Case Study Assignment
Subject: Cost of capital − cost of equity and cost of debt; beta risk; estimation; capital structure. The task for students is to evaluate the 777 against a financial standard, the investors’ required rate of return. The general objective of this case is to exercise students’ skills in estimating corporate (divisional/project) costs of capital – cost of equity and WACC. Case Questions, Analysis, and Directions: Read and analyze the case, and prepare an “Executive Summary” of this case. Write it as if you were writing it to the members of Boeing’s Board of Directors, who may not know much about the project or finance. Your Executive Summary will include: (1) A brief description of the firm and the 777 project – in your own words (about two-three paragraphs). (2) Which equity beta(s) did you use? Why? (3) When you used the capital-asset-pricing-model (CAPM), what equity-market risk-premium and risk-free rate did you use? Why? (4) Are the betas of other (industry similar) firms important? Why? Can they be used and how? If yes, what adjustments are needed? (5) List and briefly discuss various sources of capital used by Boeing. Evaluate the costs of these individual capital components for Boeing 777 project : (i) What is the cost-of-equity (R0), assuming all-equity financing? (ii) What is the cost-of-equity, considering the Boeing’s target leverage ratio? (iii) What is the cost-of-debt? (iv) What is the appropriate discount rate against which to evaluate the IRR from the Boeing 777 project? (6) Judged against your hurdle-rate, how attractive is the Boeing 777 project? Under what circumstances is this project economically attractive? What does a sensitivity analysis (either the analysis presented in the case or another that you have done on your own) reveal about the nature of Boeing’s gamble on the
