8oe|ng 7L7 Case 5tudy

t
e
t
f
-
e
t
m
t
f
1
where
r
e
cosL of equlLv for 8oelna porLfollo
r
f
rlskfree raLe

e
LqulLv beLa for Lhe porLfollo
r
m
equlLv markeL rlsk premlum raLe (LM8)
r
f
436 whlch ls Lhe 30vear Lreasurv bond value We Look Lhls value as Lhe rlsk free raLe
slnce Lhe 7L7 pro[ecL would have a Llme span of 30 vears lf underLaken

e
103 from LxhlblL 10 whlch ls Lhe value Llne esLlmaLed beLa value 8easons for chooslna
Lhls value over oLher values
1 value Llne beLas are calculaLed from Lhe rearesslon analvsls of Lhe percenLaae chanaes
of a sLock prlce and percenLaae chanaes of n?SL composlLe lndex over a perlod of 3
vears whlch lncludes a laraer seL of daLa
2 We belleve LhaL n?SL encompasses a wlder markeL Lhan S 300
3 A beLa value of 103 reflecLs volaLlllLv ln 8elna's sLock prlce beLLer Lhan oLher beLa values
due Lo a sllahLlv laraer percenLaae of commerclal buslness over defense buslness of
8oelna (34 vs 46)
r
m
64 + 436 1096 Slmllar Lo our reasonlna for rlsk free raLe we chose 30vear Lreasurv
bond value as Lhe basls for Lhe LM8
r
e
436 + 103*(1096 436) 1128
We cannoL use 8oelna's corporaLe porLfollo daLa for assesslna requlred raLe of reLurn on 7L7
pro[ecL as our assessmenL wlll be skewed due Lo Lhe wldelv dlfferlna rlsk levels assoclaLed wlLh
commerclal and defense dlvlslons ln Lhe porLfollo We musL flaure ouL Lhe beLa values and debL
Lo equlLv (u/L) raLlo for commerclal dlvlslon
8eLa value for Lhe porLfollo ls Lhe welahLed averaae of boLh defense and commerclal beLas ln
oLher words

asset portfo||o
(Defense) *
asset defense
+ (Commerc|a|) *
asset commerc|a|
2

asseL porLfollo

equlLv
/1 + (1L
c
)u/L

equlLv
103 from LxhlblL 10
L
c
33 effecLlve maralnal Lax raLe (from LxhlblL 10)
u/L 0323 markeL value debL/equlLv raLlo (from LxhlblL 10)
So
asseL porLfollo
103/1 + (1 033)*0323

asseL porLfollo
07828
Slnce Lhe defense markeL ls compleLelv conLrolled bv aovernmenL lL ls safe Lo assume LhaL
lndlvldual companv's beLas ln Lhe dlvlslon wlll be falrlv comparable Lo one anoLher lrom
LxhlblL 10 93 of Lockheed MarLln's revenue ls from defense and space So we can derlve
defense beLa value for Lockheed MarLln and aLLrlbuLe Lhe same value Lo 8oelna's defense
dlvlslon AlLernaLlvelv we could Lake Lhe averaae value of beLas for Lockheed MarLln norLhrop
Crumman and 8avLheon
lor Lockheed MarLln

asseL

equlLv
/1 + (1L
c
)u/L

equlLv
060 (lrom LxhlblL 10 value Llne beLa for Lockheed)
L
c
33 effecLlve maralnal Lax raLe (from LxhlblL 10)
u/L 041 markeL value debL/equlLv raLlo for Lockheed (from LxhlblL 10)

asseL
060/1 + (1 033)*041 04737

So for 8oelna
asseL defense
04737
uefense 46 (from LxhlblL 10 percenLaae of revenue from defense for 8oelna)
Commerclal 100 46 34
lrom Lq 2 above
07828 (046)*(04737) + (034)*(
asseL commerclal
)

asseL commerclal
( 07828 (046)*(04737))/ (034) 1046

equlLv commerclal

asseL commerclal
*1 + (1L
c
)u/L
Slnce Lhere ls no daLa ln Lhe case for debL Lo equlLv raLlo for commerclal dlvlslon lL ls safe Lo
assume LhaL 8oelna would lssue less debL Lo keep lLs debL raLlna aL A

