Global Expansion Financing

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. I have attached Milestone One and Two so you can follow Three.
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Global Expansion Proposal for Home Depot
Kumyiah McDonald
INT 620 Final Project
1
Contents
Final Project Milestone One (Module Three) ………………………….. Error! Bookmark not defined.
Introduction: Company Proposal and Background……………………………………………………………. 3
Introduction: Subsidiary Expansion ……………………………………………………………………………….. 3
Broad Strokes of the Expansion Plan: Microeconomic and Macroeconomic Factors in
Domestic Market …………………………………………………………………………………………………………. 3
Broad Strokes of the Expansion Plan: Microeconomic and Macroeconomic Factors in
Prospective Global Market ……………………………………………………………………………………………. 4
Broad Strokes of the Expansion Plan: Exchange Rate Regime in Domestic and Prospective
Global Markets ……………………………………………………………………………………………………………. 4
Broad Strokes of the Expansion Plan: Impacts of Economic Factors on Exchange Rates ………. 5
Broad Strokes of the Expansion Plan: Financial Impacts of Exchange Rate Movements on a
Corporation …………………………………………………………………………………………………………………. 5
Broad Strokes of the Expansion Plan: Main Risks and Main Benefits of the Proposed
Expansion …………………………………………………………………………………………………………………… 6
References………………………………………………………………………. Error! Bookmark not defined.
Kumyiah McDonald
INT 620 Final Project
2
Introduction: Company Proposal and Background
The Home Depot, INC is an American company that sells different types of services,
tools, and construction products. Its products are generally meant for DIY (Do It Yourself)
activities. The companies headquarter is in Atlanta and it has several across the entire United
States and-more recently-in other parts of the world, including Canada and South America
(Monestier, 2014).
Introduction: Subsidiary Expansion
A potential strong new market for Home Depot is Sweden. Sweden has a developed
economy and its society is consumerist. The country’s high quality of life is provided by both
high incomes and the universal welfare state. It is likely that Home Depot will find a sufficient
market in this highly consumerist and equalitarian society, as DIY activities are not likely to be
perceived as a sign of poverty as it is thought to have happened when Home Depot expanded in
China (Monestier, 2014).
Broad Strokes of the Expansion Plan: Microeconomic and Macroeconomic Factors in
Domestic Market
The GDP in the United States has grown at 3.0% in the last quarter despite several
disruptions, such as the ones created by the hurricane. This suggests that the American market is
at the present time in a relatively good shape and there are no signs that this will change in the
next quarter. For instance, vehicle sales and core retail suggest that the level of consumption has
remained positive while the unemployment rate has decreased significantly. If a tax reform will
be implemented in the next months, the economic outlook of the country is likely to improve,
though there is no guarantee that this will happen (Gemmell & Au, 2013). Considering that the
Kumyiah McDonald
INT 620 Final Project
3
American market is not at a significant risk of suffering major negative changes in the near
future, Home Depot has little reasons to fear in terms of stability.
Broad Strokes of the Expansion Plan: Microeconomic and Macroeconomic Factors in
Prospective Global Market
There are several macroeconomic and microeconomic factors that suggest Sweden is a
strong economy that is unlikely to suffer any difficulties in the near future that could negatively
impact consumers’ demands. For instance, the country has had an impressive performance in the
second quarter, as the private consumption level has expanded. The industrial production has also
increased since September and there are no signs that would indicate major negative changes. On
the other hand, the country is experiencing an increased level of household debts that are caused
by an increase in house prices in the last years. It is worth noticing that in Sweden the bank is
significantly exposed to changes in the real estate market (Gemmell & Au, 2013). Considering
that Sweden has a healthy economy and the market provides no indications which would suggest
drastic changes in the future, it seems reasonable to assume that Home Depot has reasons to
believe that they will be expanding in a market that is highly stable and predictable.
Broad Strokes of the Expansion Plan: Exchange Rate Regime in Domestic and Prospective
Global Markets
Sweden is one of the few members of the European Union that has not adopted EURO as
the official currency and it currently uses the Swedish crown or krona. The krona is the 9th most
traded currency in the world, likely due to its relative strength and stability.
The exchange rate of the Swedish currency has typically been dependent on the monetary
policies enacted by the Swedish government. In the recent years, however, a managed float
Kumyiah McDonald
INT 620 Final Project
4
regime has been used and it is not clear whether Sweden will return to its old system (Gemmell
& Au, 2013).
