International Trade With Korea

¶ … working average cost of capital (WACC) is an important component of determining what operations to finance and comparing different alternatives. This calculation takes into account the costs that go into providing the capital that a firm can use for different ends. It is sometimes referred to as the "hurdle" rate because projects must always return a require amount to make the investment viable; with a few exceptions. The cost of capital is determined by first considering the firms equity and debt structure.

Each time of investment in the business will have a different rate of return that it offers investors. For example, assets that were financed through a bank will have a different repayment structure and rate than assets that were financed through the sale of stock. The company must first average the cost of all the different financing activities that it has engaged in before it can calculate a baseline for the WACC.

Other factors are also important and play a role in the WACC calculations such as the "risk-free rate." This is the rate that is considered to be virtually risk free and government bonds are typically used. If the company can invest in a risk-free investment, then there is an opportunity cost in investing in alternative investments and this must be considered. There is also an inflation factor that is part of the equation.

Cash flows that come in the future are not worth quite as much as cash that comes today because future cash flows must be discounted to reflect the effects of inflation. Furthermore, the company must also include risk in the calculation. There is always a risk that the investment will not provide the returns expected and the company must also include risk when calculating WACC. Airgo in Korea Airgo, a U.S. based airline parts manufacture, is considering opening a 900 million dollar plant near Seoul, South Korea.

It has already been determined that the company will have a twelve percent working cost of capital for the investment before risk has been considered. Adding risk to this equation will be a considered along many different lines. There will be some level of risk involved with operating in a foreign country. South Korea has a different culture and a different environment altogether and some level of risk must be considered in operating in this country.

However, with that being said, South Korea's economic freedom score is 71.5, making its economy the 29th freest in the 2015 Index and its score is 0.3 point higher than last year, with improvements in property rights, labor freedom, and monetary freedom exceeding declines in the management of government spending and business freedom (Heritage Foundation, 2015). Such factors have led the country to a rapid rate of growth.

South Korea, over the past four decades, has been able to achieve incredible growth and global integration as it has developed into a high-tech industrialized economy; in the 1960s, GDP per capita was comparable with levels in the poorer countries of Africa and Asia however, in 2004, South Korea joined the trillion-dollar club of world economies, and is currently the world's 12th largest economy (Forbes, 2014). South Korea has been able to achieve such a rapid rate of growth-based heavily on its manufacturing sector and this sector is still growing.

However, South Korea's average tariff on industrial goods is considerably higher than the average U.S. tariff: 6.2% compared to 2.8%. In certain key sectors, such as medical equipment and aircraft equipment, South Korean goods enter the United States duty-free today while South Korea maintains tariff rates as high as 8% on U.S. products (U.S. Trade Representative, N.d.). Therefore, Airgo would likely benefit from an advantageous trade agreement since it is in one of the key sectors listed.

Beyond the cultural, manufacturing, and trade risks, there are also risks involved with the currency exchanges that will be necessary to operate in this market. The risks associated with exchange rate risks can be considered as being medium. The Global Financial Crisis (GFC) that occurred in 2008 exposed many of the weaknesses that South Korea has in its financial sector. The countries capital markets are large and open and also have a considerable amount of liquidity (Ree, Yoon, & Park, 2012).

Although the financial sector being highly liquid can have a range of benefits, the liquidity can also lead to volatility in certain situations. Therefore, it has been identified that South Korea's exchange rate risk is something that will definitely need to be considered. Before the risks of operating in South Korea were.