1. FINANCE Boeing 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
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3. MBA 2004

4. The Boeing 7E7 decision Investment 2004-2007 (Exhibit 8)
R&D expense: $5,100m
Capital expenditure: $1,700m
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5. FCF calculation (Exhibit 8)
After-tax profit
+ Depreciation
Change in WCR
Capital Expenditure
= Free Cash Flow
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6. Decision rule
Internal Rate of Return IRR: 15.66%
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7. Payback period
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8. Cost of Capital Calculation
Commercial Beta
Debt Beta
Beta Asset
Beta Asset
Defense Beta
Equity Beta
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9. Step 1: Boeing’s Unlevered Beta
Exhibit 10
60 months beta against S&P 500
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10. Step 2: Boeing’s Commercial Beta
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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
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12. 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 ( )
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
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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 ratio L=D/V
(Miles Ezzel with continous rebalancing)
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14. 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