International Finance & Decision Making : Case Study of Boeing

International Finance
&
Decision Making

Table of Contents
INTRODUCTION...........................................................................................................................1
QUESTION 1...................................................................................................................................1
Launch of 7E7 project.................................................................................................................1
QUESTION 2...................................................................................................................................2
a) Appropriate required rate of return to evaluate prospective IRRs from the Boeing 7E7.......2
b) Reason for not using Capital Assets Pricing Model to estimate the firm's cost of capital
directly.........................................................................................................................................2
c) Capital Asset Pricing Model to estimate the cost of equity. Analyses of Beta and risk-free
rate...............................................................................................................................................2
d) Appropriate time for using Capital Asset Pricing Model, type of risk-premium and risk-free
rate used in this scenario.............................................................................................................3
e. Boeing's Cost of Debt..............................................................................................................4
f. Commercial and defence risks.................................................................................................4
g. Reason for not using CAPM to estimate cost of debt.............................................................4
h. Weighted average of all debt and long-term debt, which method is to be considered for
calculation of Cost of debts.........................................................................................................5
i. Weighted average Capital structure of Boeing........................................................................5
Question 3........................................................................................................................................6
a. Determination of attractiveness of Boeing 7E7 project on the basis of WACC.....................6
b. Circumstances for the economical attractiveness of this project............................................6
c. Sensitivity analysis..................................................................................................................6
Question 4........................................................................................................................................7
Approval of Board for the Project...............................................................................................7
CONCLUSION................................................................................................................................8
.........................................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
International finance is the part of financial economics which is broadly concerned with
monetary and macroeconomics interlinked between more than two countries. Decision making is
a process of selecting the best alternatives among various options available with a company
(Bayne and Woolcock, 2011). International finance and decision making together means a
judgement in selecting the best global project by a company. In the given assignment, case study
of Boeing reflects its decision making process to evaluate launch of 7E7 project. Boeing's main
competitor is Airbus and so company wants to launch an aircraft which is cheap and reduces
operating costs as well as fulfil the demand of current market which is flexibility in travelling
long and short term routes.
QUESTION 1
Launch of 7E7 project
Boeing is planning to launch 7E7 project because of various reasons which are given as below:
 To replace mid-size planes
 To create mid-size planes that can travel long distances
 To reduce fuel price by 20%
 To become safe from the issue of being copy of this design by Airbus
 To lower down operating costs
 This product is meeting with the requirements of customers.
 It can compete with Airbus's short distance planes.
Yes, this is the right time to launch such a plane because it will fulfil the demand of its
customers which is providing plane having low operating costs and that are flexible to cover long
and short distances. As the biggest competitor of Boeing that is Airbus has already launched
A300/310, family which is capable to flexibly serve short, medium and long range routes. So,
Boeing is required to compete with Airbus to recover its market share in Commercial- Aircraft
Industry. Due to decrease in customer’s demand from 527 planes to 381, Boeing's earnings is
going down. Hence, to increase in customer’s demand, Boeing needs to launch 7E7 project.

QUESTION 2
a) Appropriate required rate of return to evaluate prospective IRRs from the Boeing 7E7
On the basis of above case scenario, the observed IRR is 15.7% but it is also given that
IRR is sensitive to selling of units which means IRR will be increased with growth in sales unit
and it will decrease with decline in revenue by 11%. Hence, by taking average of 11% for 5
years, the required rate of return should be at least 17.9%. At this IRR, company’s NPV of this
project will be greater than 0. Therefore, 3 possible scenarios can be presented by taking NPV or
Net present Value as a base:
 NPV > 0: At this scenario, project of 7E7 should be undertaken by Boeing. But
company should also be considered about other alternatives which are available in the
market.
 NPV = 0: At this stage, company might not lose anything but it will not gain anything as
well. But this scenario is risky as due to high volatility in the market, NPV might go
negative.
 NPV < 0: It is a clear choice that company should obviously ignore such an alternatives
and the project.
b) Reason for not using Capital Assets Pricing Model to estimate the firm's cost of capital
directly
Cost of capital includes the cost of debt + cost of equity. Capital Assets Pricing Model is
only useful for calculating cost of equity and risk on required rate of returns. Hence, CAPM can't
be used to directly estimate cost of capital (Mingst and Arreguín-Toft, 2013). It can only be
useful to estimate the cost of equity and later, this value could be used in WACC or Weighted
Average Cost of Capital method to estimate cost of the capital structure of Boeing.
c) Capital Asset Pricing Model to estimate the cost of equity. Analyses of Beta and risk-free rate
According to CAPM or Cost Asset Pricing Model concept, cost of Equity = Rf + Beta *
EMRP (Tzeng and Huang, 2011). In this, Rf is risk free rate, Beta is volatility of risk and EMRP
is Equity Market Risk Premium. Risk free rate is based on 3 months US Treasury bill or T-Bill,
Beta is identified from the financial reports of Boeing (Yahoo finance). This report indicates the
fluctuations in Boeing's stock as compared to S&P Index. EMRP is calculated in “d” part of
Question 2.