Finance for International Business Report

Added on - 22 Jul 2020

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Finance for International Business
TABLE OF CONTENTSINTRODUCTION..........................................................................................................................3MAIN BODY.................................................................................................................................3Overview of the case situation:...................................................................................................3Weighted average cost of capital (WACC).................................................................................4Financial evaluation:...................................................................................................................5Foreign exchange risk.................................................................................................................8FOREX Theories:........................................................................................................................8CONCLUSION.............................................................................................................................10REFERENCES.............................................................................................................................11
INTRODUCTIONIn the present era, with the motive to explore business operations as well as functions andattain 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 takingdecision about international expansion. Foreign exchange risk is one of the main factors thatcreate issue in front of firm as it has direct impact on the profitability aspect. Thus, managementteam is required to develop strategic and competent framework that helps in dealing with theforeign exchange risk. The present report is based on the case situation of Euro Jet that isrecognized or known as low cost no frills airlines. It is registered in Ireland and listed on Dublinstock exchange. In this report will shed light on the extent to which company’s decision inrelation to creating mini UK airline is viable from the financial perspective. Along with this, itwill also provide deeper insight to the Board pertaining to the FOREX risk associated with theconcerned project.MAIN BODYOverview of the case situation:Cited case situation presents that for attracting large number of customers and enhancingboth productivity as well as profitability Euro Jet is placing high level of emphasis on controllingcost. Moreover, controlled operating cost level enables firm to offer ticket to the customers atlower prices. Hence, by providing customers with effective airline services at affordable pricesfirm can gain competitive edge over others. Now, company is concerned about its future growthand development due to the decision taken or proposed by UK in relation to leaving EuropeanUnion. Moreover, after BREXIT Euro Jet will lose its right pertaining to freely access in UKaviation market. Further, case scenario presents that 40% of total revenue of Euro Jet isassociated with UK passengers. Thus, due to having concern regarding sales revenue and profitmargin Euro Jet is planning to establish mini airline in UK. For this purpose, businessorganization 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 peraircraft at the end of 2024 for refurbishing purpose. Hence, considering the project sales andexpenses projection has been done such as follows:Weighted average cost of capital (WACC)Given thatParticularsFiguresCorporate tax rates19%Beta0.947Yield on UK treasury bonds1.60%Price of ordinary shares currently trading£9.68Loan stock is currently trading @£100.51Issued share capital (1560000*0.5)£780 millionissued loan stock @ 4% mature in 2026£320 millionCalculation of WACCCAPM AssumptionsFiguresK(e)1.98%RFR1.6%Beta0.95R(m)2%Enterprise Value (EV)Current Market Price10Diluted Shares156Market Capitalization1,510Long Term Liabilities320Less: Cash & Cash EquivalentsEnterprise Value (in lacks)1,830Report areaDebt Equity Weightage
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