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Case Study of Boeing's Decision to Develop the 777

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Case Study of Boeing's Decision to Develop the 777
1. What is an appropriate required rate of return against which to evaluate the prospective IRRs from the Boeing 777?
1a. which beta did you use? Why?
1b. if you used the CAPM, which risk premium and risk free rate did you use? Why?
1c. which capital-structure weights did you use? Why?
Answer:
i. Key Assumptions for the Calculation:
In order to calculate the appropriate rate of return against which to evaluate the prospective cash flows from the Boeing 777 project, several assumptions had to be made.
First, in order to facilitate the calculations, I referred to betas from Exhibit 9 and selected the value for Boeing calculated in comparison to the S&P 500 Index for the previous 58 months (β= 0.81). The reason is that the project is a 35-year project. As a result, I think a long-term data may be more accurate. With Exhibit 10 as a complement, the beta calculated against the S&P 500 Index could be a better choice than that calculated against the NYSE Composite Index.
Second, according to the text, the yield on long-term U.S. Treasury bonds was 8.82% and the 64-year geometric average equity-market risk premium was 5.4% in October 1990. Since the yield of long-term U.S. Treasury bonds is always used as the risk free rate, we can assume that the risk free rate was 8.82% and market risk premium was 5.4%.
Third, according to Exhibit 9, the capital structure weights used were 26 percent for the defense division and 74 percent for the commercial aircraft division. ii. WACC calculation
After making the above mentioned assumptions, we proceeded in calculating the weighted average cost of capital. In order to calculate the betas of the two main divisions of Boeing, we first need to determine the β for one division. In Exhibit 9, we have been given the betas for four peer firms that are mainly in the

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