Hello - May you please help with question #5?

1. What is the estimate for the cost of equity? Provide the following inputs that you used and why. Note that there are several estimates given, and you have to think about the best estimates to use. There is no absolutely correct answers. However, some estimates are better than others, and some may not be appropriate. [15 Points]
   1. Risk premium
   2. Risk-free rate
   3. Beta of equity for Boeing

The case does not give you the RF (Risk-Free) and RPM (Risk Premium on the Market) at the end of 2002. Also, you are not supposed to get this from outside the case. Therefore, use the information given below to decide on the RF rate RPM for the CAPM. The data were based on December 31, 2002.

T-Bill Yield	0.85% (annual)
T-Bond Yield (30 Yr)	4.56% (annual)

1. Equity Market Risk Premium

Risk premium over T-Bill	8.40% (annual)
Risk premium over T-Bond	6.40% (annual)

2. What are the appropriate defense firms to use for calculating the commercial division beta? [15 Points]
   1. Provide a table with the equity and asset betas for the defense firms used.

Use the following guidelines when choosing betas. Case Exhibit 10 provides several betas based on different market proxies and the time horizon and frequency (daily, weekly, monthly) that is used. You have to determine the appropriate proxy to use and the best time horizon and frequency.

• According to the CAPM, the beta is the sensitivity of the stock to a global value-weighted index of all the assets. Unfortunately, we do not easily have access to such an index. Hence, we have to do with the best that we have (particularly what is given in the case). So, decide on the market proxy that would be closest to capturing most of the stock and is value-weighted. Note that the NYSE and S&P500 are value-weighted. The Value Line is geometrically weighted and hence NOT a VW (Value Weighted) index (tends to put more weight on small stocks).
• The estimate you are looking for should capture the beta of the stock going forward. Also, make sure that the estimation window does not coincide with some significant market events that might bias it.
• In your report, you must clearly articulate the reasons why you chose a particular beta.

3. What is the estimate of asset beta for the commercial division (7E7 Project)?[15 Points]
   1. Indicate all the inputs, including the weights that you used for the commercial and defense and why you chose those weights.

4. What is your estimate of the WACC for the 7E7 project? [15 Points]
   1. What was the cost of equity & debt?
   2. Tax rate?
   3. Weights for debt and equity

Boeing is currently following its target capital structure, and the projects capital structure is equal to the firms target capital structure. In other words, you can assume that the firm is going to finance the project with the capital structure that is listed in Exhibit 10.

Please understand that there is not necessarily a single correct answer to this question. In estimating the Projects WACC, you will have to make a series of assumptions/judgments. Where such judgments were required, explain why you chose to make that particular assumption.

5. Briefly review the sensitivity analysis that is presented in the case exhibits. Under what circumstances is this project financially attractive? What bets were the company making when they went ahead with the project? [10 Points]

NOTE: YOU DO NOT HAVE TO PERFORM YOUR SENSITIVITY ANALYSIS. YOU ARE TO INTERPRET THE SENSITIVITY ANALYSIS THAT IS GIVEN.

6. Given your estimated WACC and your analysis, how attractive is the project? What would have been your recommendation to the Board of Directors? Why?[10 Points]

7. Question 7 is based on current data and is not part of the case. Data outside the case should only be used for question 7. [15 Points]

An alternative to the CAPM is the Fama-French three-factor model. This model uses the market factor and two additional factors SMB (Size Factor) and HML (Book-to-Market Factor). The risk premiums for these three factors and betas for these factors can be estimated using historical data. Based on this, the expected return [E(R)] or the cost of equity is given by the following model.

ER= RF+MKTRPM+SMBSMB+HMLHML

Assume the following risk-free rate and premiums in calculating the E( R ).

RF=0.36 %per Yr, RPM=6% per Yr, SMB= 4 % per Yr, and HML=5 % per Yr.

The three returns for the three factors and the risk-free rate every month can be obtained from Frenchs website http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html. (See the appendix for more details.) Use the past five years (starting from December 2011 to December 2016 of monthly prices (there should be 61 observations and 60 monthly returns) to estimate the factor loadings (or betas) for Boeing. The data for Boeing can be obtained from the yahoo finance website http://finance.yahoo.com. Note that historical information can be downloaded to an excel spreadsheet. Use the adjusted closing prices (last column), which adjust the prices for stock splits and dividends. Finally, the data that is given shows the first trading day of the month. However, the prices are for the last trading day of the month.

1. Use the market model (CAPM) to estimate the cost of equity for Boeing on January 1, 2017.
2. Use the three-factor model to estimate the cost of equity for Boeing on January 1, 2017.

• Please view my podcast on Estimating FF Factors.
• Please note that the FF factors are given every month and in percent. So, your BA returns also should be in monthly percent to be consistent.
• The symbol for Boeing is BA.
• Please see my presentation on how to estimate a regression model with one factor and three factors using EXCEL.
• Also, I see my podcast on levering and unlevering betas and some guidelines for the case.