prod_and_cost_ii

# prod_and_cost_ii - Overview: Production and Cost II...

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Overview: Production and Cost II • Opportunity Costs in Practice – Example: Valuing a 1998 Boeing 737-700 • Economies of Scale and Scope • Learning Effects 1

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The 1998 Boeing 737-700 Check the Airliner Price Guide 2
Cost Saving From a 1998 737-700 • The User Cost of Capital UCC t = rV t + (V t -V t+1 ) = r (\$27.4 m) + (\$27.4m - \$25.8m) = 9.2% (\$27.4 m) + (\$27.4m - \$25.8m) = \$ 4.11 m Equivalently, in terms of percent depreciation, UCC t = (r + %dep’n)V t % dep’n = (V t t+1 )/V t = (27.4 - 25.8)/27.4 = 5.8% 3

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Calculating Delta’s cost of capital, r Four steps: 1. Determine Debt/Equity Structure Total Market value of Debt D: \$4.7 Bn (from Moody’s or Annual Report) Market Capitalization E: \$6.21 Bn (from Yahoo Finance – spring 2001) 2. Calculate Cost of Equity with CAPM (1 * ) r e = r f + β equity ( r r f ) m + Risk ( ) % 16 . 5 free rate Risk rel. to market Market risk premium 14 . 1 % 6 = % 0 . 12 Calculating Delta’s cost of capital (cont.) 3. Calculate Cost of Debt Weighted average of cost of each maturity of debt used by Delta (from Moody’s): r d = 9%. Corporate tax rate τ = 39.6%.
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## This note was uploaded on 10/20/2011 for the course SLOAN 15.010 taught by Professor Berndt during the Fall '04 term at MIT.

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prod_and_cost_ii - Overview: Production and Cost II...

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