Risk Diversification & International Deal Analysis

This assignment focuses on enhancing risk diversification at various levels and strengthening international deal capabilities. It involves analyzing cost of capital strategies as per Mead Corporation's case study, exploring European defense industrial policy's economics by Hartley, and examining flame spraying techniques for self-fluxing alloys from Ilushchenko et al. Additionally, it delves into rural electrification in India (Molyneaux et al.), water pricing decision-making simulation using Cobb-Douglas MUF model (Montilla-López et al.), aircraft engine market trends (Parker & Fedder), and Latin American stock markets volatility modeling by Rodríguez. It also covers foreign exchange market theory, investment appraisal techniques, and European defense research policy collaboration for new weapon systems.

Finance for International Business

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................3
MAIN BODY .................................................................................................................................3
Overview of the case situation: ...................................................................................................3
Weighted average cost of capital (WACC).................................................................................4
Financial evaluation: ...................................................................................................................5
Foreign exchange risk .................................................................................................................8
FOREX Theories:........................................................................................................................8
CONCLUSION .............................................................................................................................10
REFERENCES .............................................................................................................................11

INTRODUCTION
In the present era, with the motive to explore business operations as well as functions and
attain high margin now companies are placing high level on doing business at international level.
In this, business unit is required to consider both financial and non-financial factors while taking
decision about international expansion. Foreign exchange risk is one of the main factors that
create issue in front of firm as it has direct impact on the profitability aspect. Thus, management
team is required to develop strategic and competent framework that helps in dealing with the
foreign exchange risk. The present report is based on the case situation of Euro Jet that is
recognized or known as low cost no frills airlines. It is registered in Ireland and listed on Dublin
stock exchange. In this report will shed light on the extent to which company’s decision in
relation to creating mini UK airline is viable from the financial perspective. Along with this, it
will also provide deeper insight to the Board pertaining to the FOREX risk associated with the
concerned project.
MAIN BODY
Overview of the case situation:
Cited case situation presents that for attracting large number of customers and enhancing
both productivity as well as profitability Euro Jet is placing high level of emphasis on controlling
cost. Moreover, controlled operating cost level enables firm to offer ticket to the customers at
lower prices. Hence, by providing customers with effective airline services at affordable prices
firm can gain competitive edge over others. Now, company is concerned about its future growth
and development due to the decision taken or proposed by UK in relation to leaving European
Union. Moreover, after BREXIT Euro Jet will lose its right pertaining to freely access in UK
aviation market. Further, case scenario presents that 40% of total revenue of Euro Jet is
associated with UK passengers. Thus, due to having concern regarding sales revenue and profit
margin Euro Jet is planning to establish mini airline in UK. For this purpose, business
organization is evaluating the project in relation to entering under lease agreement, 10 boeing

737 aircraft. In accordance with the given situation, business unit requires to incur £12 m per
aircraft at the end of 2024 for refurbishing purpose. Hence, considering the project sales and
expenses projection has been done such as follows:
Weighted average cost of capital (WACC)
Given that
Particulars Figures
Corporate tax rates 19%
Beta 0.947
Yield on UK treasury bonds 1.60%
Price of ordinary shares currently trading £9.68
Loan stock is currently trading @ £100.51
Issued share capital (1560000*0.5) £780 million
issued loan stock @ 4% mature in 2026 £320 million
Calculation of WACC
CAPM Assumptions Figures
K(e) 1.98%
RFR 1.6%
Beta 0.95
R(m) 2%
Enterprise Value (EV)
Current Market Price 10
Diluted Shares 156
Market Capitalization 1,510
Long Term Liabilities 320
Less: Cash & Cash Equivalents
Enterprise Value (in lacks) 1,830
Report area