(LxhlblL 11) or beLLer and
LhaL Lhe debL Lo equlLv raLlo would be equal Lo Lhe markeL value debL Lo equlLv raLlo for Lhe
porLfollo of 0323 (LxhlblL 10)
So

equlLv commerclal
1046 * 1 + (1 033)*0323 1403
r
equlLv commerclal
r
f
+
equlLv commerclal
*(r
m
r
f
) 436 + 1403*(1096 436) 1334
JCC
commerc|a|
(debt)(r
d
)(1t
c
) + (equ|ty)(r
equ|ty commerc|a|
) J
lrom LxhlblL 10 u/L 0323 u 0323*L
u+L 1 (0323*L + L) 1 1323L 1 L 0636
u 1 L u 1 0636 0344
ln Lq 3 above r
d
cosL of debL We assumed LhaL Lhe debL would be for Lhe enLlre perlod of
Lhe pro[ecL whlch was 30 vears we Look Lhe ?1M value from exhlblL 11 for Lhe maLurlLv daLe ln
2033 (le 30 vears from 2003) whlch ls 383
So r
d
383
WACC
commerclal
(0344)*(383)*(1 033) + (0636)*(1334) 1308 + 8882 1019








3 !udaed aaalnsL vour WACC how aLLracLlve ls Lhe 8oelna 7L7 pro[ecL?
1he cosL of caplLal for Lhe commerclal dlvlslon of 8oelna whlch ls calculaLed Lo be
1019 ls areaLer Lhan Lhe l88 of 137 whlch was derlved from LxhlblL 9 based on Lhe
assumpLlon LhaL 8oelna would be able Lo sell 2300 planes aL 3 premlum 1he pro[ecL ls
verv aLLracLlve as Lhe 'Maraln of SafeLv' (l88WACC) ls hlaher
3 a under whaL clrcumsLances ls Lhe pro[ecL economlcallv aLLracLlve?
MosL aLLracLlve lf 8oelna can sell 2300 planes ln 20 vears aL 3 premlum and Lhe
developmenL cosLs are malnLalned aL or below $8 Mn and CCCS ls 80 of sales 8oelna has Lo
dellver on lLs promlse of reduced operaLlna cosLs for 7L7 wlLh a 20 lncrease ln fuel efflclencv
3 b SenslLlvlLv Analvsls
lacLors LhaL could lnfluence cosL of caplLal ln our analvsls are
l88 lrom LxhlblL 9 2 exLreme cases are 8oelna selllna onlv 1300 planes ln 20 vears aL 0
premlum and a scenarlo where developmenL cosLs are verv hlah aL $10 Mn and CCCS are 84
of Lhe sales l88 ln Lhe flrsL scenarlo ls 103 whlch ls maralnallv hlaher Lhan Lhe WACC whlle lL
ls lower aL 86 ln Lhe 2
nd
scenarlo 1he pro[ecL wlll noL be proflLable ln Lhe laLLer case
CosL of debL We assumed Lhe cosL Lo be Lhe ?1M raLe ln 2033 whlch was 383 1hls could
flucLuaLe elLher slde lf lL ls 391 WACC would be 976 lor 6191 lL ls 1027 WACC ls
much lower Lhan Lhe hurdle raLe of 137 ln boLh Lhe cases
MarkeL LqulLv 8aLe (r
m
) lf we Lake 3monLh Lblll raLe as a basls for r
m
lL would be 923 (083
+ 84) ln Lhls scenarlo WACC ls 861
4 Should Lhe board approve Lhe 7L7?
1he board should approve Lhe pro[ecL for Lhe followlna reasons
1 1he pro[ecL ls economlcallv aLLracLlve even under mosL of Lhe worsL cases as
explalned ln Lhe senslLlvlLv analvsls
2 Alrbus wlll domlnaLe Lhe markeL lf 8oelna doesn'L Lake up Lhls pro[ecL
3 lL wlll aaln ma[or markeL share and cusLomer saLlsfacLlon lf lL dellvers on lLs promlse
of lower operaLlna cosLs and lncreased fuel efflclencles
4 7L7 ls Lhe besL alLernaLlve for blaaer planes for lona dlsLance fllahLs