating costs due to increased cargo space and increased fuel economy due to new engine design, would also be versatile and suitable for both short and long flight routes. Ensuring the development and manufacturing costs are kept down by employing decades of engineering expertise and already proven technologies and solutions, it is recommended that Boeing undertakes the 7E7 project. Cost of Equity The 7E7 Project is a risky project. With a beta of 2.540738, which is substantially higher than the stock market average company, volatility is expected in this investment. However, with risk comes a reward. The 7E7 project would need to provide returns of 22.7009% in order to be considered a sound investment. E(Ri) = .0456+ 2...
Words: 2287 - Pages: 10
...Boeing Analysis - Writeup I. Brief overview of relevant issues and summarize of our recommendations. The key question in this assignment is whether Boeing should proceed with developing the family of 7E7 aircrafts in a post SARS and post 9-11 market. A major part of this decision lies in determining the profitability of such a major undertaking. Yet, apart from the project's stand-alone risk, the project's financial merit must be evaluated in terms of its overall portfolio impact as well. After studying this case and performing a detailed cash flow analysis, we recommend Boeing proceed with the production of the 7E7 planes based on the merit of the following pros and cons: Pros: 1) The NPV for this project is more than $7 billion. The baseline IRR of the 7E7 project is 15.7%. This is greater than the estimated WACC of 7.54%. (Detailed calculations are shown below). 2) Boeing has not introduced a new plane since the successful launch of B777 in 1994. A new offering is in order as customers look to replenish their fleet. 3) Many of the requirements for 7E7 are customer driven as the company looks for a plane with lower operating costs and lower fuel consumption. 4) Airbus, Boeing's main competitor, is catching up and even surpassing Boeing's commerical plane market share. To stay ahead of the competition, Boeing needs a new, efficient, cost-effective, and superior product. 5) With the improved manufacturing capability of lighter composite materials, producing...
Words: 1157 - Pages: 5
...THE BOEING 7E7 Teaching Note Synopsis and Objectives In 2003, the Boeing Company announced plans to build a new “super-efficient” commercial jet called the “7E7” or “Dreamliner.” This was a “bet the farm” gamble by Boeing, similar in magnitude to its earlier introductions of the 747 and 777 airliners. The technological superiority of the new airframe, as well as the fact that it would penetrate a rapidly growing market segment, were arguments for approval of the project. On the other hand, the current market for commercial airplanes was depressed because of terrorism risks, war, and SARS, a contagious illness that resulted in global travel warnings. Boeing’s board of directors would need to weigh those considerations before granting final approval to proceed with the project. The task for students is to evaluate the 7E7 project against a financial standard, the investors’ required returns. The case gives internal rates of return (IRR) for the 7E7 project under base-case and alternative forecasts. The students must estimate a weighted-average cost of capital (WACC) for Boeing’s commercial-aircraft business segment in order to evaluate the IRRs. As a result of that analysis, the students identify the key value drivers and distinguish, on a qualitative basis, the key gambles that Boeing is making. The general objective of this case is to exercise students’ skills in estimating a weighted-average cost of capital and cost of equity. The need for students...
Words: 7346 - Pages: 30
... 5. 6. 7. 10. 11. Contents Evolution of Project Boeing 7E7 Empirical Data 7E7 Project NPV –DCF Analysis WACC Calculation Payback Period Stock Options @ Risk Analysis Conclusion References Page 1 4 5 7 11 12 22 23 24 Table of Tables Table Number Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table 8 Table 9 Table 10 Table 11 Table 12 Table 13 Table 14 Table 15 Table 16 Table 17 Table 18 Table 19 Table 20 Table 21 Table 22 Table 23 Table 24 Content DCF Analysis Variables Regression Analysis WACC Calculations Payback Period Depreciation Call Option - NYSE Call Option - S&P 500 Put Option - NYSE Put Option - S&P 500 Sell A Call - NYSE Sell A Call - S&P 500 Sell A Put - NYSE Sell A Put - S&P 500 Covered Call - NYSE Covered Call - S&P 500 Protective Put - NYSE Protective Put - S&P 500 Protective Collar - NYSE Protective Collar - S&P 500 Long Straddle - NYSE Long Straddle - S&P 500 Short Straddle - NYSE Short Straddle - S&P 500 Table of Exhibits List of exhibits Exhibit A Exhibit B Exhibit C Exhibit D Exhibit E Exhibit F Exhibit G Exhibit H Exhibit I Exhibit J Exhibit K Exhibit L Exhibit M Exhibit N Exhibit O @ RISK Sensitivity analysis Change in Stock Price - NYSE Payback Period - NYSE ...
