Valuing Boeing
...Rate - RF The risk free rate we have selected is the October 1990 yield on U.S. Treasury Bonds less the average difference between the return on Treasury Bonds and Treasury Bills in the past 30 years, so as to adjust our rate for the maturity premium. We have calculated the risk-free rate as follows: RF = Yield T-Bond – (Average Difference in T-Bonds vs. T-Bills) = 8.82% - 1.4% = 7.42% Question 3: In computing WACC, what capital structure weights did you use and why? Are they based on book values or market values? The first step to estimate Boeing’s capital structure is to evaluate the potential sources of financing available for the 777 project. Given Boeing’s low gearing and the foreseeable difficulties to raise equity in the capital markets to fund such a risky, long-term project, it seemed reasonable to assume that Boeing would likely be using its cash balances and incurring new debt (whether through the capital markets or borrowing in the private sector). Thus, Boeing would also be able to match a long-term project (asset) with long-term liabilities. We have estimated the amount of debt to be raised by discounting the negative operating free cash flows of the project at the company’s after tax cost of debt, which indicates that funding requirements would amount to approximately $4,381 million (for working of post-tax weighted average cost of debt, please see Appendix 1). Since Boeing’s cash balance at the end of 1989 was $1,863 million, it would need to raise $2,518 million in debt, which would imply a g...