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Diversification Planning

The planning officer of your airline has been gathering information concerning several opportunities for your firm. Since the climate seems good for additional common stock sales and bank loans, the possibilities of expansion through merger and acquisition seem very good. An opposite twist has also presented itself - an offer to purchase your airline. A thorough investigation and analysis by a competent financial analyst specializing in such matters will cost $3,000 for the opportunity listed below and will be completed in three to nine months. This would be a necessary first step in pursuing this business opportunity.

Risk factors as shown below are on a scale of very low risk (1) to very high risk (10). The risk factor takes into account the economic stability of that particular type of business, the difficulty in operating it, competition, and the profit potential.

Scenario:

Begin a new company that would refurbish commuter aircraft. Due to the increasing cost of new aircraft, it is felt that many airlines would be interested in rebuilding and refurbishing their current fleet instead of purchasing a new fleet. The cost would be $2 million and the ROI is estimated to be in the 15%-28% range with a risk factor of 6.

What are your recommendations with regard to this business opportunity, the concepts of diversification planning, and ethical implications?

Solution Preview

Step 1
This option is to begin a new company that would refurbish commuter aircraft. Due to increasing cost of new aircraft it is felt that many airlines would be interested in rebuilding and refurbishing their current fleet instead of purchasing a new fleet. Even though the cost would be $2 million, the return on investment is estimated to be 15-28% range. The risk factor of 6 points shows that the risk is moderate.

Step 2
The entity would be a good investment because more and more companies are rebuilding and refurbishing. This will enable your ...

Solution Summary

This solution explains how diversification is planned. The sources used are also included in the solution.

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