Words: 5459 - Pages: 22
...Case #16 The Boeing 7E7 Synopsis and Objectives In 2003, the Boeing Company announced plans to build a new “super-efficient” commercial jet called the “7E7” or “Dreamliner.” This was a “bet the farm” gamble by Boeing, similar in magnitude to its earlier introductions of the 747 and 777 airliners. The technological superiority of the new airframe, as well as the fact that it would penetrate a rapidly growing market segment, were arguments for approval of the project. On the other hand, the current market for commercial airplanes was depressed because of terrorism risks, war, and SARS, a contagious illness that resulted in global travel warnings. Boeing’s board of directors would need to weigh those considerations before granting final approval to proceed with the project. The task is to evaluate the 7E7 project against a financial standard, the investors’ required returns. The case gives internal rates of return (IRR) for the 7E7 project under base-case and alternative forecasts. We must estimate a weighted-average cost of capital (WACC) for Boeing’s commercial-aircraft business segment in order to evaluate the IRRs. As a result of that analysis, we will identify the key value drivers and distinguish, on a qualitative basis, the key gambles that Boeing is making. The need to estimate a segment WACC draws out our abilities to critique different estimates of beta and to manipulate the levered-beta formulas. Boeing competes in both the commercial aircraft...
Words: 448 - Pages: 2
...THE BOEING 7E7 Teaching Note Synopsis and Objectives In 2003, the Boeing Company announced plans to build a new “super-efficient” commercial jet called the “7E7” or “Dreamliner.” This was a “bet the farm” gamble by Boeing, similar in magnitude to its earlier introductions of the 747 and 777 airliners. The technological superiority of the new airframe, as well as the fact that it would penetrate a rapidly growing market segment, were arguments for approval of the project. On the other hand, the current market for commercial airplanes was depressed because of terrorism risks, war, and SARS, a contagious illness that resulted in global travel warnings. Boeing’s board of directors would need to weigh those considerations before granting final approval to proceed with the project. The task for students is to evaluate the 7E7 project against a financial standard, the investors’ required returns. The case gives internal rates of return (IRR) for the 7E7 project under base-case and alternative forecasts. The students must estimate a weighted-average cost of capital (WACC) for Boeing’s commercial-aircraft business segment in order to evaluate the IRRs. As a result of that analysis, the students identify the key value drivers and distinguish, on a qualitative basis, the key gambles that Boeing is making. The general objective of this case is to exercise students’ skills in estimating a weighted-average cost of capital and cost of equity. The need...
Words: 7290 - Pages: 30
...Boeing 7E7 Case Study Solution BACKGROUND As the world’s largest aerospace company and leading manufacturer of commercial jetliners and defense, space and security system, Boeing puts a lot of efforts and innovations in its products and services. These include commercial and military aircraft, satellites, weapons, electronic information and communication systems, and performance-based logistics and training. Due to customers’ needs and requests, Boeing has expanded its product line and services. The long tradition of aerospace leadership and innovation has given the company the advantages. Its broad range of capabilities includes creating new and more efficient commercial airplane, integrating military platforms and defense systems through network-enabled solutions; and arranging innovative customer-financing options. Nowadays, Boeing, as the top exporter of U.S. and with its corporate offices in Chicago, supports airlines and U.S. and allied government customers in more than 90 countries. Besides, Boeing employs more than 159,000 people across United States and in 70 countries. In between, more than 123,000 of its employees hold college degrees, including nearly 32,000 advanced degrees, which means in virtually every business and technical field from approximately 2,700 colleges and universities worldwide. By the way, we can see how diversified, talented and innovated the workforces of Boeing company. Basically, Boeing is diversified into...
