......FINANCE ONLY WHO HAS KNOWLEDGE IN FINANCE AND CALCULATION TO BID

Introduction

This paper analyzes the Coca Cola Company’s investment in South Korea, which includes establishing a manufacturing plant for production of beverages in South Korea. The profile consist an estimation of future cash flows for the next ten years and the net present value for the proposed project. The investment is analyzed from both the subsidiary perspective and the parent company to take into consideration the international aspects involved in the investment. The initial capital outlay is estimated at $50.50 million, which equals to 43,733.45 million South Korean won. The project is financially viable because of a net present value of $250.13 million. The investment is expected to meet the growing demand for beverages in the country and the neighboring nations.

You have to make the introduction different as look very similar to the example I sent so please change it …

COCA COLA INVESTMENT IN SOUTH KOREA 1

Financial Analysis

Invested Capital and Loan Repayments ( I invested 70% debt 30% equity you didn’t read the last paper and not even my chat so please change and change anything in the text that support this )

Coca Cola Company expects that the project in South Korea will cost $50.50 million, which is equal to 43,733.45 million South Korean won. The initial capital outlay will cover: construction cost; machineries; cost or raw materials; and selling, general and administration expenses. The Company will finance the initial capital outlay with 70 percent equity and 30 percent debt.The entire debt will be issued in South Korean won. The cost of capital for the South Korean project was estimated at 9.0 percent, after taking into account the international complexities that include high interest rate, increase in taxes and foreign currency flucations. Table 1 shows the percentages of debt and equity financing for the project

Table 1: Cost of Capital (the table is wrong you have to invest 70% debt and 30% equity according to part 2)

The South Korean loan is expected to mature in 10 years, and it is assumed that the loan would be issued at a fixed annual rate of 2.14 percent. This is based on South Korea’s previous year’s loan interest rates, which the Organisation for Economic Co-operation and Development(2019) indicates stood at 3.5 percent. In light of this, the company will pay an interest of South Korean won 290.83 million, which is equivalent to $0.336 million. The figures were computed by multiplying $15.595 by 3.5 percent to get the interest rate in United States dollars. The resultant figure was multiplied by 866.009 in order to convert the value in South Korean won. The 866.009 is prevailing the purchasing power parity

Sales

The sales figures are based on the company’s annual return per region in the year 2018. Coca Cola’s consolidated net operating revenue for 2018 was $31,856 million, with the Asia Pacific region contributing 15.4% or $4,905.824 million. There region has 6 principal syrup plants, 11 distribution and storage warehouses. For this reason, each operating unit contributed $288.58 million. Hence, it is anticipated that the net sales for year 0 are then expected to be $288.58 million, which equals to 249,912.88 million won. Sales are expected to increase at a constant rate of 5% for the first five years and increase to a constant 10 percent for the remaining 5 years (see appendix 1.0). The rapid expansion is justified by increasing demand for beverages in the region. The other sales* values include the rate of inflation in South Korea, which Trading Economics (2019) observes increased to 0.6 percent in April 2019.

Costs

The costs have been computed as a percentage of sales based on Coca Cola Company’s annual result for 2018.The company’s cost of sales accounted for 36.95% of net sales. Selling, general and administrative expenses accounted for 32.35% of net sales. Other operating expenses constituted 3.39 percent of net revenue (SEC 2018). Assuming the company decided to follow the 2018’s trend then the cost of sales for the new project will be 36.95% of sales. Selling, general and administration expenses will be approximately 32.35 percent of the net revenue. Operating expenses is expected to account for 3.39 percent of net sales (see appendix 1.1).

Tax and Dividend Obligations

In South Korea, companies are always required to incur corporate tax expenses. The amount is based on net income organizations earn when conducting their business activity, usually within one financial year. Revenues from corporate tax are important source of revenue or income for the South Korean government (Trading Economics 2019). In South Korea the national corporate tax rate is 25%. The highest marginal rate rose from 22 percent as from January 2018. The corporate rate is 10 percent on the first South Korean won of 200 million of taxable income. The rate increases to 20 percent on income above 200 million won up to 20 billion won. The corporate tax rate for income above 20 billion won up to 300 billion won is 22 percent. The value increases to 25 percent for income over 300 billion won. Local surtax of 10 percent on corporate income tax due applies. Branches are subject to subsidiary profit tax ranging between 5 percent and 15 percent if permitted under tax treaty (Deloitte 2018).

