Potential challenges for opening a FedEx branch in Canada
FedEx financial managers might experience certain difficulties in opening a new FedEx branch in Canada. First of all, the challenges will take place for attracting investments if needed. FedEx already has a network of offices in Canada, so it will be easier for the company to attract funds, but still it might be more difficult than in the US. Secondly, the recoupment of capital investments will be longer than in the US, due to higher tax rates and taxation on national goods and services. Social security system will also impose a larger burden on financial performance of FedEx branch compared to that of the US. Additional challenges which might be experienced by financial management during opening a new FedEx branch are slower corporate decision-making and lower productivity of workers. Financial managers of FedEx should also take into account that risk-averse approach of Canadian investors might hinder the process of opening the branch.
5. Choice of financing method for the project in Canada
Corporate income tax and deductible interest and business loan payments exist both in the USA and in Canada. With regard to the cost of capital, debt financing is more cost-effective than equity financing both in the USA and in Canada, but the difference between the effectiveness of these forms of financing is smaller in Canada (Shoven & Walley, 1992). Several economic variables which contribute to this difference are higher personal taxes, dividend tax credit system and effective capital gains rates lower than in the US (Shoven & Walley, 1992). Overall, although financial systems and conditions in both countries are rather close, in Canada it is slightly more favorable to use equity as a source of financing compared to debt financing: in fact, in Canada the advantages and disadvantages of using debt financing outweigh each other.
In Canada, FedEx Corporation can use the following sources of financing: government grants, financing using private sector options, finance the business using personal assets (which might not be a reasonable option for FedEx though), financing from non-governmental organizations and equity financing (Shoven & Walley, 1992). In logistics services, debt to equity ratio is expected to be about 1.3-1.5 worldwide (YCharts.com, 2012), so it is recommended for FedEx to use both debt and equity financing for the new project.
In this report, fundamental analysis of a business opportunity for FedEx Corporation diversification project was performed. Using the data of FedEx Corporation annual report, industry data and market estimates of debt and equity financing of FedEx Corporation, the costs of debt financing and equity financing were determined (9.48% and 4.77% correspondingly), and WACC was calculated (8.11%). Using these estimates of capital cost, the evaluation of an investment project in Canada supposed to last for 6 years was performed. NPV value for this project was estimated as $5,251,240. Therefore, the project was supposed to be profitable.
Analysis of economic variables showed that there exist clearly beneficial variables, such as low interest rates, political stability, solid economic position of the country, low unemployment, stable exchange rates and close collaboration between the United States and Canada. At the same time, there were economic variables which could have adverse effect for the project: higher tax rates, stronger unionization, greater financial pressure on the employer and risk-averse approach of investors. Financial managers should include these variables in the project’s risk assessment and adjust potential cash flows in an appropriate way.
Analysis of financing sources showed that debt financing in Canada is less favorable than that in the US, and the difference between debt and equity financing in Canada is therefore less than in the United States. Basing on these estimates and on the fact that FedEx Corporation is tending to use equity for financing rather than debt, it is possible to recommend for FedEx Corporation to use both debt and equity financing for the new project, with possible emphasis on equity financing.