Global capital budgeting

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For this final milestone, you will complete the Final Project Section 3: Global Expansion Financing, in which you will outline how you will secure funding for the corporation you have chosen for your final project. This section will include information about available local financing, parent company contribution, and any additional financing the company will use to finance its global expansion.

To complete this assignment, review the Milestone Three Guidelines and Rubric document.

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INT 620 Milestone Three Guidelines and Rubric: Global Expansion Financing Overview: For this first milestone, due in Module Seven, you will complete Section 3: Global Expansion Financing, which will outline how you will secure funding for the corporation you have chosen for your final project. This section will include information about available local financing, parent company contribution, and any additional financing the company will use for its global expansion. Prompt: First, review the annual financial statements (Form 10-K) for your selected company. You can either retrieve the statements from the webpage SEC EDGAR Company Filings or directly from the company’s website, often listed under “Investor Information.” Second, review the Module Seven resources, which provide helpful links to financing information. Finally, complete the Final Project Milestone Three section in the Final Project Template. The paper should outline the current capital structure for the selected parent company and the funding details for the new foreign subsidiary. You will need to research the potential sources of funding and determine how best to finance the expansion. Be sure to analyze the capital structure of the new company for debt financing, stock issue financing, or using retained earnings from the parent company. Specifically, the following critical elements must be addressed:  Section 3: Global Expansion Financing A. Analyze the current capital structure of the parent company. This should be done using the current annual statements. B. Determine the funding your corporation should secure for this expansion into a global market. For example, you need to determine if the company will finance its expansion by using debt, issuing new stock, or using retained earnings of its expansion. Look at the current capital structure and use it as a guide for the subsidiary structure. C. Analyze the financing of the new expansion. Consider financial requirements and how foreign currency will be acquired. Since the company will need to have foreign currency (currency of the country it is expanding into) on hand from day one of the company operations, determine how it will obtain the foreign currency. What are the options of local financing—including any regulations on local currency reserves? Be sure to refer to the Module Seven resources, additional course materials, and your own research to support your responses. Incorporate instructor feedback on this milestone into your final project, the global expansion proposal. Rubric Guidelines for Submission: This milestone should be submitted as a Word document, 2–3 pages in length, double-spaced, using 12-point Times New Roman font, one-inch margins, and the latest edition of the APA manual for formatting and citations. Critical Elements Section 3: Capital Structure Proficient (100%) Analyzes the current capital structure of the parent company Needs Improvement (70%) Analyzes the current capital structure of the parent company, but analysis is cursory or lacks important details Not Evident (0%) Does not analyze the current capital structure of the parent company Value 30 Section 3: Funding Section 3: Financing Articulation of Response Determines the funding the corporation should secure for this expansion into a global market Analyzes the financing of the new expansion Submission has no major errors related to citations, grammar, spelling, syntax, or organization Determines the funding the corporation should secure for this expansion into a global market, but response is cursory or lacks important details Analyzes the financing of the new expansion, but analysis is cursory or lacks important details Submission has major errors related to citations, grammar, spelling, syntax, or organization that negatively impact readability and articulation of main ideas Does not determine the funding the corporation should secure for this expansion into a global market 30 Does not analyze the financing of the new expansion 30 Submission has critical errors related to citations, grammar, spelling, syntax, or organization that prevent understanding of ideas Total 10 100% Running head: THE COCA-COLA EXPANSION PLAN The Coca-Cola Expansion Plan Southern New Hampshire University INT 620 1 THE COCA-COLA EXPANSION PLAN 2 Introduction: Company Selection The aim is to expand the market of Diet Coke in both domestic and international market. The company selected is The Coca-Cola Company. It is an American multinational beverage industry having more than 500 non-alcoholic beverage brands. It has its headquarter located in Atlanta, Georgia, the U.S. The Coca-Cola Company is responsible for producing concentrated syrup which is then distributed to various manufacturers across the world. The company is selected because it is a publicly traded company and listed in the NYSE. Also, the financial statement is listed with the SEC. Since, The Coca-Cola Company is a publicly traded company where financial capital can be raised, which can then be used for R&D, fund capital expenditure and paying off debt. Coca-Cola Expansion The Coca-Cola brand is famous all over the world. The country selected for this purpose is Cuba. ("In which countries is Coca-Cola not sold?", 2012). One important reason for making an expansion in Cuba is that the country follows fixed exchange rate. Since the dollar will not vary according to market condition, therefore the possibility of exchange rate fluctuation is removed which will