international finance

Introduction

· There are various ways that Coca Cola Company can finance its proposed new project in South Korea. In particular, the company can issue share and use debt to finance the project. Brealey, Myers and Allen (2017) define equity financing as the issuing of shares to investors to support a firm’s business operations. Debt financing, on the other hand, involves borrowing money in form of loans or bonds to be repaid plus interests. This paper discusses the capital structure considerations for the project, whether the firm should raise the capital locally or from the head office , the working capital implications for the project, cost of capital for the project and how is calculated and some calculations. ( better introduction as is not really good ) Talk about coca cola investing in the project you don’t really need to explain debt and equity be more related with what is this paper showing how you will decide your proportion and be more specific of the project )

Capital Structure Considerations

Shapiro (2014) defines a company’s optimal capital structure as a structure that maximizes a firm’s stock price (more information’s about capital structure use EITMEN as reference ). Firm’s normally study the prevailing situation, make a conclusion as to the optimal capital structure, and then determine the target price. Coca-Cola Company normally invests in projects that can assure the security of funds for long term and the project in South Korea is an example of a project that can lead to long term growth. For this project, Coca Cola Company would set the target capital structure at 60percent debt financing and 40 percent equity financing (why you chose this proportion I need explanation of this choice more details ), as using more debt financing will raise the risk borne by the stockholders, debt financing will increase the expected return on equity; and this would be raised from the United States. This is based on the fact that Coca-Cola Company normally invests in projects that can assure the security of funds.

Shapiro (2014) indicates that borrowing from locally may decrease a firm’s vulnerability to exchange controls. The company can use the local currency profits to service its local currency debt. In addition, borrowing in local currency can help a firm reduce its foreign exchange exposure ( this part should be in the INTERNATIONAL COMPLEXITIES in more details ) .

Equity financing :

Shareholders investing in Coca Cola Company would provide additional cash that can be used to finance the new project in South Korea. An analysis of Coca Cola Company financial returns for the last 5 years, from 2014 to 2018, shows that the organization is financially stable allowing it to use assets for financing. The company ensures that total asset to long term debt does not go below 200%(reference ?) and is this real I think is not a real percentage I need the right one check financial time ) . In 2013 and 2014, the total assets-long term debt ratios were 471.19% and 483.79% respectively(reference and x:y the ration also like this ?). In 2015, the total assets-long term debt ratio was 317.88%, and in 2016, the total assets-long term debt ratio was 293.99% (SEC, 2016 I need different reference from website like financial time or something like that that has good data ). In 2017, the total assets-long term debt ratio was 281.88% (SEC, 2017). The ration need reference from financial times and has also to be in this form (ex 1:2) AS WELL AS the form you did and what does this ration indicates?

A firm may use funds from investors when starting its business operations to finance the start up costs. It can then use cash flow from operations for the growth of the business and to diversify into other businesses. This is due to the fact that investors tend to have a long term view of the organization, and typically do not expect immediate returns on investment (Brealey, Myers & Allen, 2017). This will allow Coca Cola Company to keep more cash in hand for business expansion instead of having to pay part of its profits for loan repayment.

Equity financing also helps to confer legitimacy as it enables firms to tap into investor networks, which enhances their credibility. Adv..Equity financing is that if a firm has prepared a prospectus for investors and made them aware that there money would at risk in the organization’s brand new start up project, the investors will understand they would not reclaim their investment in case the business fails. Finally, this method of financing offers additional advantages in terms of management of a firm. Some prospective investors may provide valuable business assistance that a firm may be unable to provide for itself (Brealey, Myers & Allen, 2017 why you are using the same reference I need more references ).

Disadv. of Equity Financing

The most important disadv of equity financing is that the investors must be guaranteed ownership of the firm. Loss of control or reduced ownership of the firm can also imply that shareholders will have to split profits. In some circumstances, certain investors may be entitled to a portion of the company’s positive returns before others can get even a single dollar. It is also important to note that with time, the distribution of profits in form of dividends to the shareholders may exceed the amount of money the organization may have to pay for loans (Brealey, Myers & Allen, 2017). How is that related to my project is good but need to be related to the project

