Boeing 7e7 Essay

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BB403953 Liu Ye-Xin
Business Project Evaluation: The Boeing 7E7
Introduction of Boeing Boeing was incorporated in Seattle by William Boeing, on July 15, 1916, as "Pacific Aero Products Co". Started as a simple airplane factory, Boeing now has become the largest global aircraft manufacturers, with a range of production of commercial and defense aircrafts, satellites, rockets, and so on. Boeing is the largest exporter in the US, and its stock is a component of the Dow Jones Industrial Average.
In terms of its defense segment, Boeing is the second-largest defense contractor in the world as Lockheed Martin stays at the lead. On the other hand, Boeing is one of the only two commercial aircraft manufacturers, with the only and aggressive competitor, …show more content…

It is one of the top five defense contractors in the world. 91% of Northrop Grumman’s revenue came from defense and space in 2003.
● Raytheon The Raytheon Company is a major U.S. defense contractor and industrial corporation with core manufacturing concentrations in weapons and military and commercial electronics. It was previously involved in corporate and special-mission aircraft until early 2007. 73% of Raytheon’s revenue is derived from defense and space in 2003.

Calculation of Cost of Capital Since Boeing 7E7 is a project within the commercial segment, we have to find out the cost of capital of Boeing’s commercial segment.
a. Cost of Debt I use the market value-weighted average of all YTM of Boeing bonds as the cost of debt:
Original Issuer Coupon Maturity Rating Price YTM Issue Amount ($millions) Market Value
($ millions) % Market Value Weighted YTM
Rockwell International 7.625% 15/2/05 A- 106.175 3.911% $202 $214.474 4.27% 0.001670
Rockwell International 6.625% 1/6/05 A- 105.593 3.393% $298 $314.667 6.27% 0.002126
McDonnell Douglas 6.875% 1/11/06 A- 110.614 3.475% $249 $275.429 5.48% 0.001906
Boeing 8.100% 15/11/06 A- 112.650 4.049% $175 $197.138 3.93% …show more content…

WACC( Cost of capital)
WACC=Rd*Rd*(1-T)+Re*We
Boing’s cost of capital of its commercial segment equals to
5.33%*0.344*(1-35%)+10.74%*0.656 = 8.24%
Free cash Flow Forecast ( based on economic cycle)
According to Boeing’s previous projects, Boeing 757 and 767, the lifecycle of aircrafts has a pattern that can be observed. As the graph shows, aircraft sales increases gradually after the introduction of the new aircraft and then starts to fall around 11 years after introduction. Thereafter, sales would rise and fall as derivatives of the aircraft were offered.
To forecast Boeing’s free cash flow, I set up some assumptions based on its previous financial statement and precedents:
• Total development cost: $8,000 million
● initial price of 7E7: $136.95 million
● initial price of 7E7 stretch: $170.87 million (7E7 stretch is a larger version of 7E7)
● cost of goods sold (% of sales): 80%
● working capital requirement (% of sales): 6.7%
● general, selling and administrative (% of sales): 8%
● research and development (% of sales): 2.3% (excluding 2004~2007)
● capital expenditure (% of sales): 0.16% (excluding

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