The weakest the krona has been relative to Euro was 6 March 2009 when one Euro bought
11.6465 SEK. The strongest the krona has been relative to the Euro was 3.44 years later on 13
August 2012 when one Euro bought 8.2065 SEK. The weakness in the Euro was due to the crisis
in Greece which began in July 2012 and fear of further spreading to Italy and Spain. The average
exchange rate since the beginning of 2002 when the Euro banknote and coins were issued and 1
March 2017 was 9.2884 SEK/EUR (Gemmell & Au, 2013).
Broad Strokes of the Expansion Plan: Impacts of Economic Factors on Exchange Rates
Sweden’s economy is quite stable, for which it is unlikely that the exchange rate will
change significantly in the future. For instance, Sweden’s inflation rate was 1.70 in the last
month and 2.10 in the previous one. The inflation rate hasn’t raised above 5% since 1995
(Gemmell & Au, 2013). Considering that a high inflation rate can often mean a weakening of the
country’s currency, the low and highly stable inflation rate that Sweden enjoys further supports
the country’s image as one with a highly stable economy.
Broad Strokes of the Expansion Plan: Financial Impacts of Exchange Rate Movements on a
Corporation
Changes in the exchange rate can significant impact corporations. For instance, if Home
Depot decides to sell its good in a foreign market and the U.S. dollar strengthens, the financial
impact on the company will be negative, as it will either have to increase the price of its products
in the foreign market either to exchange the same amount of money of the same currency (e.g.,
Swedish crown) for a stronger dollar, which means less revenue.
Kumyiah McDonald
INT 620 Final Project
5
Broad Strokes of the Expansion Plan: Main Risks and Main Benefits of the Proposed
Expansion
The proposed expansion comes with both benefits and inconvenient. On one hand, the
company will benefit from expanding in a country that has a large market potential and a very
stable economy. On the other hand, the country will have to learn how to market their products in
a country that has a culture with which it may be less familiarized, though this is probably less
true in the case of Sweden than it was in the case of China. Another risk that the company is
facing is the possibility that the dollar will gain strength in the near future. While in the recent
months the dollar has weakened as a result of different political events, it has been increasing for
a long time and if certain factors that have weakened the dollar in the last months would be
solved, it is quite likely that the currency will surpass its last highest level.
Kumyiah McDonald
INT 620 Final Project
6
References
Monestier, T. J. (2014). Where is Home Depot’At Home’? Daimler v. Bauman and the End of
Doing Business Jurisdiction.
Gemmell, N., & Au, J. (2013). Do smaller governments raise the level or growth of output? A
review of recent evidence. Review of Economics, 64(2), 85-116.
Kumyiah McDonald
INT 620 Final Project
7
Global Expansion Proposal
Home Depot Inc.
Kumyiah McDonald
12/22/17
Kumyiah McDonald
INT 620 Final Project
1
Contents
Final Project Milestone Two (Module Five) ……………………………………………………………………….. 3
Risk Mitigation Strategies: Current Financial and Strategic Impacts of International Risks …… 3
Risk Mitigation Strategies: Mitigating Foreign Exchange Rate Risk and Justifying Tools …….. 3
Risk Mitigation Strategies: Analyze Financial Impacts of Foreign Exchange Risks to Inform
Risk Mitigation Strategies …………………………………………………………………………………………….. 4
Risk Mitigation Strategies: Future Mitigation Strategies Based on Prospective Market ………… 4
References………………………………………………………………………………………………………………………. 6
Appendix………………………………………………………………………………………………………………………… 7
Kumyiah McDonald
INT 620 Final Project
2
Final Project Milestone Two (Module Five)
Risk Mitigation Strategies: Current Financial and Strategic Impacts of International Risks
Home Depot faces a number of risks in the international market. Just like in the United
States, the corporation international operations are affected by the respective country’s laws and
customs (Home Depot Inc., 2017. Other main operational risks that face Home Depot as a result
of international trading is the adverse tax consequences, difficulty in enforcing intellectual
property rights and corrupt local authority.
In addition to the operational risks, the corporation also faces translation risk. The
translation risk is caused by the fluctuations in exchange rates (Home Depot Inc., 2017). The
corporation’s international operations are done using the local currency, and hence there is a need
to translate these balances when preparing the consolidated financial statements. As a result, the
company always has foreign exchange loss or gain which is not easy to predict since the
exchange rates keep fluctuating. Such fluctuations have a significant impact on the corporation’s
sales and net income margins making this risk the main international market risk that affects
Home Depot Inc. Apart from the two main risks discussed above, the corporation also faces
economic risks as a result of different economic conditions in the respective countries as well as
the global economic conditions.
Risk Mitigation Strategies: Mitigating Foreign Exchange Rate Risk and Justifying Tools
The corporation exposure to the foreign exchange rate is not material since the company
do not have many subsidiaries (Home Depot Inc., 2017). However, the corporation uses
derivative from time to time to mitigate and control its exposure to foreign exchange risk.
