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FINANCE Boeing 7E7

FINANCE Boeing 7E7. Professor André Farber Solvay Business School Université Libre de Bruxelles Fall 2004. The Boeing Co (BA) – early 2003. Stock price (June 16, 2003): $36.41 Number of shares: 800m (Yahoo)

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FINANCE Boeing 7E7

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  1. FINANCEBoeing 7E7 Professor André Farber Solvay Business School Université Libre de Bruxelles Fall 2004

  2. The Boeing Co (BA) – early 2003 • Stock price (June 16, 2003): $36.41 • Number of shares: 800m (Yahoo) • Market Cap: $29.1b (Book Equity $7.7b) • Debt: $14.4b (Exhibit 2) • Enterprise value: $43.5b MBA 2004

  3. MBA 2004

  4. The Boeing 7E7 decision • Investment 2004-2007 (Exhibit 8) • R&D expense: $5,100m • Capital expenditure: $1,700m MBA 2004

  5. FCF calculation (Exhibit 8) • After-tax profit • + Depreciation • Change in WCR • Capital Expenditure • = Free Cash Flow MBA 2004

  6. Decision rule Internal Rate of Return IRR: 15.66% MBA 2004

  7. Payback period MBA 2004

  8. Cost of Capital Calculation Commercial Beta Debt Beta Beta Asset Beta Asset Defense Beta Equity Beta MBA 2004

  9. Step 1: Boeing’s Unlevered Beta Exhibit 10 60 months beta against S&P 500 MBA 2004

  10. Step 2: Boeing’s Commercial Beta MBA 2004

  11. Cost of capital calculation (all equity) • Risk-free interest rate rf: TBill 0.85% / TBond 4.56% • Market risk premium rM – rf: 8.4% / 6.4% (see next page) • Beta (asset): 0.88 / 1.02 TBill: TBond MBA 2004

  12. Total returns US 1926-2002 Source: Ross, Westerfield, Jaffee (2005) Table 9.2 MBA 2004

  13. Weighted Average Cost of Capital • Motivation: • Project partially funded with debt • Interest payments are tax deductible Tax shield • V = VU + VTS  WACC < rAsset • If constant debt level: • If constant debt ratioL=D/V • (Miles Ezzel with continous rebalancing) MBA 2004

  14. Using the WACC • Suppose • Cost of capital unlevered rAsset = 10% (NPV=$3,561m) • Cost of debt rDebt = 5.18% (Weighted average YTM) • Tax rate TC= 35% • L = D/V = 30% MBA 2004

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