International Finance & Decision Making : Assignment
Added on 2020-07-22
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FinancePolitical Science
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International Finance &Decision Making
TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1QUESTION 1...................................................................................................................................1a. Launching of 7E7 project...................................................................................................1QUESTION 2...................................................................................................................................2a) Required rate of return with IRRs from the Boeing 7E7...................................................2b) Critical evaluation of CAPM model that does not directly estimate cost of capital..........2c) Use of CAPM to calculate cost of equity ..........................................................................2d) Use of Beta.........................................................................................................................3e) Boeing cost of debts...........................................................................................................3F): Commercial risk components...........................................................................................4g): Discuss not simple use of CAPM to estimate cost of debt...............................................4H): Calculate a weighted average of debt ..............................................................................4I): Capital structure weight ....................................................................................................5QUESTION 3...................................................................................................................................5a) Judgement against WACC.................................................................................................5b) Situation in which project can be attractive.......................................................................6c) Sensitivity analysis.............................................................................................................6QUESTION 4...................................................................................................................................7Is it board approve the 7E7 ....................................................................................................7CONCLUSION................................................................................................................................8REFERENCES..............................................................................................................................10
INTRODUCTIONInternational finance is said to be the branch of economics that is associated with themonetary and macroeconomic relation among two or more countries. Financial decisions arelinked with cross border complexities. They need to make choice about raising capital,investment, risk management and other necessary aspects which involve internationalconsideration (Bayne and Woolcock, 2011). In this project report, information about 7E7 projectwhich is planned by Boeing is discussed. Financial analysis for Boeing 7E7 is done by using IRRand other sources. Various tools and techniques are used to discuss the financial performanceand chances of future growth of Boeing.QUESTION 1a. Launching of 7E7 projectBoeing is associated with designing plenty of attractive and economic air planes thatmeet with customers’ needs and wants. Because in the news over the last six months depressedthe market for aircraft. UK went to war against spasms of international terrorism in Iraq thatoffered shocking news and deadly illness known as SARS. It results in global travel warnings.The reason of this, airlines profits were goes on declining stage in coming generation. Thus, atthat point of time, 7E7 could not be launched as it was difficult to get buyers as the market wasdown. Profitability cannot be recover according to the expected target. The situation prevail atthat time was incredible in which to launch a huge new airframe project.It has been seen that Boeing has not introduced any commercial aircraft since its successof 777 in 1994. So, they are planning to design two new commercial aircraft programs that canhelp customers to fly 15% to 20% faster than any other aircraft. But after two years ofdevelopment, Boeing customers are not been able to pay a premium price for a faster ride. Itmake company to go into financial falloff. After looking into this, they have decided to introduce7E7 which can regain the commercial sales and control losses of company. This was the perfecttime to launch its project in order to control their sales as well as retain their customers.1
QUESTION 2a) Required rate of return with IRRs from the Boeing 7E7In order to find out required rate of return, they need to analyse company’s financialposition which is based on market estimation of the next coming year. As, it has been found thatBoeing business is preparing for almost 2000 to 3000 planes of the 7E7 types within next 20years (Frieden, 2015). For they are expected to attain appropriate rate of return so that they canmeet out their required data. For this purpose, Rate of return is calculated by using this particular formula: re= Rf+ β[E(Rm) – Rf]b) Critical evaluation of CAPM model that does not directly estimate cost of capitalCAPM is a model which is used for the purpose of pricing an individual security orportfolio. It can be identified that current financial market price securities and thereby estimateabout expected returns on total capital investments. This model provides a method fordetermining risk and translate the same into an estimate of expected return on equity. The majoradvantage of using CAPM is the nature of estimated costs of equity that the model can generate.The reason is not taken into consideration in estimating cost of capital which is quite simple. Theinformation provided by company is based on unit’s components for 20 years. Boeing estimatesthat in the initial 20 years, they sell 2000-3000 units. As, analysts predicted that it would be2500 units in 1st year till 20. After evaluating all these information, it can provide weight-agevalue not cost of capital. This is the main reason it is not used during cost of capital estimation.In the mentioned case, WACC is used for total cost estimation because of the values provided bycompany are in weighted form. Boeing consists of two different segments, relatively more stabledefence concern and conversely more volatile commercial businesses.c) Use of CAPM to calculate cost of equity According to CAPM, the 7E7 project is a more risky project of current scenario. Withbeta of 2.54 which is higher than stock market average company (Capital Asset Pricing Model,2017). Volatility is expectable in this investment. The 7E7 project would be required to providereturn of 22.7009% in order to maintain sound investment. Cost can be derived from usingappropriate the following formula: Cost of equity: Rf + beta (Rm – Rf)2
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