Words: 1038 - Pages: 5
...Introduction In this case Boeing faces a number of challenges in determiningthe viability of bringing forth the 7E7 aircraft series. Aircraft manufacturersbringing forth a new product has to take extra care since a miss in this assessment can place a company in a position to fail the result of huge cash outflows required. Boeing faced stiff competition from French based Airbus and had not brought forth a successful new product in recent years. Since the September 11th attacks travel had taken a drop in general and Boeing was making assumptions regarding future needs and opportunities. This included the willingness of travelers to pay 5% more for efficiency and the increase of hub and spoke travel for airlines requiring flexibility in mid-sized aircraft. To assess the validity of the 7E7 series extra care will be taken to look at all the measurements to reduce the risk inherent in new product introductions in the aircraft business. Question 1 a. What is an appropriate required rate of return against which to evaluate the prospective IRRs from the Boeing 7E7? Please use the capital asset pricing model to estimate the cost of equity. At the date of the case, the 74-year equity market risk premium (EMRP) as estimated to be (see below). Which beta and risk-free rate did you use? Why? Applying the Capital Asset Pricing Model estimate the required rate of return for Boeing equity for the last 74 years: RBA= RF+ β(RM-RF)in which: * Market Risk Premium 74 year period...
Words: 3183 - Pages: 13
...Case Study – The Boeing 7E7 In early 2003, Boeing announced its “Dreamliner” plan to design and sell a new, “super-efficient” jet -- “7E7”. However, the overall market for aircrafts was negatively affected by several shock news: the United States went to war against Iraq, a deadly illness called SARS resulted in global travel warnings. These negative news made airline profits the worst seen in a generation. Michael Bair, the leader of the 7E7 project, announced that Boeing was making “excellent progress on the development of the 7E7 and continues to be on track to seek authority to offer the airplane.” on June 16, 2003, at the prestigious Paris Air Show. In order to proceed with the project, Bair sought a firm commitment from Boeing’s board of directors in early 2004. If the board approved the plan, he could start collecting orders from airlines and expect passengers to start flying on the new jets in 2008. Between now and his recommendation to the board, he would need to complete a valuation of the 7E7 project and gain the support of Boeing’s CEO, Philip Condit, and the other senior managers. Two aspects should be considered to solve the problem. The first aspect is whether this project can bring strategic advantage to the company. The second aspect is whether the cost of capital is less than the estimated rate of return. 7E7 is twin-aisle aircraft. Exhibit 4 shows aircraft distribution forecast of Boeing and Airbus (Boeing and Airbus almost occupies the global commercial aircraft...
Words: 762 - Pages: 4
...about the Boeing 7E7 project: 1. What is an appropriate required rate of return against which to evaluate the prospective IRRs from the Boeing 7E7? a. Please use the capital asset pricing model to estimate the cost of equity. b. Which equity market risk premium (EMRP) did you use? Why? c. What Beta did you use and how did you derive it? d. Which risk-free rate did you use? Why? e. Which capital-structure weights did you use? Why? 2. Judged against your WACC, how attractive is the Boeing 7E7 project? a. Under what circumstances is the project economically attractive? b. What does sensitivity analysis (your own and/or that shown in the case) reveal about the nature of Boeing’s gamble on the 7E7? 3. Should the board approve the 7E7? Management Summary The analysis identifies both risks and benefits associated with undertaking the 7E7 project. Giving a calculated WAAC of 15.44% for the commercial division of Boeing, the project is feasible and profitable. As you will find, the financial calculations provided in this report show that the project will increase the wealth of the shareholders, also identifying the associated risks and how those could be minimized. Assuming the development costs are correctly estimated and the market response is properly gauged, the reasons to go forward with the project outweigh those against it. The market competition corroborated with the unfavorable economic conditions prompt a swift and decisive answer from Boeing. The new 7E7 will have...
