Boeing 777
Boeing 777
1) Is it optimal for Boeing to have such a low leverage? Is it optimal for Boeing to have a high leverage? Why or why not?
Based on Boeing’s financial statements, it seems that it is not optimal for Boeing to have such a low leverage. Indeed, the leverage decision is a trade-off between the value created through the tax shield and the increase in the cost of additional debt (lower credit rating). In fact, looking at Boeing’s interest coverage ratio (profit before tax / interest expense = from 130 to 150 in 1988 and 1989) we can conclude that Boeing could handle more leverage than it is currently doing without significantly increasing the cost of its debt.
It seems that it is not optimal for Boeing to have a high leverage due to the business risk related to its industry driven by 2 combined factors:
Cyclicality of the industry: the probability of a low performance of