Kumyiah McDonald
INT 620 Final Project
3
Risk Mitigation Strategies: Analyze Financial Impacts of Foreign Exchange Risks to
Inform Risk Mitigation Strategies
Foreign exchange risks have an impact on the company’s financials. As indicated in the
tables in the appendix, an increase or decrease in an average exchange rate can either increase or
decrease a company’s balance. Such increase or decrease in the exchange rate is normally
brought about by either appreciation or depreciation of a currency. This either be the functional
currency or the foreign currency. Either way, the company’s financials will be affected.
From the tables in the appendix, it is evident that a 5% appreciation in the dollar would
increase the proportion of income from the corporation subsidiary whereas depreciation would
decrease the subsidiary revenue proportion. A 5% appreciation in the dollar increases the income
proportion to 8.88% in 2016 compared to the initial 8.46%. A 5% depreciation, on the other
hand, reduces the 2016 income proportion by 0.43%.
Risk Mitigation Strategies: Future Mitigation Strategies Based on Prospective Market
Home Depot Inc. is planning on opening more subsidiaries, and as a result, the exposure
to foreign exchange rate impact on its financials will become material. Therefore there is need to
come up with future risk mitigation strategies to help the corporation remain competitive. One
common way of mitigating foreign exchange risk is spot contract (Hakala & Wystup, 2007). A
company can buy spot contract to hedge the foreign exchange risk. By so doing the company is
protected from losses during the downswings but does not benefit from the upswings. Also, the
company will have to bear the cost of buying these contracts.
Another common contract that can be used to mitigate foreign exchange risk is the
forward contracts. Forward contracts can be as either a hedging tool or a speculation tool (Hakala
& Wystup, 2007). Last but not least a company can decide to control its foreign exchange risk
Kumyiah McDonald
INT 620 Final Project
4
through the use of specialized exchange-traded funds. These funds provide both long-term and
short-term different currency exposure that can be used to hedge foreign exchange risks.
Kumyiah McDonald
INT 620 Final Project
5
References
Hakala, J., & Wystup, U. (2007). Foreign exchange risk: models, instruments, and strategies.
London: Risk Books.
Home Depot Inc. (2017). 2016 Annual Report of the Home Depot Inc. Retrieved from
http://www.annualreports.com/HostedData/AnnualReports/PDF/NYSE_HD_2016.pdf
Kumyiah McDonald
INT 620 Final Project
6
Appendix
STEP 1: REVENUE TABLE
2016
2017
2014
94,595.00 88,519.00 85,176.00
8,000.00 8,000.00 8,500.00
Overall Company Revenue
Canada Revenue
STEP 2: AVERAGE YEARLY EXCHANGE
RATE
FISCAL YEAR
USD
2016
2015
2014
0.74
0.72
0.86
Canada
Local Curr
1.34
1.38
1.16
STEP 3: CALCULATE IMPACTS OF SUBSIDIARY REVENUE ON TOTAL REVENUE
FISCAL
YEAR
2016
2015
2014
Overall
Revenue
in USD
Canada
Rev in
Local Curr
94,595.00 10,810.81
88,519.00 11,111.11
85,176.00 9,883.72
Canada Rev in USD
% of Subsidiary Revenue From
Total Revenue (USD)
8,000.00
8,000.00
8,500.00
8.46%
9.04%
9.98%
STEP 4: Scenario #1—Dollar Appreciates 5%
YEAR
2016
2015
2014
Overall
Revenue
in USD
Canada
Rev in
Local Curr
94,595.00 10,810.81
88,519.00 11,111.11
85,176.00 9,883.72
Canada Rev in USD
After 5% Appreciation
8,400.00
8,400.00
8,925.00
% of Subsidiary Revenue From
Total Revenue (USD)
8.88%
9.49%
10.48%
STEP 5: Scenario #2—Dollar Depreciates 5%
YEAR
2016
2015
2014
Overall
Revenue
in USD
Canada
Rev in
Local Curr
94,595.00 10,810.81
88,519.00 11,111.11
85,176.00 9,883.72
Kumyiah McDonald
Canada Rev in USD
After 5% Depreciation
7600
7600
8075
INT 620 Final Project
% of subsidiary revenue from
Total Revenue (USD)
8.03%
8.59%
9.48%
7
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%
Global Expansion Proposal

INT 620 Final Project
1
Contents
Final Project Milestone One (Module Three) ………………………………………………………………………. 3
Introduction: Company Proposal and Background……………………………………………………………. 3
Introduction: Subsidiary Expansion ……. …
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