Financing Foreign Operations
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United Airlines recently inaugurated service to Japan and now wants to finance the purchase of Boeing 747s to service that route. The CFO for United is attracted to yen financing because the interest rate on yen is 300 basis points lower than the dollar interest rate. Although he doesn't expect this interest differential to be offset by yen appreciation over the ten-year life of the loan, he would like an independent opinion before issuing yen debt.
a. What are the key questions you would ask in responding to UAL's CFO?
b. Can you think of any other reason for using yen debt?
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Solution Summary
The solution explains the questions that we should ask in relation to financing foreign operations
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a. What are the key questions you would ask in responding to UAL's CFO?
The key questions to ask is -
(1) What is business of UAL? The UAL is in the airline business and it should make profits from its business rather than trying to make profits from financing the business.
(2) How can UAL be sure that interest rate differential will not be offset by yen appreciation? ...
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