International Financial Strategy
International Financial Strategy
Short term debt: interest rate x (1-corporation tax rate)
10% x (1-35%) = 0.065
Long term debt: yield to maturity x (1-corporation tax rate)
$17.07 x (1-35%) = $11.1 (million)
Equity: required rate of return
E (Rj) = Rf + βi [E (RM) – Rf]
[E (RM) – Rf] = 6%
β = 1.04
E (Rj) = 6.37% + 1.04 x 6% = 0.1261
WACC = (E/V) x Re + (D/V) x Rd x (1- Tc)
13626/23049 x 10% + 9423/23049 x 6.5% x (1-35%)
= 0.0591+ 0.001727 = 0.0608 or 6.08%
There was global financial recession during the 2008-2010 economic years; this had an adverse impact on many enterprises in terms of financing. All financial institutions including banks could not afford to lend money hence the businesses had to look, for other means to finance their operations; this in some instances included using personal savings. However, a gradual improvement in economic conditions was experienced. This helped in improving particularly in international shipping volumes at FedEx Express, during the third quarter and a strong fourth quarter performance.
The performance at the end of 2010 was positive as compared to the previous two years. The inclusion in 2009 of a $1.2 billion charge related to goodwill, and other impairments of assets caused the earnings obtained, in 2010 to improve greatly although there was a decline in revenues. FedEx deals with fuel so changes that were experienced in fuel prices also had a negative impact on the earnings, particularly in the first half of 2010. The employee compensation programs were reintroduced which greatly improved the performance, during that fiscal year.
There are significant economic variables that FedEx Corporation financial managers need to identify before expanding in Canada this includes:
The extent to which Canada has been affected by the global financial crises, many firms fail to continue in operation due to insufficient funds, many employees were retrenched, and the cost of living was high. Inflationary forces caused prices to escalate, and payment of mortgages was difficult.
First, FedEx should determine if there are incentives or reliefs given to foreign investors like a venture capitalist, tax holidays, and double taxation relief in order to encourage foreign investment. The import duty charged and the corporation tax can discourage foreign investment because if it too expensive the investor will shy away from investing in such a business.
Every employee always wants to belong to a labor organization which basically protects their rights. Potential changes in labor laws could make it easier for the labor organizations attempt to organize groups of employees to join these unions. The cost of operations notably could increase, and the operational flexibility could be greatly be reduced if the business is not able to maintain good relationships with the workers and prevent local and international labor organizations from organizing employees' groups. On the flipside, all of FedEx's United States employees have thus far decided not to unionize, despite the attempts by labor unions, other than the pilots of FedEx Express to unionize the employees.
In connection with this, the financial manager must study the labor laws that exist in Canada before making a decision on whether to invest there. Some labor laws can discourage the business to be dynamic in their operations. Also, in addition some laws could lead, to payment of high legal fees in settlement of employer and employee disagreement. A business should be able to make its rules according to its operation and what it can manage to cater for its employees.
There are market risks to be covered in case of dynamics in the price of the vehicle and jet fuel, this risk is significantly mitigated by the fuel surcharges because the fuel surcharges are closely linked to prices for fuel in the market. The earnings will greatly be affected, and so before any changes they must focus, on both the cons and pros, to avoid running at a loss. The costs of manufacturing and distributing the fuel must also be considered, the earnings must be high enough in order to earn profits and be able to recoup the costs that was spent.
Accordingly, the operating income in a distinct period may be extremely affected should the spot price of fuel abruptly change by a substantial figure or change by quantities that do not conclude in an adjustment, in FedEx fuel surcharges. This will economically affect the operational costs especially when they are deciding to venture into other locations.
FedEx also has to look into the tax laws that exist in Canada, since it is a branch they should find out if there are provisions for double taxation relief and other issues that will affect group accounts. The cost of obtaining raw materials must be relatively cheap also to ensure that they can operate profitably.
Opening a new business can lead to personal and financial rewards in the future, but there are a number of challenges when starting out. However, with careful planning the financial managers can anticipate some of the challenges and be able to overcome them when they occur. As a business is trying to venture into new locations, they should consider first if they can be able to handle the challenges especially financial and operational constraints.
Obtaining financing to open up a new branch can be quite a challenge especially due the difficult economic condition as of 2010. Since Canada is a new location, there are other well established organizations all together hence getting customer base and maintaining customer loyalty may be quite a challenge. A lot of funds will also be spent in marketing so as to introduce the business services to clients. If the business does not get returns they will as a result, suffer losses, at the end.
Obtaining qualified personnel to work can also be a challenge for the financial manager. He has to set aside some funds in order to train the new workers in order to equip them with the technical knowledge of how the business operates. The financial manager should also look into the cost of running the business; operational costs in setting up the business and the legal requirements for foreign investments governing Canada.
References
Joseph C. Challenges of starting a new business from smallbusiness.chron.com accessed on 22/12/2013
FedEx Corporation report http://www.fedex.com/us/investorrelations accessed on 22/12/2013
Martins A. T. Challenges of starting a new business: Entrepreneurship training www.mytopbusinessideas.com
