Boeing must decide whether to build the 7E7 aircraft. Your task is to calculate an appropriate WACC with which to evaluate the project cash flows. The issue is that Boeing is in both the commercial and the military aircraft business, where each division has a different risk level; so, it is inappropriate to use Boeings overall company cost of capital. You need to create a divisional cost of capital for a commercial aircraft project. You dont have any comparable commercial aircraft companies, but you do have military aircraft comparable companies. You can calculate the beta for a military aircraft project and use that beta to calculate a commercial aircraft project beta.

1. Calculate a military/defense asset bet Use Lockheed Martin (LM) and Northrup Grummon (NG) as military comps. (Raytheon has too much commercial business to be a reliable comparable.) Choose a beta from the first exhibit no right or wrong beta. Im hoping students will pick a variety of betas so we can see the differences in WACC. Use the Hamada equation (see video about how to unlever and re-lever betas) to unlever LMs and NGs beta; then average them to have a military asset beta. Then find Boeings asset beta. Boeings overall company beta is a weighted average of a military beta and a commercial beta (percent of revenue for Boeings divisions are given.) Solve for Boeings commercial asset beta. (Look at the voice over PowerPoint Boeing Equations for hints)
2. Relever Boeings commercial asset beta according to Boeings chosen capital structure. Plug this into the capital asset pricing model. Note that you are given a risk free rate and market risk premium.
3. Using the second exhibit in the handout, decide what is an appropriate cost of debt are you going to use all the debt? Just the long term debt?
4. Calculate WACC. (You will need to turn a D/E ratio (given) into a debt ratio and an equity ratio. Assume a tax rate of 35%. Remember that the debt ratio = [D/(D + E)] = {(D/E)/[(D/E)+(E/E)]} = {(D/E)/[(D/E) + 1]} so you can convert a debt ratio into a D/E ratio and vice versa. Also, note that the Equity Ratio = 1 minus the debt ratio.

= 2 == . 2 = - = = = = = FE 1 . E 1 ... R S - - - 3 EN == =" = - - - - VE = 5 - * " + = NE 11.18 == = = = = L-MIt up a 513695 133691 123 KXHIBITA Forecast of Hacing ?EFres Cash Flows (Sin millions) *** W T W 'Stors De calculation tout pelufolii [761Z SEKS (113'S THESIS CSOPIS i Sog'is $885025 Szeres LISTES 51371.16 53.11599 EE SESTS SSS OF 165 597803 escos #1015 5275 WCB Depreclitor 510683 9119.54 $1128511485 $115.18 $117.16 $1186 $0.00 $19531 OLEME "6815 56465 1966 2015 K9 8015 WSITS D'215 57.50 $9.44 51922) $2,0 $123.71 2105 NH G193 SSSSSS AURI! SESSIS 8S 33333900SSEE MEGANE SPRE NERES os ASPER SE PROBE HERE 12 RENA OS CARRER 28 GATE SHER HEST ERA e FREE BE 3 CA: LAP EXHIBIT 9 Sensitivity Analysis of Project IRR's by Price, Volume, Development Unit Volume (First 20 Years) Price Premium 15.66% 0% 5% 10% 15% 1500 10.5% 10.9% 11.3% 11.7% 1750 11.9% 12.3% 12.7% % 13.1% 2000 13.0% 13.5% 13.9% 14.4% 2250 14.1% 14.6% 15.1% 15.5% 2500 15.2% 15.7% 16.1% 16.6% 2750 16.1% 16,6% 17.1% 17.6% 3000 17.6% 18.1% 18.6% 17.1% Development Costs 15.66% $6,000,000,000 $7,000,000,000 $8,000,000,000 $9,000,000,000 $10,000,000,000 COGS / Sales 78% 80% 21.3% 18.7% 19.4% 17.0% 17.9% 15.7% 16.6% 14.5% 15.5% 13.5% 82% 15.9% 14.4% 13.2% 12.1% 11.2% 84% 12.6% 11.3% 10.3% 9.4% 8.6% Note: The section below gives key assumptions driving the model--varying these assumptions, given in yellow, allows one to test the sensitivity of IRR. 3 Average % deliveries of total to date of 757 and 767 For First 20 Years Year % % Deliveries Year %7E7 %7E7 Stretch 1.19% 2008 100% 0% 4.32% 2009 100% 0% 2.54% 2010 80% 20% 3.30% 2011 50% 50% Year -30 (Need to modify Exhibit & spreadsheet construction if the 50% is changed) 