...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...
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...Luqing Zhang August 28th 2013 Boeing 7E7 D/E ratio Tax Rate MRP (6.4%-‐8.4%) 3-‐month T-‐bill 30-‐yr T-‐bond Weight of defence Weight of commercial 1.a 0.525 0.35 8.40% 0.85% 4.56% 46% 54% Exhibit 10 Exhibit 10 Given Page 8 Page 8 Exhibit 10 Exhibit 10 Using CAPM to determine cost of equity Since Boeing's revenue highly correlates with the market, I choose the MRP to be 8.4%. Re = Rf + equity beta*(market risk premium) Cost of Equity = 27.3414% 1.b Risk free rate = 4.56% Using the 30-‐year Treasury Bond rate to be the risk free rate because the 7E7 project span is about 20 to 30 years 1.c Since the 7E7 project we are evaluating is a commercial project, I will focus the beta on the commercial part, and Boeing Overall Beta Unlevered beta = Levered beta/(1+D/E*(1-‐t)) Overall levered beta = 1.62 Unlevered beta = 1.2078 Defence Industry Lockheed Martin Northrop Grumman Defence Industry Average = D/E 0.41 0.64 Levered β Unlevered β 0.37 0.292143703 0.3 0.211864407 0.2520 *selected from the 60...
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...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...
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...Background Boeing, a well-known aerospace company, has been facing a large decision regarding investing money in to producing a new aircraft. Boeing is split into two different primary segments: commercial airplanes and integrated defense systems or in other words, government contracts. Boeing makes commercial airplanes that can be used for both short and long-range flights, while also accepting government defense contracts. Boeing produces and sells six different airplanes to meet the needs of short- to long-range markets. Some of these aircrafts include the 717, 737, 747, 757, 767, and 777. For 2003, Boeing expects to deliver 280 aircraft and expects between 275 and 300 the following year. The expected revenues for 2003 are at $22 billion, which are down from $28 billion the previous year. B. History of the Industry Fundamentally, Boeing is a commercial-aircraft company. Unfortunately, as a part of this industry, they have started to see a significant downfall. They have lost the number one position to Airbus, their largest commercial competitors. Not only this, but also the current economic conditions look less than desirable for the commercial aircraft industry at the moment due to several reasons: • The SARS outbreak • Terrorist risks • Post 9-11 flying fears • War With all of this in mind, the decision to produce a new aircraft becomes even more questionable when analyzing how this company is to remain a dominant player in the future. C. Boeing and the...
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...The Boeing 7E7 ‘Dreamliner’ Case #3 Section 1, Group 8 Introduction: The Boeing 787 Dreamliner case provides us with a brief background of Boeing’s business through the end of the 1990’s, and how company management recognized the importance of reinventing their core business in order to remain competitive in the consumer air travel segment. We learned how in-depth of a process it can be to successfully design and produce a new airplane with revolutionary technology and high-tech manufacturing requirements. Boeing struggled with these aspects of the plane, and as we learned, greatly underestimated the amount of time and money that the project would require. 1.) A: Boeing and Airbus both issued corporate reports regarding the demand for aircraft in different segments going forward. Despite differences in the overall outlook in terms of segment popularity and the exact volumes of aircraft to be required by the market, both reports were very obviously positive. The main differences between the reports were seen in Boeing’s willingness to forecast for the increased popularity of mid-range aircraft, versus Airbus’ decision to place a higher weight on the importance of international-scale jetliners. Boeing predicted demand over 20 years would call for “5,437 intermediate twin-aisle airplanes; and 889 747-size or larger airplanes” (Boeing’s 2003 Current Market Outlook). Airbus’ predictions were shifted toward the larger aircraft segments, citing “3,842 twin-aisle aircraft;...
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...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...
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...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...
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...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...
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...Existing Schedule | |Proposed Schedule | | | |25 June 2011 8:00 AM -11:00 AM and 1:00 PM – 3:00 PM |5 |25 June 2011 8:00 AM -12:00 AM and 1:00 PM – 4:00 PM |7 | |02 July 2011 8:00 AM -11:00 AM and 1:00 PM – 3:00 PM |5 | | | |09 July 2011 8:00 AM -11:00 AM and 1:00 PM – 3:00 PM |5 |09 July 2011 8:00 AM -12:00 AM and 1:00 PM – 5:00 PM |8 | |16 July 2011 8:00 AM -11:00 AM and 1:00 PM – 3:00 PM |5 | | | |23 July 2011 8:00 AM -11:00 AM and 1:00 PM – 3:00 PM |5 |23 July 2011 8:00 AM -12:00 AM and 1:00 PM – 4:00 PM |7 | |30 July 2011 8:00 AM -11:00 AM and 1:00 PM – 3:00 PM |5 |30 July 2011 8:00 AM -12:00 AM and 1:00 PM – 5:00 PM |8 | | |30 hours | ...