Words: 2499 - Pages: 10
...Boeing 7E7 It is our understanding that there is a new and better jet to be made. However, with times they way they are, it is extremely risky to embark on an endeavor of this magnitude and not be successful. We have put together a study and recommendation that should assist you in your decision in whether or not to grant final approval to proceed with the project. Although significant investments are required to develop the Boeing 7E7, a competitive advantage cannot be achieved with the Company’s current product scope. Therefore, due to the IRR being higher than the commercial segment’s WACC as well as the need to achieve a competitive advantage in the market, we believe the project should be undertaken. #18 and The Force Executive Summary Due to the above quantitative analysis, it is evident that the project is beneficial to the company. However, several other issues should be taken into consideration before the Board of Directors’ make their final decision. A positive factor is the ability to achieve customer satisfaction as the aircraft will provide 20% less fuel costs than any other plane in its size. There is flexibility of short or long flights and Boeing 7E7 has enhanced passenger features. This will increase the demand for the airplane as customers will face lower operating costs, increased flexibility and will be better able to satisfy their market share. There is a projected rate of annual increase in air travel of 5.1%. This growth in the industry will...
Words: 2365 - Pages: 10
...Financial Management Case - Boeing 7E7 1. Background 1.1 General introduction of Boeing Boeing is the world's largest aerospace company and leading manufacturer of commercial jetliners and defense, space and security systems. Boeing is organized into two business units: Boeing Commercial Airplanes and Boeing Defense, Space & Security. According to Boeing’s 2002 Annual Report, the revenues split between its commercial airplanes division and its integrated defense systems division is about 50/50. Boeing has been the premier manufacturer of commercial jetliners for more than 40 years. Today, the main commercial products are the 737, 747, 767 and 777 families of airplanes and the Boeing Business Jet. New product development efforts are focused on the Boeing 7E7. 1.2 Basic information of Boeing 7E7 Boeing 7E7 was expected to enter service in 2008 with three versions: a baseline model with 200 seats and a range of 7,800 nautical miles; a lighter version with a 3,500 nautical-mile range; and a stretch version with 250 seats and a 8,300 nautical-mile range. The 7E7 is intended to replace the 757, 767 and A300 and even the successful A330. This is why Boeing has a lot of opportunities in this market segment. With almost every U.S. major airline operating a large fleet of 757/767 aircraft, this will be the main target market for Boeing's 7E7. American Airlines, Delta Airlines and United Airlines may all be the customers we want to pay attention to. American Airlines also operates...
Words: 2793 - Pages: 12
...The concept of taking on a new project, such as the Boeing is considering with the 7E7, is groundbreaking. It has the potential of pulling Boeing out of its financial slump and has the potential to appeal to a multitude of customers. Boeing needs to consider the value of this project to the company in the long run, however. To calculate the cost of capital, we need to use the Weighted Average Cost of Capital (WACC) formula, a shown below. WACC: (%debt)* (pretax cost of debt capital)*(1-marginal effective tax rate) + (%equity)*(cost of equity capital) In order to calculate Boeing’s debt percentage, it is assumed in this analysis that the capital structure remains the same and is unaffected by the current potential 7E7 project. The debt/equity ratio is .525, as listed in Exhibit 10 of the case. To calculate the total market value of debt, the market value of all of the bonds listed in Exhibit 11 must be summed. The market value is $5,023.28M. By dividing this value by .525, the market value of equity can be calculated at $9,568.15M. Dividing $5,023.28M by $14,591.43M (sum of market value of debt plus the market value of equity) and multiplying by 100 gives the percent debt of 34.43%. Please see Exhibit 1 for calculations. The pretax cost of debt capital will be the yield to maturity of a proxy bond. The bond that matures on 2/15/2013 will be used as a proxy for the entire cost of debt capital because of its relative size in relation to the entire company’s...
Words: 1076 - Pages: 5
