What does sensitivity analysis (your own and/or that shown in the case) reveal about the nature of Boeings gamble on the 7E7? Should the board approve the 7E7?
Cost of Equity an Show more Case Studies in Finance: Managing for Corporate Value Creation The Boeing 7E7 Case Cost of Equity and Divisional Hurdle Rate: When a division or specific project involves risk that is substantially greater than the rest of the companys business a riskadjusted hurdle rate should be used for investment decisions instead of the company cost of capital. Otherwise there would be a tendency to over-allocate resources to the higher-risk project. One way to determine the appropriate hurdle rate is to use the risk premium for a pure-play competitor a company whose primary business is in the higher-risk market. What is an appropriate required rate of return against which to evaluate the prospective IRRs from the Boeing 7E7? Please use the capital asset pricing model to estimate the cost of equity. At the date of the case the 74-year equity market risk premium (EMRP) was estimated to be ___. Which beta and risk-free rate did you use? Why? When you used the capital asset pricing model which risk-premium and risk-free rate did you use? Why? Which capital-structure weights did you use? Why? Judged against your WACC how attractive is the Boeing 7E7 project? Under what circumstances is the project economically attractive? What does sensitivity analysis (your own and/or that shown in the case) reveal about the nature of Boeings gamble on the 7E7? Should the board approve the 7E7? Show less