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...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...
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...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...
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...In late 2003, the company of Boeing was the worst of its life. However, it was changed some market demand and solved the technology issues, then slowing to improve. According to the case study (Boeing), the six-box organisational model provides a framework that succinctly identifies the key factors at the centre of the Boeing situation. It explains the following according to Palmer et al. (2009): 1. Strategy – was to update their technology systems, downsize their operations, and re-establish relationships with their suppliers and the only feasible way costs could be cut. 2. Structure – the problem of 1994 airbus which shocked the management executives and began a series of changes that were implemented to overcome the bureaucratic structure, outdated technological systems, and unnecessary processes in a company that had reportedly changed. 3. Systems – Boeing adopted the principles of lean manufacturing and aimed to rejuvenate their reputation by making their production more efficient. The object of the project was to implement an automated system of assembly lines. 4. Style – the decision was made to diversify from the traditional commercial airline industry and the many acquisitions that were made created integration issues for the company. The aim again was to add more stability to the business by diversifying into information services and the space industry that providing services with elevated margins that would reflect on Boeing’s bottom line. ...
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...Case Study: Boeing 42 The long list of Boeing's woes seems to have reached its pinnacle in late 2003 with the scandal surrounding the Pentagon deal that alleged inappropriate behavior and the loss of documents by Boeing officials. After his seven-year reign at the head of the organization, December 2003 saw the eventual resignation of Phil Condit. Many breathed a sigh of relief at the news. The problems at Boeing were reportedly endless. From a stock price that had decreased by 6.5 percent while the company was under his leadership to increasing competitive pressures, the future for Boeing was in doubt and changes were needed. For many years Boeing graced American corporate news for their prowess as the leading manufacturer of aircraft. However, in 1994 Airbus—their main rival—booked more orders. This shocked the management executives and began a series of changes that were implemented to overcome the bureaucratic structure, outdated technological systems, and unnecessary processes in a company that had reportedly changed little since World War II. THE BEGINNING OF CHANGE AT BOEING In 1997 market demand increased dramatically and Boeing attempted to meet this surplus of orders by doubling their production capabilities instantaneously. A manufacturing crisis ensued and Boeing's reputation took a dramatic turn for the worse when they were required to halt production of the 747 aircraft for 20 days. The company had “stubbed its toe,” according to the then-president of the Commercial...
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...The Boeing Company Report By: Dararith Kim Lymon Ting Alp Onurlu Mario Aguilar Mike Vuzick Business 188 Professor Kwan Table of Content History and background of Boeing: 3 Current Status of Boeing: 4 Porter’s Competitive Forces: 6 Strategy: 8 Culture: 9 History and background of Boeing: William Boeing, the founder of The Boeing Company, was born in October 1, 1881, in Detroit, Michigan. He was 22 years old when the Wright Brothers made their very first official flight in 1903. William Boeing was very impressed with the Wright brother’s achievement. In 1915, William Boeing moved to California to take flying lessons with his friend Westervelt from the nation’s only aviation school. After doing more research they decided to design a new, innovative and more practical plane. They called their very first plane the “B&W”. In two years the company grew to several hundred employees. When World War I started, the company focused more on the fighter planes. They started the production of the B-17, the XPBB-1 a long-range patrol bomber, and the B-29 bomber that had the ability to fly both day and night. By the 1950’s former president of the company, William Allen, decided that The Boeing Company has enough scientists, engineers, experience, and the production facilities to revolutionize the airplane...
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...the center of the Boeing situation. Explain your choice. I chose the 7 S Framework and the six box organizational model. The models are most often used as a tool to assess and monitor changes in the internal situation of an organization. 7S Framework 1. Strategy- Boeings strategy was to update the technology systems, downsize their operations and reestablish relationships with their suppliers and the only chance of cutting operating cost. 2. Structure- the problem of 1994 was the Airbus ( their main rival-booked more orders). This shocked the management executives and began a series changes that were implemented to overcome the bureaucratic structure, outdated technological systems, and unnecessary processes in a company that reportedly changed. 3. Systems-Boeing adopted the principles of creating more value for customers with fewer resources. 4. Style-the decision was made to diversify from the traditional commercial airline industry and that many acquisitions that were made createe integration issues for the company. They were trying to add more stability to the business by entering the space industry and information services. 5. Staff-According to The CEO of Airbus( Noel Foregeard), the process of diversification was demoralizing for Boeing employees. Boeings vice-president of marketing contradicted Foregeard and said “what affects morale right now is that we are in a down cycle” (Palmer, 2009). Regardless of why the employees morale was low, Boeing had to take steps...
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