This would earn a IRR of The weighted average cost of capital WACC was calculated to be Boeing had to determine what the decide what the underlying variables were which in this case happen to be development costs and the per-copy costs to build the 7E7. The hurdle rate, or the internal rate of return that gives the project an NPV of zero is It is crucial that the new 7E7 delivers on its promise of lower operating cost. Both ended June 16,
There is an awful lot of good work in the construction of this document: With the economy so volatile, airlines will be looking for options that reduce their operating costs. What is an appropriate required rate of return against which to evaluate the prospective IRRs from the Boeing 7E7? If the market expectations underperform, we can also lower our estimates of Boeing 7E7 Page 5 cost of capital. In this case, the extended length of the regression period is a detriment to the calculation of future risk.
studu Therefore the equity market risk premium is equal to 7. Instead of the This data is highly skewed due to the events of September 11, and the subsequent deterioration of the airline industry. Solultion to Case Study Cost of Capital The supply chain is very large and spread over the globe. With a beta of 2.
Add to collection s Add to saved. However, if yield to maturity rates are lower than expected, we can lower the WACC.
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Boeing 7E7 case study by Aaron Casey on Prezi
A reverse of this trend is crucial to reach some of the projected sales numbers that Dase is counting on. If the market expectations underperform, we can also lower our estimates of Boeing 7E7 Page 5 cost of capital. The Equity beta for the whole company and for the commercial division is calculated in the appendix.
Also calculated WACC for the commercial division only, using the equity beta found in appendix.
Which capital-structure weights did you use? Boeing is expecting to reach this unit goal The financial calculations provided in this report show that there is a very good chance that the project will increase the wealth of the shareholders.
The weighted average cost boeiing capital Annswers was calculated to be There are other risks mentioned above that must be considered but on balance the reasons to go forward with the project outweigh those against it. We used the rate of 5.
Staff Analyst 2 — The Boeing Company.
For example, a rate of 3. This plane will be a formidable competitor to the 7E7. Since this project has a time horizon on the order of years it would be very reasonable to use the year Treasury Bond as the value for the risk free interest rate.
What is an appropriate required rate of return against which to evaluate the prospective IRRs from the Boeing 7E7? This will help command a larger share of the market. There is an awful lot of good work in the construction of this document: Boeing had to determine what the decide what the underlying variables were which in this case happen to be development costs and the per-copy costs to build the 7E7.
The Boeing 7E7
A beta of 3 instead of 2. Due to the large beta, investors should expect greater returns than the stock market is providing.
Add this document to collection s. Sensitivity Analysis The following is the sensitivity analysis of the Boeing project which gives optimistic and pessimistic estimates for the underlying variables of volume and cost of sales.
However, with risk comes a reward.
Please use the capital asset pricing model to estimate the cost of equity. The market competition corroborated with the unfavorable economic conditions prompt a swift and decisive answer from Boeing.
What Beta did you use and how did you derive it? The equity market risk premium should equal the excess return expected by investors on the market portfolio. The 7E7 will carry more passengers per flight in a fuel efficient answer allowing the airline companies to justify purchasing the plane. 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.