Finance for International Business: EuroJet's WACC and FOREX Analysis

This report provides a comprehensive financial analysis of EuroJet, a European airline, focusing on the impact of Brexit on its operations. It examines the company's Weighted Average Cost of Capital (WACC) calculation, considering factors like corporate tax rates, beta, and treasury yields in both the UK and Ireland. The report delves into the theory of FOREX, including exchange rates, purchasing power parity, interest rate parity, balance of payments, asset market models, and monetary models, and how these concepts affect EuroJet's financial strategies. The report also assesses the company's plans to mitigate the negative effects of Brexit through the introduction of EuroJet UK plc and the leasing of Boeing 737 aircraft. The analysis includes the impact of fluctuating exchange rates, taxation, interest rates, and currency rates on the company's profitability and decision-making. The report highlights the importance of understanding FOREX dynamics and their influence on international business, providing valuable insights into EuroJet's financial health and strategic responses to external challenges. This report is a financial analysis of EuroJet, covering WACC, FOREX, and Brexit's impact, helping students understand financial concepts and international business.

Finance for International
Business

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Overview................................................................................................................................1
Theory of FOREX:.................................................................................................................2
Measurement of WACC for EuroJet......................................................................................5
Measurements for NPV of EuroJet.........................................................................................6
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
In the present assessment, there will be discussion based on the impacts of Brexit over
Euro-jet while its big market hub UK is getting out from the European union. The organisation
has 40% of the revenue from UK but the governance policies are of Europe government. Thus, it
can be said that the existence of such country from this group will affect the profitability and
business of this organisation. The report will also be beneficial in determining the ways or
theories under which they can make the necessary improvements in the operational activities.
The managers in firm have planned to introduce new aircraft which in turn will be helpful for
making the required improvements in the business. There will be discussion based on the WACC
and NPV calculations. Therefore, the need of such measurement will evaluate the favourable
decision making from Eurojet stakeholders.
Overview
Eurojet is the European airline and operating in various nations such as Europe, North
America, UK etc. This organisation has a favourable growth since 1980s as it offers the low-cost
tickets to the passengers. This firm has 300 Boeing B737-800 aircraft which serves flying over
1750 routes and several destinations. There have been five main operating centres such as
Stansted, Brussels, Dublin, Düsseldorf and Milan on which Stansted is the most profitable centre
as 40% of flights were operated by such location. There have been various rivalry firms to
Eurojet in consideration with offering the special offered seats to consumers which makes them
to switch the companies (Priewe, 2017). However, apart from the operational obstacles, there
have been various other issues which are being faced by Eurojet in survival. However, the most
unpleasant decision made by UK to leave the European Union group affected various aviation
industries in these two countries. Euroject has 40% of its revenue from UK passengers which
will reflect the deficit growth in their operational performances. Currently, the firm is operating
over the Governance of European authorities which in turn is helpful for business in having the
favourable rates and policy procedure which will be beneficial for them (Mele, 2017). However,
it is assumed that after 2019, there will be influence of UK government in the policies and
procedures which will bring the negative impacts over the revenue gathering of the business.
However, it terms with overcoming such major issue and preventing the business from
the effect of BREXIT, the firm has started making suitable changes in the operations. They have
1

planned to introduce Eurojet UK plc which in turn serves the UK citizens as well as have the UK
governance with the help of leasing the 10 Boeing aircrafts 737. Thus, with such plan they will
continue to make the fruitful industrial operations. It is being assumed by the owners or directors
of this company that if EuroJet UK Plc will have the sound growth in the coming time then they
will acquire such company. They have planned to make the lease of such 10 Boeing aircraft for
10 years of period at the fixed annual cost for US$403 Million per annum from 2019 to 2024.
They have planned to make the main base of such Aircraft at Stansted in UK which is the best
market hub for this aviation industry. Thus, after the completion of such period, EuroJetperiod,
EuroJet UK plc will have satisfactory growth in the coming time as in 2024 there will be
requirement for refurbishment of aircraft at the cost of 12 million pounds per aircraft. There have
been calculations which will evaluate the viability of the projects which are introduced by the
company as well as make suitable changes in the business operations. However, the impact of
BREXIT will negatively influence the market of this corporation in terms with changes in the
taxation, interest rates, currency rates and various norms and regulations will influence the
operations of this business.
Theory of FOREX:
FOREX is the largest financial market which in turn helps and affect the forex market of
every country such as currency rates and import or exports. Therefore, there have been various
rules and regulation of various nations which in turn influence the trade and commerce of
businesses. In accordance with the aviation industries, there have been influence of various
nations (Dymova, Sevastjanov and Kaczmarek, 2016). There have been variations in economic
and political environment in such countries as changing currency rates, taxation policies, laws
and ethics as well as cultural variations. In terms with the EuroJet aviation industry, the firm will
be highly affected by the changes in the market and the impact of BREXIT will influence the
operations of this business (Foreign Exchange Markets and Exchange Rates, 2017). However,
the main issue is arising that the fluctuating exchange rates is the main reason behind the
financial obstacles in industrial operations. There have been various approaches and terms which
were being the reason for affecting the business of Eurojet in the Forex context such as:
Exchange rate:
2

