CORPORATE FINANCING & INVESTMENT

Corporate Financing & Investment

Table of Content

1. WHY IS BOEING CONTEMPLATING THE LAUNCH OF THE 7E7 PROJECT? IS THIS A GOOD TIME TO DO SO?1

2. WHAT IS AN APPROPRIATE REQUIRED RATE OF RETURN AGAINST WHICH TO EVALUATE THE PROSPECTIVE IRRS FROM THE BOEING 7E7?2

3. WHY THE CAPITAL ASSET PRICING MODEL IS NOT USED TO ESTIMATE THE FIRM'S COST OF CAPITAL DIRECTLY?3

4. USE THE CAPITAL ASSET PRICING MODEL TO ESTIMATE THE COST OF EQUITY. WHICH BETA AND RISK-FREE RATE DID YOU USE? WHY?4

5. WHEN YOU USED THE CAPITAL ASSET PRICING MODEL, WHICH RISK-PREMIUM AND RISK-FREE RATE DID YOU USE? WHY?4

6. WHAT IS THE BOEING'S COST OF DEBT?5

7. IS DEBT NOT ALSO SUBJECT TO COMMERCIAL AND DEFENCE RISK, AND SHOULD ONE THEREFORE BACK OUT THE COMMERCIAL RISK COMPONENT?6

8. WHICH CAPITAL-STRUCTURE WEIGHTS DID YOU USE? WHY?6

9. WHY NOT SIMPLY USE THE CAPM TO ESTIMATE THE COST OF DEBT?9

10. SHOULD ONE CALCULATE A WEIGHTED AVERAGE OF ALL DEBT OR A WEIGHTED AVERAGE OF LONG-TERM DEBT WITH MATURITIES THAT MATCH THE LENGTH OF THE PROJECT?10

11. JUDGED AGAINST YOUR WACC, HOW ATTRACTIVE IS THE BOEING 7E7 PROJECT?10

a. Under what circumstances is the project economically attractive?10

b. What does sensitivity analysis (you're own and/or that shown in the case) reveal about the nature of Boeing's gamble on the 7E7?11

REFERENCES13

Corporate Financing & Investment

1. Why is Boeing contemplating the launch of the 7E7 project? Is this a good time to do so?

There are certain factors to consider before proposing any decision with respect to the launch of 7E7 project. There should be evaluation of all the factors before the launch of this project since it is combined with hefty costs; as high as $ 10 bn.

The case entails that Boeing has been losing its position in the market and its rival Air Bus has been able to achieve 57 percent share of the market. This is a major threat to Boeing's leading position in the market. To cope with this situation, the launch of Boeing 7E7 was planned so that it can replace the existing A300/310 launched by Air Bus since it was a foundation for Air Bus to expand their business and capture the market share. Secondly, the failure witnessed by Sonia Cruiser brought out an understanding that market was more in a need for a cost effective aircraft rather than a fast one. This was the sole reason behind Boeing to drop the idea of development for superjumbo or any small size jets and rather went for 7E7 (Baker et.al, 2011, pp. 48).

There are several uncertainties relating to 7E7 specifications and scepticism of the market due to air plane crash recently. This would result in downward pressure on the price as well as volume of sales (Baker et.al, 2011, pp. 48). However, from the long term perspective the profit in the airline industry is positive and we can expect the industry cycle to smooth out. From the Boeing's Market Outlook, we can predict in the next 20 years, economies will grow at a rate of ...