Debt Equity Weightage
E/(D+E) @ Enterprise Value 82.51%
D/(D+E) @ Enterprise Value 17.49%
Interest Rate (%) 4%
Tax Rate (@) 19%
WACC Calculation
WACC 2.20%
Interpretation: Tabular presentation shows that WACC, as per the information supplied,
accounts for 2.20% respectively. In the field of finance, WACC is referred as cost of capital that
firm undertakes for discounting cash flows. In order to meet financial requirements business unit
undertakes several sources such as equity, loan stock etc. In this, for fulfilling the monetary
needs Euro Jet Plc (UK) issues shares and stock at @ 4% interest. This aspect shows that with
the motive to create optimal capital structure firm has employed both the sources equity and loan
stock. Thus, by applying 1.6% RFR, .95 beta and considering weights it has assessed that cost of
capital is 2.20%.
Financial evaluation:
In order to evaluate the viability of Euro Jet Plc’s project in monetary terms tool and
techniques of investment appraisal are applied. Such tool is highly significant that assists
manager in assessing the return which business unit will get from the concerned project. Profit
maximization is one of the main motives of firm when it takes decision pertaining to expansion
or international business. In this context, by taking into account capital budgeting tools such as
payback period, net present value, average and internal rate of return techniques helps in
assessing the extent to which concerned project will prove to be fruitful for the firm. Moreover,
payback method clearly entails the time within which initial investment will be recovered by an
entity (Investment appraisal techniques, 2017). However, such method is less effective as
compared to NPV because it completely avoids time value of money concept. Thus, assessing
and considering suitable discounting factor Euro Jet Plc (UK) can identify the return which will

be generated after the specific time frame. On the basis of such method firm should select the
proposal only when it offers high and positive returns.
Year
2018 (initial
investment)
20
19
202
0
202
1
202
2
202
3
202
4
202
5
202
6
202
7
202
8
60 million
Scheduled
revenue
52
8.6
9
534
.08
539
.53
545
.03
550
.59
556
.21
561
.88
567
.61
573
.40
579
.25
Ancillary
revenue
14
8
149
.55
151
.12
152
.71
154
.31
155
.93
157
.57
159
.23
160
.90
162
.59
Total revenues
67
6.6
9
683
.63
7
690
.65
5
697
.74
5
704
.90
7
712
.14
4
719
.45
4
726
.84
734
.30
2
741
.84
Staff costs
35.
15
35.
5
37.
3
39.
2
41.
1
43.
2
45.
3
47.
6
50.
0
52.
5
Fuel & oil
15
2.4
7
154
.07
155
.69
157
.32
158
.98
160
.64
162
.33
164
.04
165
.76
167
.50
Maintenance and
repairs
9.7
8 9.9
10.
0
10.
1
10.
2
10.
3
10.
4
10.
5
10.
6
10.
7
Airport and
handling charges
49.
37
49.
87
50.
38
50.
90
51.
42
51.
94
52.
47
53.
00
53.
55
54.
09
Marketing &
administration
costs 1 16
16.
16
16.
33
16.
50
16.
67
16.
84
17.
01
17.
19
17.
37
17.
55
Refurbishing of
aircraft 120
Route charges
39.
2
39.
60
40.
00
40.
41
40.
82
41.
24
41.
66
42.
09
42.
52
42.
95
Lease cost
31
0 310 310 310 310 310 310 310 310 310
Total expenses
61
1.9
7
615
.10
2
619
.67
6
624
.36
8
629
.18
3
754
.12
5
639
.2
644
.41
3
649
.77
655
.27
7
Profit (Revenue
- expenses)
64.
7
68.
5
71.
0
73.
4
75.
7
-
42.
0
80.
3
82.
4
84.
5
86.
6
Tax @ 19%
Profit after tax
52.
42
55.
51
57.
49
59.
43
61.
34
--
42
65.
01
66.
77
68.
47
70.
12
Calculation of NPV

