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) Market Cap: $29.1b (Book Equity $7.7b) Debt: $14.4b (Exhibit 2) Enterprise value: $43.5b MBA 2004

MBA 2004

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

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

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

Payback period MBA 2004

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

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

Step 2: Boeing’s Commercial Beta MBA 2004

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

Total returns US 1926-2002 Arithmetic Mean Standard Deviation Risk Premium Common Stocks 12.2% 20.5% 8.4% Small Company Stocks 16.9 33.2 13.1 Long-term Corporate Bonds 6.2 8.7 2.4 Long-term government bonds 5.8 9.4 2.0 Intermediate-term government bond (1926-1999) 5.4 1.6 U.S. Treasury bills 3.8 3.2 Inflation 3.1 4.4 Source: Ross, Westerfield, Jaffee (2005) Table 9.2 MBA 2004

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 ratio L=D/V (Miles Ezzel with continous rebalancing) MBA 2004

Cost of capital unlevered rAsset = 10% (NPV=$3,561m) 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