The Boeing 7E7 case illustrates the concept and estimation process of the weighted average cost of...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
The Boeing 7E7 case illustrates the concept and estimation process of the weighted average cost of capital (WACC). Boeing has two divisions: commercial and defense. The defense division generated $20 million in revenue last year while the commercial division generated $80 million. Boeing is considering the 7E7 project in the commercial division and needs an estimate of the weighted average cost of capital (WACC) that can be used to value this project. Boeing has two debt issues outstanding. The first debt issue is a debt just (i.e., today) issued at par with a coupon rate of 12% and a par value of $600 million. The second debt issue has a coupon rate of 7.625%, a face value of $400 million, and three years to maturity. This coupon bond pays semiannual coupon payments, and the current market interest rate for a comparable issue with the same maturity and rating is 8.08%. The current stock price for Boeing is $36 per share and the number of total shares outstanding is 156 million shares. We are also given the following information about Boeing and two major firms in the defense industry: (1) Levered beta is 1.58 for Boeing as a whole, (2) Lockheed has a levered beta of 0.90 and a market-value debt to equity ratio of 1.52, (3) Northrop has a levered beta of 0.82 and a market-value debt to equity ratio of 2.6. Corporate tax rate is 34% for all companies. (30 points) a. Assume that Lockheed and Northrop are the best set of pure play firms we can choose for the defense division of Boeing. What is the estimate of unlevered beta for the defense division of Boeing? (8 points) (Round to 4 decimal places, e.g., 0.1234.) b. What is Boeing's debt ratio? What is Boeing's equity ratio? (4 points) (Round to 4 decimal places, e.g., 0.1234.) c. Based on the portfolio concept, we can view Boeing as a portfolio of the commercial division and the defense division, and therefore, Boeing's beta as a whole is a weighted average of the betas from the two divisions. Assume we use revenue weights as the proxy for weights in this case. What is the levered beta for the commercial division? (8 points) The Boeing 7E7 case illustrates the concept and estimation process of the weighted average cost of capital (WACC). Boeing has two divisions: commercial and defense. The defense division generated $20 million in revenue last year while the commercial division generated $80 million. Boeing is considering the 7E7 project in the commercial division and needs an estimate of the weighted average cost of capital (WACC) that can be used to value this project. Boeing has two debt issues outstanding. The first debt issue is a debt just (i.e., today) issued at par with a coupon rate of 12% and a par value of $600 million. The second debt issue has a coupon rate of 7.625%, a face value of $400 million, and three years to maturity. This coupon bond pays semiannual coupon payments, and the current market interest rate for a comparable issue with the same maturity and rating is 8.08%. The current stock price for Boeing is $36 per share and the number of total shares outstanding is 156 million shares. We are also given the following information about Boeing and two major firms in the defense industry: (1) Levered beta is 1.58 for Boeing as a whole, (2) Lockheed has a levered beta of 0.90 and a market-value debt to equity ratio of 1.52, (3) Northrop has a levered beta of 0.82 and a market-value debt to equity ratio of 2.6. Corporate tax rate is 34% for all companies. (30 points) a. Assume that Lockheed and Northrop are the best set of pure play firms we can choose for the defense division of Boeing. What is the estimate of unlevered beta for the defense division of Boeing? (8 points) (Round to 4 decimal places, e.g., 0.1234.) b. What is Boeing's debt ratio? What is Boeing's equity ratio? (4 points) (Round to 4 decimal places, e.g., 0.1234.) c. Based on the portfolio concept, we can view Boeing as a portfolio of the commercial division and the defense division, and therefore, Boeing's beta as a whole is a weighted average of the betas from the two divisions. Assume we use revenue weights as the proxy for weights in this case. What is the levered beta for the commercial division? (8 points)
Expert Answer:
Answer rating: 100% (QA)
1 Given that Lockheed and Northrop represent the defense division of Boeing Boeings Unlevered Beta U... View the full answer
Related Book For
Case Studies in Finance Managing for Corporate Value Creation
ISBN: 978-0077861711
7th edition
Authors: Robert F. Bruner, Kenneth Eades, Michael Schill
Posted Date:
Students also viewed these general management questions
-
The IA64 processors contain registers that can be used to address a 64-bit address space. However, Windows XPlimits the address space of user programs to 8-TB, which corresponds to 43 bits' worth....