In accordance with the variation in the rates of each country's currency which in turn
helps the nation in context with retaining the maximum revenue as well as bring the economic
stability. Thus, the variations in the rates determines the economic viability of such nation, for
instance, USA Dollar is the most preferred currency in the world because of less fluctuation in
the rates of such currency as well as the sound economy of this country (Harish and
Sathyanarayana, 2016). There will be three kinds of trade which in turn affects the economic
conditions of such nations as well as have impact over foreign exchange market such as swap,
forward and spot.
Purchasing Power Parity:
This is the economic theory which in turn represents that the pricing level between two
nations must be equivalent to other exchange rate adjustments. In accordance with such model,
the business will be fruitful in terms of having suitable benefits from importing the goods in the
national boundaries (Li and Zhang, 2017). Therefore, if there is large gap between prices and the
purchasing rate then the arbitrage opportunity is being created and the country is being suggested
to make the selling of such products and services at the lower rates. In context with EuroJet, the
company need to have satisfactory exchange rates in UK and the relevant nations which in turn
do not affect the rate of tickets and the revenue gathering of this organisation. However, the
formula to analyse such PPP approach is as follows:
Interest and exchange rate parity:
In consideration with this approach such as IRP which in same as Purchase power parity
but there is no Arbitrage facility is awarded to any nations. This concept lies over the method
that wall the goods and services must be exchanged over the same rates in both the nations.
Thus, it can be said that these is the one price law which in implicated over both the countries.
Therefore, there will be benefits of having the same returns and yield from such countries which
in turn are helpful for the business in terms of having satisfactory business operations. EuroJet
will be beneficial if the rates of tickets and the services offered by them in the business or in the
one country will be same as another so, it will become profitable for them in context with having
3

the same returns for such operations (Sidehabi and Tandungan, 2016). However, here the
exchange rate policies will not affect the business of such organisation. Therefore, to calculate
the Interest rate parity which will be mutually agreed by both the countrriescountries lies over
the formula such as:
Balance of Payments:
These are the measurement which are relevant with the monetary transactions between
two nations. Therefore, it considers the current and capital accounts of such countries as well as
facilitate suitable solutions to lower down the costs of goods and services which are imported
and exported by the nation. It measures the total inflows and outflows of the products a service
within the nation as well as estimates the surplus and deficit value of such operations. However,
if the balance of capital and current account reflects the surplus value that determiners that the
exports of the nation is more than its imports which in turn reflect the positive balance of
payments. Therefore, in accordance with the deficits in such accountants which is the reciprocal
of such concept that the imports are higher than compared to the exports of the nation. Hence, it
will be representing the unfavourable or negative balance for BOP (Omondi, 2016). However,
EuroJet will consider the exchange of such monetary transactions as well as have the favourable
balances in trading the aviation services in both the nations. Therefore, there is need to determine
the prices of the tickets which has been offered by the firm in context with meeting the
favourable balances.
Asset Market model:
In terms of making the purchase of the currency the inflows of money in a nation by the
foreign investor in terms of obtaining shares, debenture and bonds from the organisation. Here,
the theory comprises over the concept that the total balance in the capital account of BOT must
be compared to the current account in the BOP (Galeshchuk, 2017). Thus, with the help of such
4