Year PV factor @ 10% Cash flows Discounted cash flows
2019 0.978 52.4 51.29
2020 0.957 55.513 53.15
2021 0.937 57.5 53.86
2022 0.917 59.4 54.48
2023 0.897 61.3 55.01
2024 0.878 -42.0 -36.84
2025 0.859 65.0 55.82
2026 0.840 66.8 56.10
2027 0.822 68.5 56.29
2028 0.804 70.1 56.40
Total discounted cash
flows 455.57
Initial investment 60
Net present value 395.57
Interpretation: The above depicted table shows that profit margin of the firm after tax
accounted for £52.42 m in the period of 2019. On the other side, in the year of 2024, cash flow of
Euro Jet Plc (UK) accounts for negative return due to the high refurbishing cost of airlines. From
assessment, it has been found that around 120 GBP millions are required for the purpose of
refurbishing at the end of 2024. This is one of the main causes due to which cash flow of Euro
Jet Plc (UK) was negative in 2024. Hence, after such assessment, increasing pattern has found in
the cash flow of firm. Thus, it can be presented that business organization will generate high
revenue over the expenses.
Further, by applying the technique of investment appraisal, it has assessed that net
present value of mini airline project is £395.57 significantly that is higher as compared to the
initial investment. Considering such aspect, it can be stated that Euro Jet Plc UK will get positive
and high return from the proposal with the initial investment of £60 million. Hence, such future
development plan will make significant contribution in the attainment of goal and objective.
Moreover, due to the fear in relation to the negative impact of BREXIT on the customer base as
well as sales revenue of Euro Jet Plc is planning to expand. Thus, by establishing mini airlines in
UK, Euro Jet would become able to enhance customer base, profitability and gaining competitive
position. Thus, on the basis of overall evaluation, it is advised to the management team or

department to invest money in such proposal. Such concerned proposal is highly suitable as it
offers opportunity in relation to generating high return and recovering the amount of initial
investment within the fewer time frames. Payback method of invest appraisal shows that firm
will recover the amount of initial investment within the period of 1 year and 1 month. Hence,
after such time frame, firm will start to get profit margin. Thus, management of Euro Jet Plc
(UK) should place emphasis on investing money in such project.
Foreign exchange risk
Given case situation presents that route charges are mentioned in Euro, whereas aircraft
lease cost per annum is denominated in $. This aspect clearly presents those fluctuations take
place in foreign exchange market more frequently which in turn places adverse impact on the
profit margin of firm. Thus, fluctuations of current prices considered as major forex risk that is
associated with the current project or proposal. In the real life scenario or context, market news
has significant impact on the currency price level. Thus, in the uncertain business environment it
is highly required for the firm to create or develop a back-up plan.
In the absence of having appropriate framework Euro Jet Plc (UK) would not become
able to deal with relative risk level. Moreover, there are several determinants which have major
impact on foreign exchange rates such as business cycle, BOP statistics, political developments,
new tax laws and inflationary expectations (Foreign Exchange Market, 2017). Along with this,
international investment patterns and policies formulated by central bank also have significant
impact on the rate of foreign exchange. In this regard, for coping up with such kind of risk it is
highly required for the firm to undertake suitable hedging tools and options such as future,
option, swap etc. All such tools are highly significant that assist Euro Jet Plc (UK) in dealing
with or reducing adverse effects of currency fluctuations on business operations.
FOREX Theories:
In order to have synthesized determination over the exchange rates it is necessary to
develop the integrated models for this segmentation. However, Forex it the method over which
the adequate exchange rates were determined by the various big economies. Due to changes in
the rates of currency and the level of imports or export operated in the country there has been
various techniques or polices which are developed to give the cure to such operations. Hence,
there will benefits or drawbacks of such theories while implicating in the daily trade and

commerce (Molyneaux, Wagner and Foster, 2016). The change in the economics level as well as
laws and ethics in every country which will be helpful for business in making the adequate
business activities. EuroJet UK plc will be profitable in terms of acquiring the beneficial returns
as well as evaluating the profits from such daily operations. However, there has been implication
of various theories such as:
Exchange Rate:
The variations in the currency rates of various nations which determines the economic
ability of such nations to meet the financial challenges such as inflation, interest rates etc. Hence,
with the help of analyzing the operations of business there has been need to develop the policies
and procedures which in turn gives the fruitful returns to EuroJet. In the current scenario most of
the international firm which are operating business in Dollar due to the reason behind the rate of
this currency do not change frequently as compared to other nation's currency (Eades and et.al.,,
2017). Hence, most of the international trade were operated with consideration of Dollars.
Asset Market:
To buy and obtain the currency of other nation there has been determination over the
inflows and outflows cash or monetary transaction over the period (Rodríguez, 2017). Thus,
these techniques focuses over the values of shares, debenture and bonds of company in the
national boundaries. However, it will enhance the market growth of the country in the
international environment (orenz, Kruschwitz and Löffler, 2016). Therefore, it comprises with
the net balance of capital account in consideration with balance of trade to the Current account of
balance of payments. However, with the help of such techniques business can acquire such assets
form various nations on the international basis.
Monetary Model:
It helps in determining the monetary policies of such nations and the interest rates which
are being issued or planned by central banks (Parker and Fedder, 2016). Thus, with the help of
such model the business will become able to analyses the economic growth of such nation ads
well as they will become able to determine the profitability in such countries.
Balance of payments:

