M12-S5 - Case - Boeing 777

${\beta }_{boeing}^{u}=W_{commercial}{\beta }_{boeing}^{u}+W_{defense}{\beta }_{defense}^{u}$

1) Select a beta for boeing => 2) Look for 3 defense companies, unlever beta and take average 3) Unlever ${\beta }_{boeing}^{u}=W_{c}{\beta }_{c}^{u}+W_{d}{\beta }_{d}^{u}$

Estimate ${\beta }_{comm}^{u}$ = ${\beta }_{comm}^{u}*(1+(1-t){\frac {D}{E}}$ Go to CAPM: $K_{c}R_{F}+\beta _{comm}^{L}*(EMRP)$

4) Calculate WACC = $W_{D}K_{D}+W_{E}K_{E}$

1) Characteristics of aircraft construction

• Capital intensive
• Highly concentrated
  • Boeing
  • Airbus
  • McDonald Douglas
• Very long payback periods
• Long life cycle
• Long sales cycle
• Build to order
• Highly competitive
• Demand dependent on economic cycles, Political events
• High tech product
• Time to market
• Only a fraction of the products make money

The ROE is 12%: how can this be increased?

• Decrease the equity
  • Lever the company
• Increase net income
  • Lower cost
  • Increase sales price