Boeing 7E7 Case Study

Jun 18th, 2015
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Alabama State University
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re = rf + βe[rm – rf] - Eq. 1 where re = cost of equity for Boeing portfolio rf = risk-free rate βe = Equity beta for the portfolio rm = equity market risk premium rate (EMRP) rf = 4.56% which is the 30-year treasury bond value. We took this value as the risk free rate since the 7E7 project would have a time span of 30 years, if undertaken. βe = 1.05, from Exhibit 10 which is the Value Line estimated beta value. Reasons for choosing this value over other values: 1. Value Line betas are calculated from the regression analysis of the percentage changes of a stock price and percentage changes of NYSE composite Index over a period of 5 years which includes a larger set of data. 2. We believe that NYSE encompasses a wider market than S&P 500. 3. A beta value of 1.05 reflects volatility in Being’s stock price better than other beta values due to a slightly larger percentage of commercial business over defense business of Boeing (54% vs 46%).

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Boeing 7E7 Case Studyre = rf + ?e[rm - rf] - Eq. 1wherere = cost of equity for Boeing portfoliorf = risk-free rate?e = Equity beta for the portfoliorm = equity market risk premium rate (EMRP)rf = 4.56% which is the 30-year treasury bond value. We took this value as the risk free rate since the 7E7 project would have a time span of 30 years, if undertaken.?e = 1.05, from Exhibit 10 which is the Value Line estimated beta value. Reasons for choosing this value over other values:1. Value Line betas are calculated from the regression analysis of the percentage changes of a stock price and percentage changes of NYSE composite Index over a period of 5 years which includes a larger set of data.2. We believe that NYSE encompasses a wider market than S&P 500.3. A beta value of 1.05 reflects volatility in Being's stock price better than other beta values due to a slightly larger percentage of commercial business over defense business of Boeing (54% vs 46%). rm = 6.4 + 4.56 = 10.96. Similar to our reasoning for risk free rate, we chose 30-year treasury bond value as the basis for the EMRP.re = 4.56 + 1.05*(10.96 - 4.56) = 11.28%We cannot use Boeing's corporate portfolio data for assessing required rate of return on 7E7 project as our assessment will be skewed due to the widely differing risk levels associated with commercial and defense divisions in the portfolio. We must figure out the beta values and debt to equity (D/E) ratio for commercial division.Beta value for t

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