Boeing Company 7E7 Project Corporate Finance Case study

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Question Description

Remember to use these questions to help guide you to understanding the problem and the environment as you propose alternative strategies and solutions. Do not provide answers to these questions in a list format.

Guiding questions to help you identify the pertinent issues and potential strategies for Boeing:

  1. What is an appropriate hurdle rate that Boeing should use to evaluate the prospective returns from the 7E7?
    1. Which beta did you use? Why?
    2. When you used the CAPM, which risk premium and risk-free rate did you use? Why?
      1. Note that at the time of this case, the geometric average market excess return (above T-bills) was 6.4%
      2. The geometric average market excess return (above T-bonds) was 4.7%.
      3. The arithmetic average market excess return (above T-bills) was 8.4%
      4. The arithmetic average market excess return (above T-bonds) was 6.4%.
    3. Which capital structure weights did you use? Why?
  2. Based on your WACC, how attractive is the Boeing 7E7 project? How sensitive is the decision to various factors?
  3. Should Boeing board approve the 7E7?

Exhibits are attached below in spreadsheet format.

Please use the following format:

The case study has two parts. Exhibits, etc. should be included if necessary.

  1. Executive Summary (required for all assignments, not to exceed three double-spaced pages)
    1. Introduction: Here, you will provide general background information for the case and introduce the main issue. This should be a single, short paragraph. Use your own words, not words from the case author.
    2. Problem statement: Isolate the key issues from the case. When possible, quantify the problem (for example, "The Acme Company does not have sufficient capacity to meet the forecasted demand of 10 million units per year".) This should be a few sentences at most combined into a paragraph.
    3. Environmental Analysis: Use up to two pages to succinctly describe the various issues that need to be considered. This is where you can summarize your analysis and incorporate the relative strengths and weaknesses. Discuss resources, market forces, competition, technology, etc.
    4. Alternative Strategies: As appropriate, outline the two or three possible approaches that a manager can take. There does not need to be an exhaustive and comprehensive analysis of each, but a recognition that there is rarely one solution to a problem. This is your opportunity to demonstrate clear and logical reasoning.
    5. Recommendations: Identify your selected strategy from the choices presented in section D. Here is where you should elaborate on the reasoning for your choice. Your strategy must be stated specifically and also be possible for the manager to implement.
  2. Exhibits, tables, financial analysis and formulas (when necessary): If your case write-up references new calculations or quantitative analysis, you should prepare formal exhibits, tables, financial analyses and worked out formulas. These should be prepared professionally (i.e. not hand-written), ordered logically, numbered and referenced in the executive summary.

Tutor Answer

CASIMIR
School: University of Maryland

Here you go. In case of any further inputs, please let me know.All the best!I appreciate working with you!

Revenues, Operating Profits, and Identifiable Assets
By Segment for the Boeing Company
1987
1988
1989
Revenues
Commercial Aircraft
$
9,827 $
11,369 $
14,305
Defense and Other
5,986
5,971
6,318
Total
$ 15,813 $
17,340 $
20,623
Operating Profit
Commercial Aircraft
Defense and Other
Total
Identifiable Assets
Commercial Aircraft
Defense and Other
Total

$
$

$
$

352 $
306
658 $

585 $
235
820 $

5,170 $
7,396
12,566 $

4,558 $
8,050
12,608 $

Source: The Boeing Company annual reports.

1,165
(243)
922

6,675
6,603
13,278

Boeing Balance Sheets
(dollars in millions)
1988
Assets
Cash
Other current assets
Total current assets

$

Customer financing
Net property, plant and equipment
Investments
Total Assets
Liabilities and stockholders' equity
Accounts payable
Current portion of long-term debt
Other current liabilities
Total current liabilities

1,863
6,797
8,660

1,039
2,703
305

822
3,481
315

12,608 $

13,278

$

4,697 $
7
697
6,705 $

4,932
5
291
6,673

$

Stockholders' equity
Common shares
Retained earnings
Treasury stock
Total stockholders' equity

Source: The Boeing Company annual report, 1989.

3,544 $
5,017
8,561

$

Long-term debt
Deferred taxes
Deferred investment credit

Total liabilities and stockholders' equity

1989

$

251
205
43

275
174
25

4%

1,341
4,137
(74)
5,404

1,736
4,452
(57)
6,131

24%
73%
-1%
96%

12,608 $

13,278

4%

27%
69%
-1%
96%

Boeing Income Statements
(dollars in millions, except per-share data)

Revenues
Costs and expenses
Earnings from operations

$
$

1988
16,962 $
16,514
448 $

1989
20,276
19,695
581

Other income (interest)
Interest expense

378
(6)

347
(6)

Profit before taxes

820

922

Taxes
Effect of change in method of accounting for taxes

206

247
298

Net earnings

614

973

Earnings per share

2.68

4.23

Cash dividend per share

Source: The Boeing Company annual report, 1989.

$

1.03330 $

1.11666

Forecast of Boeing 777 Free Cash Flows
Assumptions
Price per plane
Working capital requirement (WCR) as % of sales
General, selling and administrative (GS&A) expense
(% of sales)
R&D expense (% of sales)
Capital expenditure (% of sales)
Depreciation
Total # of plans yrs 1-10
Total # of planes yrs 11-20
Inflation
Marginal effective tax rate

130
9.80%
4%
3% (excluding 1990-1995)
0.10% (excluding 1990-1994 and years before introduction
Double-digit accelerated method
1000
1000
3%
34%
1990

Revenues
Number of planes delivered
Price per plane
Total revenues
Cost of goods sold
Gross profit
Depreciation
GS&A Expense
Operating profit (before R&D)
R&D expense
Pretax profit
Taxes (or tax credit)
After-tax profit
Capital expenditure
Depreciation add-back
Change in WCR
Annual free cash flow

$

-

1991

$

40.00 $

142.00
(142.00)
(48.28)
(93.72)

865.00
(905.00)
(307.70)
(597.30)

-

400.00
40.00

1992

96.00 $

1,340.00
(1,436.00)
(488.24)
(947.76)
600.00
96.00

1993

116.40

1,240.00
(1,356.40)
(461.18)
(895.22)
300.00
116.40

$ (93.72) $ (957.30) $ (1,451.76) $ (1,078.82)

ars before introduction of derivatives)

1994

$ 124.76

840.00
(964.76)
(328.02)
(636.74)
200.00
124.76

1995

1996

1997

1998

1999

2000

2001

14
145
140
111
111
102
92
$ 130.00 $ 133.90 $ 137.92 $ 142.05 $ 146.32 $ 150.71 $ 155.23
1,847.55 19,418.96 19,244.23 15,737.95 16,257.35 15,333.42 14,289.29
1,662.79 16,506.12 15,202.94 12,275.60 12,518.16 11,653.40 10,859.86
184.76
2,912.84
4,041.29
3,462.35
3,739.19
3,680.02
3,429.43
112.28
101.06
90.95
82.72
77.75
75.63
75.00
73.90
776.76
769.77
629.52
650.29
613.34
571.57
(1.42)
2,035.02
3,180.57
2,750.11
3,011.15
2,991.05
2,782.86
240.00
582.57
577.33
472.14
487.72
460.00
428.68
(241.42)
1,452.45
2,603.24
2,277.97
2,523.43
2,531.05
2,354.18
(82.08)
493.83
885.10
774.51
857.96
860.56
800.42
(159.34)
958.62
1,718.14
1,503.46
1,665.46
1,670.49
1,553.76

1.85
19.42
19....

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Review

Anonymous
awesome work thanks

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