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 Boeings 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 companys 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 reason for this is derived from the Income Statement shown in Exhibit 3 of the case. By using the 2002 Income Taxes figure and dividing by Earnings Before Income Taxes (861/3,180), it can be seen that taxes truly represented 21.1% of Earnings. Therefore, in the following calculations, a tax rate of 21.1% will be used as the marginal effective tax rate. The amount of equity financing has already been calculated as $9,568.15M. Taking this amount and dividing by the amount of equity financing plus debt financing and multiplying by 100 gives the equity percentage of 65.57%. The next calculation is the cost of equity capital. This is calculated using the Capital Asset Pricing Model. (CAPM) The CAPM equation consists of the risk free rate plus Beta multiplied by the market premium.

The risk free rate is the geometric/tbonds 30 year bond return. Analysts generally use the yields of long-term (10 to 30 year bonds) to determine the riskfree interest rate. This has been given as 4.7%. Furthermore, the market premium also has been given at a rate of 4.7%. The Market Premium (the return that can be made in the market minus the risk free rate) that will be used in these calculations is 4.7%, which is the geometric/tbonds rate because it is geometric, therefore compounded, and will be a more accurate estimation than will the arithmetic/tbonds. The t-bonds rate from June of 2003 as opposed to the t-bill rate is used because the thirty year bond rate will correspond more closely to the length and breadth of Boeings project time horizon (30 years versus 3 months), and the rate for a t-bill will be underestimating the expected return, since a shorter bond (tbill) will reflect a lower rate of return compared with a tbond, which will reflect a higher rate of return. Market premium measures the expected return of the market minus the risk free rate. This gives the amount that the investment will generate over a risk-free bond. Beta can be estimated using Exhibit 10. Estimated beta can be calculated by looking at the NYSE which will reflect the beta values of not only 500 companies (S&P 500) but of the entire market in general. The 21 month time frame is used in the following calculations, because excludes the extreme values and instability of the airline industry as a result of the incidents of 9/11. 60 months is an extremely lengthy time frame and these values will not be a good predictor of where the industry currently is and where it will be in the future, whereas 60 days is far too short and doesnt take enough historical data into account. In order to estimate Boeings Beta and account for the fact that Boeings defense revenues have been rising despite the fact that commercial-aircraft revenues have been falling, Lockheeds Beta has been used as a point of comparison, because both companies have significant defense contract segments. In 2002, Lockheed was awarded $17 billion in defense contract, followed by Boeing, which was awarded $16.6 billion in defense contracts. In order to calculate Boeings beta based on Lockheed Beta, Lockheeds Beta must first be unlevered in order to adjust it for the capital structure of Boeing. Once Lockheeds beta is unlevered, then it will need to be re-levered based on Boeings capital structure (debt/equity ratio). After this, Boeings beta should be adjusted for the commercial business. Beta for the WACC calculation has been estimated as 1.769. Please see calculations in Exhibit 2. Taking on a project such as the 7E7 would allow Boeing to take a daring risk in the commercial-aircraft industry, which would ultimately allow them to compete effectively with their largest competitor, Airbus. Not only is the 7E7 the first aircraft to primarily be built out of carbon-reinforced material, but also, it is fuel efficient, and would take less time to manufacture (as opposed to a 767 aircraft). In addition to all of these benefits, the board should undertake this project and

proceed with plans for the 7E7 because it makes financial sense - the weighted average cost of capital is less than the internal rate of return of the project.