Debt Financing

As of December 31, 2017, the Standard & Poor 500 rated Coca Cola’s long term debt at A- minus, which is a high grade. The double A-minus rating implies that the company’s capacity to meet its financial obligations is very strong (ref). As it has a high credit rating, the company can easily access short term debts. The United States Securities and Exchange Commission (2017) also shows that the company’s long term debts to total assets for years 2017, 2016 and 2015 were 0.35, 0.34 and 0.31, respectively. In 2014 and 2013, the long term debt to total assets ratios were 0.21 and 0.21 respectively (SEC, 2017 another reference ). This enhances the credibility of the firm which will enhance its ability to raise debts to finance the project in South Korea. Debt financing does not reduce shareholders’ interests in the firms because the investor has no claim to the business equity. Secondly, the investor is entitled to the repayment of the agreed upon loan principle and the interests and has no claims on the future profits of a firm. Moreover, the tax agency can deduct interest on debt on a firm’s tax obligations thereby lowering the actual cost of loan to the firm. In addition, raising debt is not as complicated as equity financing because a firm does not have to comply with the state as well as the federal laws and regulations (Brealey, Myers & Allen, 2017 new reference ).on the other hand ,the company must at some time repay the debt. Also, high cost of debt during difficult financial circumstances can increase the risk of insolvency. A company must also use its cash flows from operations to repay both the principle and the interest payments. Moreover, debt financing always contain restrictions on a firm’s activities, preventing the management from pursuing non-core business opportunities. Finally, a firm must pledge its assets to the investor as collateral and shareholders are in some cases required to guarantee repayment of debt (Brealey, Myers & Allen, 2017).

INTERNATIONAL COMPLEXITIES ( how to reduce risk when its overseas ) please read

SHAPIRO chapter 14 THE COST OF CAPITAL FOR FOREIGN INVESTMENTS

To reduce exposure from losses, subsidiary can use borrowing in local currency.

· Political risk management , CURRENCY RISK MANAGEMENT , LEVERAGE AND FOREIGN TAX CREDITS IF YOU READ Shapiro YOU WILL NEED ONLY TO SUMMARISE IT IN FEW SENTENCES (CHECK SHAPIRO IN THE PICTURE PAGE 396-397) where is this part u should read and summarise this part from shapiro shapter the one I posted with the page number u don’t need to write alot but it has to be in the report with Shapiro reference .

Working Capital Considerations

Optimal management of an organization’s working capital is a critical financial decision that can contribute positively to value creation of a business. A business needs investment to buy fixed assets, which normally remain in use for long period of time. Money invested in fixed assets is referred to as long term funds. Business also requires funds for short term purposes in order to finance its current operations. These investments in short term assets such as cash, trade receivables and inventories are known as working capital( reference ). Working capital, as such, is the current assets used in operations and net working capital is the difference between current assets and current liabilities (Sharma & Kumar, 2011).

An analysis of Coca Cola Company’s financial results shows that the company’s current assets in the years 2017 and 2016 were $36,545 million and $34,010 million respectively (SEC, 2017). The company’s current assets for the years 2015 and 2014 were $33,395 million and $32,986 million, respectively (SEC, 2015 ( use financial time for the data ). The total current liabilities for 2017 and 2016 were $27,194 million and $26,532 million. For the years 2015 and 2014, the company’s current liabilities were $26,930 million and $32,374 million, respectively.

Net Working Capital = Current assets- Current liabilities

Coca Cola Company’s net working capital for 2017:

Net working capital = $36,545 million-$27,194million

= $9,351 million

Coca Cola Company’s net working capital for 2016;

Net working capital =$34,010 million-$26,532

=$7,478 million

Coca Cola Company’s net working capital for 2015;

Net working capital =$33,395million-$26,930million

=$6,465

Coca Cola Company’s net working capital for 2014;

Net working capital=$32,986million-32,374million

=$612 million

It also important to calculate the company’s working capital days, to determine the number of days it takes an organization to convert working capital into revenues.

Working Capital days= (Average working capital x 365)/Annual sales

Coca Cola’s working capital days for 2017;

Working capital days = ($9,351x365)/$35,410

= 96.38 days

According to Shapiro (2014), working capital can help in identifying the funds required for smooth operations of the business day to day activities. The management of working capital is important just as the management of an organization’s long term financial investments. Working capital is also concerned with maintaining liquidity in a firm for smooth running of daily operations and the ability to meet its financial obligations. Therefore, a mismatch in Coca Cola Company’s effective management of the company’s current assets as well as current liabilities would negatively affect the company’s profitability and growth. In the worst scenario, it may cause financial distress of the business entity.

Given that the South Korea is an international project, the company’s working capital may be affected by various international complexities. Shapiro (2014) observes that multinational companies in managing their working capital encounter various risks peculiar to the sourcing as well as investment of funds, like exchange rate risks and political risks. Regarding political risks multinational companies have problems managing the working capital of their subsidiary companies because of geographical divide and the management lack of knowledge regarding the subsidiaries’ financial state of affairs and the working of local foreign markets. Multinational companies also face problems in making financial decisions due to the different taxation systems and rates.