To analyse the total imports and exports made during the period business will become
able to analyses the adequate changes in the growth of economy (Ilushchenko and et.al., 2017).
However, this considers the current and capital account of organizations. Thus, if there are
increments in the numbers of imports than compare to exports it will reflect the negative Balance
of payments (Matthews, 2018). Thus, if the increment in the exports than compared with the
imports than it indicates the surplus or positive balance of payments which will be fruitful for the
economic growth.
Purchasing Power Parity:
These reflect the ability of the nation to meet the rates of making the payments for the
expense incurred by them in context with attain the adequate growth in country (Hartley, 2018).
However, if the business not being able to meet the required purchase rate that there has been
offer of Arbitrage opportunities under which the rates of such operations were lower down as tit
meets the expenses (Montilla-López, Gutiérrez-Martín and Gómez-Limón, 2017).
CONCLUSION
From the above report, it has been articulated that cost of capital of Euro Jet Plc (UK)
implies for 2.02% respectively. It can be seen in the report that business unit has used both
equity and debt sources for meeting financial requirements. Along with this, it has been
articulated by investing money in the project of mini airlines firm will get high revenue and
margin. Further, it can be summarized that risk is one of the main and essential part of the
business. In the context of Euro Jet Plc (UK), manager is facing issue from the fluctuations
which take place in the prices of foreign stock exchange market. Thus, by undertaking hedging
options, tools and techniques firm can mitigate such risk to a great extent. Moreover, derivative
instruments enable firm to diversify risk level and deal at international level more effectually.

REFERENCES
Books and Journals
Eades, K.M. and et.al.,, 2017. Mead Corporation: Cost of Capital. Darden Business Publishing
Cases, pp.1-12.
Hartley, K., 2018. The Economics of European Defense Industrial Policy. In The Emergence of
EU Defense Research Policy (pp. 77-92). Springer, Cham.
Ilushchenko, A. F. and et.al., 2017. Flame spraying of coatings of self-fluxing alloys. Welding
International. 31(11). pp.887-891.
Lorenz, D., Kruschwitz, L. and Löffler, A., 2016. Are costs of capital necessarily constant over
time and across states of nature?: Some remarks on the debate on ‘WACC is not quite
right’. The Quarterly Review of Economics and Finance. 60. pp.81-85.
Matthews, R., 2018. European Collaboration in the Development of New Weapon Systems. In
The Emergence of EU Defense Research Policy (pp. 111-130). Springer, Cham.
Molyneaux, L., Wagner, L. and Foster, J., 2016. Rural electrification in India: Galilee Basin coal
versus decentralised renewable energy micro grids. Renewable Energy. 89. pp.422-436.
Montilla-López, N. M., Gutiérrez-Martín, C. and Gómez-Limón, J. A., 2017, September.
SIMULATING FARMERS’DECISION-MAKING WITH A COBB-DOUGLASS MAUF.
ANAPPLICATION FOREX-ANTE POLICY ANALYSIS OF WATER PRICING. In XI
Congreso de la Asociación Española de Economía Agraria (p. 97). Universidad Miguel
Hernández.
Parker, R. and Fedder, G., 2016. Aircraft engines: a proud heritage and an exciting future. The
Aeronautical Journal. 120(1223). pp.131-169.
Rodríguez, G., 2017. Modeling Latin-American stock and Forex markets volatility: Empirical
application of a model with random level shifts and genuine long memory. The North
American Journal of Economics and Finance. 42. pp.393-420.
Online
Foreign Exchange Market. 2017. [Online]. Available through:
<http://www.brownconsultancy.com/ds-theory-foreign-exchange.asp>.

Investment appraisal techniques. 2017. [Online]. Available through: <
http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Basic%20investment
%20appraisal%20techniques.aspx>.