theory and the implication of these policies, the flow of international currency will be at bull as
well as have the increment benefits form that.
Monetary Model:
To consider the monetary transactions in the country, this policy will help to determine
the interest rates of both the countries. A country's monetary policy can be determined by its
supply of money as well as the rates are to be fixed by the central banks. Thus, to make the
sound monetary environment in the economy of the country the focus is paid over the planning
the adequate interest rates as well as helps on rapid growth of the nation (Priewe, 2017).
However, in terms with EuroJet UK plc it can be said that if the European government and the
UK government has the adequate monetary policies which in turn helpful for the firms in context
with making the adequate growth as well as make the fruitful contribution in the national
economy.
Measurement of WACC for EuroJet
In terms with the measurement for WACC of EuroJet UK plc, there have been
determination of all the capital revenue of the organisation such as preference shares, common
shares, bonds as well as the long termlong-term debts which indicates that all the debts have the
equal or proportionate weight-age. Therefore, it can be beneficial in terms of making adequate
utilisation of such resources (Mele, 2017). However, if the increment in the rate of return in
equity as well as beta in WACC measurements than it specifies raise in the risk as well as
reduction in the valuations of such assets of the organisation.
Particulars UK
Republic of
Ireland
Corporate tax rates 19.0% 12.50%
Beta 0.947
UK treasury bonds Yield 1.60%
ordinary shares currently trading 9.68
currently trading Loan stock @ 100.51
share capital (1560000*0.5) 780
loan stock @ 4% (for 2026) 320
5

Interpretation: In consideration with the above-mentioned table which represents that
there have been payments for the corporate tax at the rate of 19.05 in UK while in Ireland, it is
12.50%. There has been rate of beta rate and the treasury yield bonds for UK at the rate of 0.947
and 1.60%. The share of Eurojet as the ordinary share the rate will be 9.68 and the current
trading loan stock at 100.51. The share capital of the company will be measured at 1560000
shares for 0.5 rate which represents the value at 780 and same with the loan over shares till 2026
for the 4% rates represents the value at 320.
Data entry area
Enterprise Value (EV)
Market Price (Current) 10
Shares (Diluted) 156
CAPM Assumptions Market Capitalisation
1,51
0
K(e) 1.98% Liabilities (Long Term) 320
RFR 1.6% Less: Cash
Beta 0.95 Enterprise Value (in lacs)
1,83
0
R(m) 2%
Report area
Debt Equity Weight-age
E/(D+E) @ EV 82.51%
D/(D+E) @ EV 17.49%
Interest Rate 4%
Tax Rate 19%
WACC Measurement
WACC 2.20%
6

Interpretation: In accordance with the WACC measurements, the business has obtained
various Enterprise value rate at 82.51% and 17.79% respectively. The interest and tax rate of the
company is at 4% and 19% respectively. Hence, with the help of such tools the WACC was
measured at 2.20%.
Measurements for NPV of EuroJet
To measure the NPV, there is need to analyse the cash inflows and outflows for the
period which are based on the initial investment as well as the expense or revenue incurred
during the period (Net Present Value, 2017). However, Euroject has presented the various
balance which are representing the cash flows of the period and then the measurements will be
based on determining the net present value.
Year
2018 (initial
investment) 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
60 (m)
Scheduled
Earning 528.69
534.
08
539.
53
545.
03
550.
59
556.
21
561.
88
567.
61
573.
40
579.
25
Ancillary Earning 148
149.
55
151.
12
152.
71
154.
31
155.
93
157.
57
159.
23
160.
90
162.
59
Total Earning 676.69
683.
6366
38
690.
6545
9790
76
697.
7446
1210
14
704.
9074
2048
15
712.
1437
7054
71
719.
4544
1747
44
726.
8401
2419
52
734.
3016
6147
71
741.
8398
0800
34
Staff Expenses 35.15 35.5 37.3 39.2 41.1 43.2 45.3 47.6 50.0 52.5
Oil and Fuel 152.47
154.
07
155.
69
157.
32
158.
98
160.
64
162.
33
164.
04
165.
76
167.
50
Repairs and
Maintenance 9.78 9.9 10.0 10.1 10.2 10.3 10.4 10.5 10.6 10.7
handling charges
and Airport 49.37
49.8
7
50.3
8
50.9
0
51.4
2
51.9
4
52.4
7
53.0
0
53.5
5
54.0
9
Administration & 16 16.1 16.3 16.5 16.6 16.8 17.0 17.1 17.3 17.5
7

