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Boeing 7e7

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The concept of taking on a new project, such as the Boeing is considering with the 7E7, is groundbreaking. It has the potential of pulling Boeing out of its financial slump and has the potential to appeal to a multitude of customers. Boeing needs to consider the value of this project to the company in the long run, however. To calculate the cost of capital, we need to use the Weighted Average Cost of Capital (WACC) formula, a shown below.
WACC: (%debt)* (pretax cost of debt capital)*(1-marginal effective tax rate) + (%equity)*(cost of equity capital) In order to calculate Boeing’s debt percentage, it is assumed in this analysis that the capital structure remains the same and is unaffected by the current potential 7E7 project. The debt/equity ratio is .525, as listed in Exhibit 10 of the case. To calculate the total market value of debt, the market value of all of the bonds listed in Exhibit 11 must be summed. The market value is $5,023.28M. By dividing this value by .525, the market value of equity can be calculated at $9,568.15M. Dividing $5,023.28M by $14,591.43M (sum of market value of debt plus the market value of equity) and multiplying by 100 gives the percent debt of 34.43%. Please see Exhibit 1 for calculations. The pretax cost of debt capital will be the yield to maturity of a proxy bond. The bond that matures on 2/15/2013 will be used as a proxy for the entire cost of debt capital because of its relative size in relation to the entire company’s debt capital. Additionally, the maturity date most closely matches when the largest amount of cash inflows will be needed by Boeing. The yield to maturity of this bond is 4.657%. Though the marginal effective tax rate is listed as 35% in cash flow estimations from the case, this is seems like too aggressive of a number. Instead, the tax rate I will use in estimations will be 27.1%. The

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