3.35% 2012 4.16% 2013 5.46% 2014 4.76% 2015 7.41% 2016 7.68% 2017 8.76% 2018 6.59% 2019 5.95% 2020 4.32% 2021 4.59% 2022 4.76% 2023 5.46% 2024 6.00% 2025 4,81% 2026 4.59% 2027 21-30 4.59% 13 144 Is 16 17 18 19 20 2500 Same as year 20 $8,000,000,000 Deliveries in years 1-20 Deliveries in years 21-30 Development costs Composition of development costs: Capital Expenditures R&D Timing of development costs 25% 75% 2004 5% 2005 15% 2006 50% 2007 15% 2008 10% 2009 5% Minimum Price of 7E7 in 2002 U.S. S Minimum Price of 7E7 stretch in 2002 U.S. S Cheaper operating cost and other features price premium 120500000 144500000 5% Service Revenues Cost of goods sold GSA percentage R&D Tax Expense Capital Expenditures Working capital % of sales Inflation Depreciation 80% 7.5% 2.3% 35% 0.16% 6.7% 2% 150% declining balance 20 year, 0 salvage value. Calculations at bottom of exhibit 7 Airframe Lifecycle Annual Units Sold/Total Units Sold 10.00% 9.00% 8.00% 7.00% 6.00% Percent of Total Unit Sales 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Year Since Introduction = 2 == . 2 = - = = = = = FE 1 . E 1 ... R S - - - 3 EN == =" = - - - - VE = 5 - * " + = NE 11.18 == = = = = L-MIt up a 513695 133691 123 KXHIBITA Forecast of Hacing ?EFres Cash Flows (Sin millions) *** W T W 'Stors De calculation tout pelufolii [761Z SEKS (113'S THESIS CSOPIS i Sog'is $885025 Szeres LISTES 51371.16 53.11599 EE SESTS SSS OF 165 597803 escos #1015 5275 WCB Depreclitor 510683 9119.54 $1128511485 $115.18 $117.16 $1186 $0.00 $19531 OLEME "6815 56465 1966 2015 K9 8015 WSITS D'215 57.50 $9.44 51922) $2,0 $123.71 2105 NH G193 SSSSSS AURI! SESSIS 8S 33333900SSEE MEGANE SPRE NERES os ASPER SE PROBE HERE 12 RENA OS CARRER 28 GATE SHER HEST ERA e FREE BE 3 CA: LAP EXHIBIT 9 Sensitivity Analysis of Project IRR's by Price, Volume, Development Unit Volume (First 20 Years) Price Premium 15.66% 0% 5% 10% 15% 1500 10.5% 10.9% 11.3% 11.7% 1750 11.9% 12.3% 12.7% % 13.1% 2000 13.0% 13.5% 13.9% 14.4% 2250 14.1% 14.6% 15.1% 15.5% 2500 15.2% 15.7% 16.1% 16.6% 2750 16.1% 16,6% 17.1% 17.6% 3000 17.6% 18.1% 18.6% 17.1% Development Costs 15.66% $6,000,000,000 $7,000,000,000 $8,000,000,000 $9,000,000,000 $10,000,000,000 COGS / Sales 78% 80% 21.3% 18.7% 19.4% 17.0% 17.9% 15.7% 16.6% 14.5% 15.5% 13.5% 82% 15.9% 14.4% 13.2% 12.1% 11.2% 84% 12.6% 11.3% 10.3% 9.4% 8.6% Note: The section below gives key assumptions driving the model--varying these assumptions, given in yellow, allows one to test the sensitivity of IRR. 3 Average % deliveries of total to date of 757 and 767 For First 20 Years Year % % Deliveries Year %7E7 %7E7 Stretch 1.19% 2008 100% 0% 4.32% 2009 100% 0% 2.54% 2010 80% 20% 3.30% 2011 50% 50% Year -30 (Need to modify Exhibit & spreadsheet construction if the 50% is changed) 3.35% 2012 4.16% 2013 5.46% 2014 4.76% 2015 7.41% 2016 7.68% 2017 8.76% 2018 6.59% 2019 5.95% 2020 4.32% 2021 4.59% 2022 4.76% 2023 5.46% 2024 6.00% 2025 4,81% 2026 4.59% 2027 21-30 4.59% 13 144 Is 16 17 18 19 20 2500 Same as year 20 $8,000,000,000 Deliveries in years 1-20 Deliveries in years 21-30 Development costs Composition of development costs: Capital Expenditures R&D Timing of development costs 25% 75% 2004 5% 2005 15% 2006 50% 2007 15% 2008 10% 2009 5% Minimum Price of 7E7 in 2002 U.S. S Minimum Price of 7E7 stretch in 2002 U.S. S Cheaper operating cost and other features price premium 120500000 144500000 5% Service Revenues Cost of goods sold GSA percentage R&D Tax Expense Capital Expenditures Working capital % of sales Inflation Depreciation 80% 7.5% 2.3% 35% 0.16% 6.7% 2% 150% declining balance 20 year, 0 salvage value. Calculations at bottom of exhibit 7 Airframe Lifecycle Annual Units Sold/Total Units Sold 10.00% 9.00% 8.00% 7.00% 6.00% Percent of Total Unit Sales 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Year Since Introduction