Coca Cola Company will be subject to a national corporate tax of 22 percent for the first three years because the net incomes fall in the 20 billion won-300 billion won tax bracket. From the 4th year the company will be charged a corporate tax rate of 25 percent because the net incomes will be greater than 300billion won. Coca Cola Company will also pay local surtax rate of 10 percent on the corporate income tax due (see appendix 1.2). From the parent company perspective, the company will incur a corporate tax of 19.4 percent, which is the effective tax rate (SEC, 2018). The United States Securities Exchange and Commission (2018) indicate that Coca Cola paid more than $6,644 million in form of dividends in the financial year 2018. Therefore, it is anticipated that the new project will pay 20.5 percent of profit after tax as dividends (see appendix 1.3).

Cash Inflows and Net Present Value

Coca Cola Company’s net cash flow, after repatriation of profits to the United States, equals to $492.64 million. The net cash flow is obtained by subtracting dividends from profit after tax. By using 9 percent as the discount factor, the discounted cash flow amounts to $300.63 million. Net present value is $250.13 million, which is the difference between the discounted cash flow and the initial capital outlay of $50.50 million (see Appendix 1.4).While the project seems to be subject to high exchange risk effects when translating the profits from South Korean won to the United States dollars, it resulted in high net present value of $250.13 million. The project is, therefore, acceptable.

International Complexities (by looking at the example I see that what he used are more relevant for international complexity please have a look an make sure that what you wrote are related to international complaexity )

As of December 31, 2018, Coca Cola Company had 292 operating units located in 6 operating segments: Europe, Middle East and Africa; Latin America; North America, Asia Pacific, Bottling investments; and corporate. Hence, the company could be affected by changes in foreign exchange rates. The company earns revenues, pays its expenses, owns assets as well as incurs liabilities in other nations using currencies other than the United States dollars. In 2018, for instance, Coca Cola Company used 72 different currencies excluding the United States dollars and derived net revenue of $20.5 billion from international operations. The company always presents its consolidated financial statements in United States dollars (SEC 2018).

For this reason, it must translate assets, liabilities, revenues, income as well as expenses into United States dollars at the prevailing exchange. Therefore, an increase or a decrease in the value of the United States dollar against foreign currencies affect Coca Cola’s net operating revenues, the operating income plus the value items in balance sheet that are denominated in foreign currencies(SEC 2018). By investing in South Korea, Coca Cola is exposed to currency fluctuations between the United States dollar and South Korean won. At present, $1 is equivalent to 866.009 won (OECD, 2019). Hence, it is important to take into consideration the foreign exchange movements.

Increase in Interest Rates

Coca Cola Company maintains debt levels that it considers prudent based on its cash flows, debt to equity ratio and interest coverage ratio. It uses debt financing to lower cost of capital, thereby increasing return on shareholders’ equity. Nonetheless, this exposes the company to adverse changes in the interest rates. For instance, an increase in interest rates can negatively affect the company’s net income. Whenever appropriate the company uses derivative financial instruments to reduce the exposure to interest rate risks. Even so, the Coca Cola’s financial risk program may not reduce exposure to interest rate fluctuations. Coca Cola’s interest rate expense can also be affected by the company’s credit ratings (SEC 2018).

Increases in Corporate Tax Rates and Changes in Tax Laws

Coca Cola Company is subject to income tax in various jurisdictions in which it generates profits. Its overall effective tax rate is based on the applicable tax rates as well as the geographical mix of income from continuing operations before taxes. Consequently, any unfavorable movement in tax rates, foreign exchange rates plus geographic mix, would reduce the company’s after tax income. The company’s annual tax rate is based on its income and the applicable tax laws in various jurisdictions it operates. Effective judgment is necessary for determination of the annual income tax expense and evaluation of tax position. In as much as the company tries to have reasonable tax estimates, the tax audit determination could materially differ from its historical income tax provisions as well as accruals (SEC 2018).

Reference List