Boeing Case Study Essay

3192 Words May 1st, 2013 13 Pages
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
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* Risk-free rate | We decide to use the geometric mean for 30-year risk-free rate T-bonds in the period 1926-2003 which is equal 5%based on a research conducted by Pablo Fernandez about “Market risk premium, required, historical, and expected”. The long term T-bond spot rate at December 30th, 2002 is 4.7% in US Department of Treasury website, which also quite close to our assumption for risk-free rate. |
Hence, Boeing`s cost of equity for the 74 year period ended Dec 31st, 2002:
RBA= 5% + 1.07 x 4.7% = 10.029% b. When you used the capital asset pricing model, which risk-premium and risk-free rate did you use? Why?
When we calculate required rate of return using CAPM based on Beta calculate based on 5 year data, we got required rate of return as follows:
Beta calculated using data from Jan 1997 to Dec 2002 is: 0.847
Risk free Rate: using 10 year T-bond rate traded on Dec 31st 2002 as shown above: 4.7%
When we consider the recent 5 year S&P the Market Return is only 0.02% and
Risk Premium = 0.02% – 4.73% = -4.68%
Required rate: r = 4.73% + 0.837 (0.02% - 4.73%) = 0.73%

Since due to 09/11 effect and market is moving very slow, relying on recent 5 years data is not reliable, so we would like consider data calculated based on 74-year and use Risk Premium of 4.7% and Risk Free Rate of 5%. c. Which capital-structure weights did you use? Why? As stated

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