Question

take data from morningstar and solve using Excel

estimate the weighted average cost of capital, listing the necessary inputs at the top of your sheet, calculate Boeing’s cost of equity and beta.

2. use the capital asset pricing model to estimate Boeing’s cost of equity, assuming 3.5% risk-free rate and 5.5% market risk premium. Link to a separate sheet with beta estimation.

3. where you estimated Boeing’s beta, using historical prices with WEEKLY frequency for the most recent 5 YEARS. Use the SLOPE function to estimate beta. Insert a scatter chart that shows the trendline from regressing returns of BA on the VFINX returns, displays the estimated equation, and the R-squared (check the boxes to display the equation and the R-squared).

4. In the context of your regression analysis shown on the chart, using the specific numbers that you estimated. Explain the meaning of the slope coefficient from the estimated equation and discuss what your estimate implies about the risk of holding BA stock. Explain the meaning of the R-squared from the estimated equation.

Finally, Is Boeing’s cost of equity smaller or larger than Boeing’s cost of debt? Is that what we would expect? Explain!

Answer 1

weighted average cost of capital (WACC ) = weight of debt * rate of debt (1-tax rate) + weight of equity* cost of equity + weight of preference shares * cost of preference shares.

2. to calculate cost of equity, capital asset pricing model is one of the methods, formula for cost of equity using this method is risk free rate + (beta * market risk premium)

data is downloaded for 5years weekly frequency. the returns are calculated as( Day 2 adj close / day 1 adj close - 1 )%,

after both VFINX and BA returns are calculated, beta is determined using slope function = slope( returns of BA , returns of VFINX) = 102.02%

using capm formula, rate of equity is = 9.11%