make The Coca-Cola Company ascertain their profit correctly. Also, Cuba was one of the first countries that Coca-Cola expanded into internationally. However, the US recently lifted the trade embargo with Cuba, which paves the way for Coca-Cola for entering the market and rebuilding its brand. Cuba will be a favorable destination for expansion because of the influx of tourism and jobs being created because of growth in the tourism sector. Further, the geographical distance between Cuba and the US is less, making it a favorable destination for expansion because of the low cost of Coca-Cola products. THE COCA-COLA EXPANSION PLAN 3 Factors in the Domestic Market The US country is the largest economy in the world with the GDP of approximately $18.57 trillion. The GDP of the country is increasing indicating a significant rise in the production of goods and services which is an indication of the increase in demand of diet coke in the future. The inflation rate in the US is around 2.12% ("10-Year Breakeven Inflation Rate", n.d.). The US has been able to maintain its inflation around 2% meaning the price of the product will not increase much, and the company will not have to incur the high cost of operations. Thus, when inflation increases people would not like the product. The income level of the people in the US is rising indicating increase in the consumption of goods and services which signifies an increase in demand for diet coke. Further, the unemployment rate is 4.4% (2017 est) which decreased from 4.9% (2016 ). The microeconomic factors impacting the business decision making of the company are customers and competitors. It is the customers that play an important role in making a decision whether to buy a product or not. Further, the company must consider its competition from major soft drink companies like Pepsi and Red Bull. Factors in the Global Market: Cuba Cuba is a member of The Caribbean Community(CARICOM) whose objective is to promote economic integration among its members. The company has a large tourism market being favorable for Coca-Cola products. State-run enterprises run the economy of Cuba. The inflation rate from 2015 to 2017 averaged 4.6%. The country recorded the highest inflation of 6% in 2013 and lowest of 0.8% in 2008. The GDP of Cuba was 87.13 billion US dollar in 2015 which represented 0.14% of the world economy ("Cuba GDP, “n.d.). The housing and transportation costs are low with the government providing subsidies in the healthcare and education sector. The company must also consider the slow pace of growth of the economy which is a good indication of an increase in demand for diet coke.Now,the government in THE COCA-COLA EXPANSION PLAN 4 Cuba is providing more freedom to its people as they are now able to buy electronic appliances,cell phone and stay in hotels. ("The World Factbook — Central Intelligence Agency," n.d.). It will finally lead to more consumption of diet coke. Exchange Rate Regime The central banks in the US intervene to a small degree to influence the exchange rate. Thus, the US follows floating rate system where the central bank almost never intervenes to manage the exchange regimes. Almost all advanced economies have floating exchange rate regimes ("Finance and Development," n.d.). The economic situation in Cuba is complex as the country follows dual currency system. One currency is The Peso Convertible (CUC) which is the currency used by tourist, whereas The Peso Cubano (CUP) used mainly by Cubans. Presently, the CUC in Cuba is fixed by the Cuban government which is set at a fixed rate of 1CUC=1$ ("Money and Currency in Cuba," n.d.). Economic Factors and Exchange Rate Inflation will not have much effect on countries following fixed exchange rate regime as the foreign currency is pegged to US dollar which is fixed. The main reason for following fixed rate regime by Cuba is that fixed rate system supports a rising standard of living and increasing economic growth. Further, economic growth can be influenced either by increased productivity or investment. Pegged regimes like Cuba have higher investment. A reduction in interest rates increases domestic investment and consumption. However, since Cuba is pegged to US dollar, therefore lowering or the rise of interest rate will not affect the exchange rate between the two countries. There exists a strong relationship between the interest rate,inflation and exchange rates. By changing the interest rates, central banks will exert influence over both inflation and exchange rate. A higher interest rate will cause more foreign capital to attract which will cause the exchange rate to rise. Also, lower interest rate tends to decrease the exchange rate. However, since in the inflation in Cuba is higher than the US, the THE COCA-COLA EXPANSION PLAN 5 impact of interest rate gets lowered. Further, lower inflation in Cuba will exhibit a rising currency value because the purchasing power of the country increases relative to other currencies. However, inflationary tendency gets diminished when government follows fixed exchange rate. Financial Impact The exchange rate movement will impact the company’s financial statement which will be reflected in higher costs and thus lower profit margin. Since the Coca-Cola company has largely based on shareholders. The increase in the value of Cuban currency will lower the profit of the company operating internationally. Thus, the company will experience less revenue as the same amount of good Risk and Benefits One of the most important benefits of expansion includes Cuba’s potential to present new sales opportunity is high which would be realized in the near future. It offers huge growth potential for the Coca-Cola which is the untapped potential market. The main risk associated with doing business for the company is an economic risk. It has a cash flow effect on a company. It is related to uncommitted cash flows which may lead to the reduction in future sales when the dollar is exchanged for Cuban currency. THE COCA-COLA EXPANSION PLAN 6 References Cuba GDP | 1970-2018 | Data | Chart | Calendar | Forecast | News. Tradingeconomics.com. Retrieved 4 March 2018, from https://tradingeconomics.com/cuba/gdp 10-Year Breakeven Inflation Rate. Fred.stlouisfed.org. Retrieved 4 March 2018, from https://fred.stlouisfed.org/series/T10YIE Finance and Development. Finance and Development | F&D. Retrieved 4 March 2018, from http://www.imf.org/external/pubs/ft/fandd/2008/03/basics.htm In which countries is Coca-Cola not sold? (2012). BBC News. Retrieved 4 March 2018, from http://www.bbc.com/news/magazine-19550067 Martin, W. (2017). These will be the 32 most powerful economies in the world by 2050. The Independent. Retrieved 4 March 2018, from http://www.independent.co.uk/news/business/these-will-be-the-32-most-powerfuleconomies-in-the-world-by-2050-a7587401.html Money and Currency in Cuba. Cubagrouptour.com. Retrieved 4 March 2018, from https://www.cubagrouptour.com/information/cuba/money/ 1 Running head: RISKS AND MITIGATION STRATEGIES Risks and Mitigation Strategies SNHU 2 RISKS AND MITIGATION STRATEGIES Risks coca cola is exposed to Coca Cola as a multinational company is prone to risks both in the domestic and overseas markets. A notable risk is the fluctuations in the exchange rates especially in the European market. This risk impacts on the financial performance of the company greatly. Prices of commodities in the market also has economic effects to the company. Interest rates also pose a significant risk to the operations of Coca Cola Company. Political instability especially in the Eurasia and African markets where Coca Cola Company has entered poses economical risks. All these risks pose great challenges to the company since achieving of its profitability obligations becomes a problem. When the financial results are affected by these risks it becomes difficult for firms to meet their strategic goals hence affecting the business negatively (Jain and Kedia, 2011). Foreign exchange rates risk mitigation Companies can manage the exchange rate fluctuations through using a combined foundation which enables the companies’ management to get exposures and obtain benefits from them. Derivative tools are used by many companies to offset these changes which include forwarding exchange products and acquiring of currency options through buying, especially those that have low volatility risks. Through use of these tools the company is able to stabilize their prices and investments since the value of their contracts and sales is determined at a future date hence does not change to reach adverse situations that are detrimental to the organization’s returns on assets. Translation exposures are also used in recording of foreign currencies used in transactions (Coca-Cola., 2013). The translation are recorded in the financial statements without being stated as common currency which allows adjustments to be made in case changes occur. Both short term and long term exposures can be used to reduce these risks depending on the time period the transactions will take place. 3 RISKS AND MITIGATION STRATEGIES Tools used by Coca Cola Company to mitigate foreign exchange rate risk Coca Cola Company primarily uses the derivative financial tools to mitigate this risk of foreign exchange rate fluctuations. Hedging is widely used by the company to offset future changes in the prices of commodities in the foreign markets. The company enters into forward exchange contracts and buys currency options. This helps the company hedge its sales obligation and denominate them using other foreign money. The company also buys currency options, specifically in Japanese yen and European currencies so to hedge certain expected sales. Profits and losses that are realized are recorded in the financial statements as prepaid expenses or other assets (Coca-Cola., 2013). These gains on the derivative tools are labelled as hedges as investments in international markets hence are recorded as part of the shareholders’ equity in form of translation adjustment income. Financial impacts of international foreign exchange risk to inform risk mitigation strategies Generally, foreign exchange risk is defined as risks associated with the unexpected changes or fluctuations in the exchange rates as well as the foreign exchange exposure. Such unexpected changes or fluctuations in the exchange rates impact the value of company’s assets. Normally, foreign exchange risk is experienced when the fluctuation of currencies in foreign nation impacts the competitive position of an organization. Coca Cola can mitigate through foreign exchange risks by trading with nations with strong economic background (Coca-Cola., 2013). Some nations such as USA and China are in good economic condition thus won’t subject both domestic and foreign companies to foreign exchange risks. 4 RISKS AND MITIGATION STRATEGIES Future mitigation strategies Pricing policy can be used to mitigate prospective risks. In this the company can decide to charge more for their commodities after anticipating the foreign currency might devalue with a certain percentage in future. However this strategy is also risky since it may not work well if the fluctuations are more than expected. Purchasing of spot contracts is another strategy that can used to mitigate exchange rate risk (Risk mitigation and management, 2006). These contracts work through fixing the exchange rates from fluctuating hence one does not suffer from any negative fluctuations at the same time not gaining from the positive increases. Prompt payments arrangements is also another strategy that can used. The company may set the payment terms to be short so as to ensure that any contracts are paid before the exchange rates fluctuate too much. 5 RISKS AND MITIGATION STRATEGIES References Coca-Cola. (2013). Coca cola. [Place of publication not identified]: Spruce Books. Jain, S., & Kedia, B. (2011). Enhancing global competitiveness through sustainable environmental stewardship. Cheltenham, UK: Edward Elgar. Risk mitigation and management. (2006). [Idaho Falls, Idaho]. 6 RISKS AND MITIGATION STRATEGIES
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