This excerpt is based on a case study related to Southwest Airlines company limited, one of the world’s largest transport companies. The vision of the business is to connect people to what's important in their lives through friendly, reliable, and low-cost air travel. In 2000 a finance expert was appointed as CFO of Southwest Airlines. In the first year of his engagement, his advice helped the company doubled their EBIT by 20%. Recently, you have been appointed by Ghana Cocoa Board as the CFO. You’ve just received an email from the head of Public Relations department, referencing a statement posted on a popular social media site on what the CFO of Southwest Airlines accomplished: “In early 2001, when oil prices were close to $20 per barrel, a hedging strategy was developed to protect the airline from a surge in oil prices. By the time oil prices soared above $30 per barrel later that year, Southwest had signed contracts guaranteeing a price for its fuel equivalent to $23 per barrel. However, had oil prices fallen below $23 per barrel in the fall of 2000, Southwest’s hedging policy would have obligated it to pay $23 per barrel for its oil. Southwest accomplished its objective by locking in its cost of oil at $23 per barrel, regardless of what the price of oil did on the open market” Required: Consider what business issues could arise as well as the ethical concerns with this Hedging strategy. You should consider what may be the most relevant principles in addressing the Southwest Airlines dilemma and address another case study below: Your off taker a chocolate maker will need 10,000 tons of cocoa beans next year. Suppose the current market price of cocoa beans is $1400 per ton. At this price, the firm expects earnings before interest and taxes of $22 million next year. What will the firm’s EBIT be if the price of cocoa beans rises to $1950 per ton? What will EBIT be if the price of cocoa beans falls to $1200 per ton? What will EBIT be in each scenario if the firm enters into a supply contract for cocoa beans for fixed price of $1450 per ton?
This excerpt is based on a case study related to Southwest Airlines company limited, one of the world’s largest transport companies. The vision of the business is to connect people to what's important in their lives through friendly, reliable, and low-cost air travel. In 2000 a finance expert was appointed as CFO of Southwest Airlines. In the first year of his engagement, his advice helped the company doubled their EBIT by 20%.
Recently, you have been appointed by Ghana Cocoa Board as the CFO. You’ve just received an email from the head of Public Relations department, referencing a statement posted on a popular social media site on what the CFO of Southwest Airlines accomplished:
“In early 2001, when oil prices were close to $20 per barrel, a hedging strategy was developed to protect the airline from a surge in oil prices. By the time oil prices soared above $30 per barrel later that year, Southwest had signed contracts guaranteeing a price for its fuel equivalent to $23 per barrel. However, had oil prices fallen below $23 per barrel in the fall of 2000, Southwest’s hedging policy would have obligated it to pay $23 per barrel for its oil. Southwest accomplished its objective by locking in its cost of oil at $23 per barrel, regardless of what the price of oil did on the open market”
Required:
- Consider what business issues could arise as well as the ethical concerns with this Hedging strategy.
- You should consider what may be the most relevant principles in addressing the Southwest Airlines dilemma and address another case study below:
Your off taker a chocolate maker will need 10,000 tons of cocoa beans next year. Suppose the current market price of cocoa beans is $1400 per ton. At this price, the firm expects earnings before interest and taxes of $22 million next year. What will the firm’s EBIT be if the price of cocoa beans rises to $1950 per ton? What will EBIT be if the price of cocoa beans falls to $1200 per ton? What will EBIT be in each scenario if the firm enters into a supply contract for cocoa beans for fixed price of $1450 per ton?
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