Global business concepts and applications

Global Business

Financial overview of McDonald's Japan 2006

The company's solvency, reflected by debt-to-assets ratio showed positive results. The assets increased faster than the liabilities. The liquidity expressed by the current ratio, registered a slight deterioration by the fact that current assets increased slower than current liabilities. The company's profitability deteriorated considerably from one period to another. This state is expressed by the loss per share first of all and by the equity per share secondly. For the company to become truly profitable, the loss per share has to turn into earning per share, so have a positive value. Finally, the efficiency, expressed by ROA and ROE improved considerably over the two-year period. The net income reported to the total amount of assets and the total shareholder equity increased more than 20 times.

Indicator

Evolution (%)

Formula

Gross profit margin (YEN'000'000)

Sales revenues-Cost of sales

Gross profit margin (%)

Sales revenues/Cost of sales*100

Current ratio

Current assets/Current liabilities

Debt to assets ratio

Total liabilities/Total asset

ROA

Net income/Total asset*100

ROE

Net income / Shareholder equity*100

Equity per share

Taken from the company's FS

Loss per share

Taken from the company's FS

Given the increased solvency, long-term liquidity and efficiency, the company has decided to expand its activity abroad. Thus, the management decided to acquire raw products with Mediterranean specific from Spain and Italy for its vegetarian and health oriented customers. The merchandise will be worth 5,000,000 EUR on the 5th of August 2007. Today is 10th of May of the same year.

Today's YEN/EUR parity is 161.69YEN=1EUR, which implies that if the company had to pay the 5,000,000 EUR today, it would have to pay 808,450,000 YENs.

Until August, there are 2 scenarios: (1) - the YEN depreciates and the company will pay more YENs to the suppliers or (2) - the YEN appreciates and the company will pay less YENs to the suppliers, but the same amount of euros. To avoid the first scenario, McDonald's has to use currency risk tools: futures and forwards. These are agreements signed today to buy/sell a given amount of money at a given date in the future for a well defined exchange rate. Therefore, the company will sign a contract with a broker from a financial institution that will contain an agreement to buy 5,000,000EUR on the 5th of August at a 161.69YEN=1EUR parity. The former will have to cover the so called margin account, which pays respect to an amount deposited in the broker's account meant to cover potential losses with the futures or forward contract. There are 2 types of margins: initial and maintenance. The initial one is equal to the initial margin of the account the second one is equal the lower limit possible for the account. If the losses will not be higher than the difference between the 2 margins, no margin call is issued and if losses are higher than this difference, then the entire difference will be added to the account. Usually on the market, speculators and hedgers are those to buy and sell futures and forwards. According to www.investorwords.com, a hedger can be "any corporation that takes a position in a commodity market for business reasons."