-
The ISO commercial crime coverage form can be used to insure specific crime exposures of most business firms. Assume that you are a risk management consultant. For each of the following losses,...
-
A number of different models can be used to estimate return. Derive the circumstances under which the use of the zero-beta model might lead to the market being considered inefficient when the...
-
If possible, completely factor the expressions in Problems 336. x - 7x + 12 X
-
Analyze how communication in groups differs from individual communication. Are there unique challenges to communicating with groups? Provide examples. Use at least one resource to support your key...
-
The pie chart below shows the percent of land in Rhode Island in the different counties. If Rhode Island has a total of 1,045 square miles of land, how many square miles are in Bristol County and...
-
Define unbundled legal services.
-
Tom, an individual taxpayer, has been audited by the IRS and, as a result, has been assessed a substantial deficiency (which has not yet been paid) in additional income taxes. In preparing his...
-
What are the legal consequences of using corporate assets for personal use? Back it with primary sources like the internal revenue code, internal revenue manual, treasury regulations.
-
A typical tube-style incandescent light bulb lasts for 1,000 hours and is available to consumers for $3.00 per bulb. A manufacturer has produced a tube-style halogen light bulb that gives the same...
-
If a letter of intent was signed which stated in part "make every reasonable effort to agree upon and have prepared as quickly as possible" a contract for the purchase of a car. but then the seller...
-
Stubbs Company uses the perpetual inventory method and the weighted-average cost flow method. On January 1, Year 2, Stubbs purchased 1,400 units of inventory that cost $12.00 each. On January 10,...
-
I have a space shooter game I have the code for. I need to make the following changes. I would like to able to track the players score and save the high score, add a new enemy type and a new weapon...
-
Part Three-Analyzing How Transactions That Affect Owner's Equity Change an Accounting Equation Directions: For each of the following transactions, select the two accounts in the accounting equation...
-
Consider the DE tx" + 3tx' + x = 0 who has an auxiliary equation with roots r = -1,-1 a. Form first solution: x = b. Use the method of reduction of order to calculate X2:
-
Consider a daily stock return time series (continuously compounded) that follows a Gaussian White Noise model: R~ N(0.002, 0.022). We can write this as R = u + et, where: a. has a mean of: b. has a...
-
You invested $10,000 at the end of each half-year for 5 years in an investment fund. At the end of year 5, if the balance in the fund was $115,000, what was the nominal interest rate compounded...
-
The landing gear of an aircraft with: mass of 2000 kg the spring-mass-damper system Consider that the runway surface is y(t) = 0.2 cos 157.08t stiffness of the spring is 5 x 105 N/m. What is the...
-
1. What is going on at American Greetings? 2. What is the market thinking when assigning an Enterprise-value-to-EBITDA ratio of 3.5 times? 3. How might a DCF analysis be used to value American...
-
1. What is the business model for Genzyme? What does Termeer want for his company going forward? 2. What is the business model for Relational Investors? 3. Should Termeer fight Whitworth, or can he...
-
1. What was the revenue actually received from the original order, and how does it affect the profitability of that order? 2. How might exchange-rate risk be managed? 3. Assume Baker decides to take...
-
By conducting testcrosses, researchers have found that the sweet pea plant has seven linkage groups. How many chromosomes would you expect to find in leaf cells of sweet pea plants?
-
Describe the unique features of ascomycetes that facilitate genetic analysis of these fungi.
-
Though we often think of genes in terms of the phenotypes they produce (e.g., curly leaves, flaky tail, brown eyes), the molecular function of most genes is to encode proteins. Many cellular proteins...
Study smarter with the SolutionInn App