Marketing costs 1 6 3 0 7 4 1 9 7 5
Aircraft
Refurbishment 120
charges of Route 39.2
39.6
0
40.0
0
40.4
1
40.8
2
41.2
4
41.6
6
42.0
9
42.5
2
42.9
5
Lease Expenses 310 310 310 310 310 310 310 310 310 310
Total Costs 611.97
615.
1019
28
619.
6761
7289
05
624.
3682
5619
88
629.
1829
1869
74
754.
1251
2624
35
639.
2000
8090
92
644.
4132
3266
62
649.
7702
9165
5
655.
2772
4106
43
Profit (Earning -
expenses) 64.7 68.5 71.0 73.4 75.7
-
42.0 80.3 82.4 84.5 86.6
0.978
0.95
7
0.93
7
0.91
7
0.89
7
0.87
8
0.85
9
0.84
0
0.82
2
0.80
4
63.33
65.6
2
66.4
9
67.2
6
67.9
2
-
36.8
4
68.9
1
69.2
6
69.5
0
69.6
3
8

Interpretation: In consideration with the above-mentioned report, the business will be
beneficial in terms of making adequate changes in the operational activities as well as the
printability of the investments made in such investments made by the organisation during such
period. The Eurojet has initial investment of 60 million in the year 2018 and then the rest of the
period starts from 2019 to 2028; the business has the cash flow which in turn represents the
profit in such years as well as fruitfulness of the project. Hence, it can be suggested to the
managers that the firm is having adequate benefits from such investment as well as they would
be able to attain the favourable returns in the coming time.
CONCLUSION
To improve the revenue retention of EuroJet in the UK aviation market, there is need to
make adequate changes in the operational activities of the business. Hence, with the help of this
report, the suitable solution and conclusion will be made which in turn helps the business in
underrating the WACC returns as well as NPV of the period. Further, it can be said that the
project will be beneficial for this industry in terms of profitability and the market strength in UK
environment. There has been decision which are based on the various Forex theories that will
help in determining the policies and procedure of economy.
9

REFERENCES
Books and Journals
Dymova, L., Sevastjanov, P. and Kaczmarek, K., 2016. A Forex trading expert system based on
a new approach to the rule-base evidential reasoning. Expert Systems with Applications.
51. pp.1-13.
Galeshchuk, S., 2017. Technological bias at the exchange rate market. Intelligent Systems in
Accounting, Finance and Management.
Harish, S. N. and Sathyanarayana, S., 2016. Forex Market Weak Form Efficiency and
Seasonality: Evidence from India. Kuwait Chapter of Arabian Journal of Business and
Management Review. 6(4). pp.21-36.
Li, Y. and Zhang, X., 2017. China's National Balance Sheet: Theories, Methods and Risk
Assessment. Springer.
Mele, M., 2017. A Logical Process about the Chaos in FOREX Financial Market. Asian Journal
of Finance & Accounting. 9(1). pp.105-115.
Omondi, O. G., 2016. Welfare Economics of IPO’s: The Deal that Never was. Kenya. Int J Econ
Manag Sci. 5(340). p.2.
Priewe, J., 2017. Review of exchange-rate theories in four leading economics textbooks.
European Journal of Economics and Economic Policies. 14(1). pp.32-47.
Sidehabi, S. W. and Tandungan, S., 2016, November. Statistical and Machine Learning approach
in forex prediction based on empirical data. In Computational Intelligence and Cybernetics
(CYBERNETICSCOM), 2016 International Conference on (pp. 63-68). IEEE.
Online
Net Present Value. 2017. [Online]. Available through
:<http://financeformulas.net/Net_Present_Value.html>.
PDF
Foreign Exchange Markets and Exchange Rates. 2017. [PDF]. Available through
:<http://spu.fem.uniag.sk/cvicenia/kf/cierna/Medzinarodne%20Financie/IF%2008-09-LS
%20druhy.r.%20AJ/Theory/5-6%20Course.pdf>.
10