Financial Analysis of Carrefour S A - Case Study Example

Financial Analysis of Carrefour S.A Executive Summary Carrefour S.A. is a great multinational company that targets to issue EURO 750million value of debt. The corporation must know the market which is best suited for placing the bond. In the past, the company had used securities denominated in the currency to finance its growth for the operation of its business. However, borrowing in British pounds sterling had been recently recommended by Carrefour’s investment banks such as Morgan Stanley and UBS-Warburg for the advantage of borrowing opportunity in that currency. This suggestion seems to be good the British coupon is higher compared to other currencies, especially the Swiss franc. Sikhumbuzo Bhengu, junior financial analyst ordered this report which was demanded by Carrefour S.A.’s CFO Barry Strydom. The request of this report is to identify the cost effective currency in which the issuing of the bond from the firm to that currency denominated, and it turn that foreign currency is effective then the hedging strategy required to hedge exchange rate risk. Nevertheless, investing in the British pound had several reasons why it was a good idea. Due to high inflation rate in U.K, the real interest rate became lower while the nominal interest rate of the Swiss franc got lower than that of British pound. Method of investigation The data information provided by Carrefour S.A. was used to solve the report which was not being expanded beyond the scope of the information given. The position of Carrefour in the market was not conducted by research provided by the internet. The information provided by the case study is assumed to be true and accurate. This report has been conducted by the use of interest rate parity which is the main underlying theory in this case. Problem Identification Carrefour S.A. was seeking to contribute EURO 750million debt financing by issuing a bond at a lower cost either by the use of domestic currency or foreign currency denomination bond in the Eurobond market in the summer of 2002. Carrefour S.A.’s investment banks (Morgan Stanley and UBS Warburg) not only suggested the provision of funds at the lowest cost but also anticipated that the Carrefour 10-year bonds can be dispensed at 5.25% in Euros, 5.375% in British pounds, 3.625% in Swiss francs, and 5.5% in U.S. dollars in August 2002. Assumption was that the bonds were to be issued at par. Action Plan The action plan which was taken was based on the sales, profits and sources of profits in various currencies. The percentage of profits, stores and revenues were found in different currencies. Carrefour S.A. should pursue an expansionary strategy financed by debt so as to enhance the shareholder value. The British-pound currency of 10-year, 750million euro, and annual coupon bond should be issued by the firm because of its low interest rate. The action plan the company should take should boost its growth so as to stabilize the firm. The firm should also be free from risk exposure to avoid unnecessary losses to the firm. With this kind of strategy, the firm can achieve its set goals and objectives. Financial Analysis The action which was taken by Carrefour S.A. was the calculation of GBP/EUR ( i.e 5.375/5.25=1.024) which appeared to be more favorable as compared to the exchange rate of US dollars/EUR ( i.e 5.5/5.25=1.048). Implied forward rate was calculated to help in decision making process. We can use the formula F (f.c. /EUR) = (1+i(EUR))N*S(f.c./EUR) to find the implied 10 year forward rates (i.e 750000000( f.c/5.25)= (1+ 0.1(5.25))10*19.75*(f.c./5.25) which gives a f.c.3.6million of. Use of British pound is a wise a choice to make because of the low forward rates for GBP/EUR (5.375/5.25=1.024) Cash flow for each currency (in Euros) is calculated by the use of implied forward rates. This will help in comparison of each currency to determine which one has the smallest cash outflow (a better option for debt issuing). This is done by calculating the coupon payment in every currency after which you divide by the implied forward rate for the appropriate year. From this information, GBP’s cash outflow is found to be the smallest thus favoring from British pound. Cash outflow for the Swiss franc. Conclusion Carrefour is a distribution sector company which is aimed at achieving the economies of the scale through large retail space of the mode of self-service marketing. Distributors are then considered the maintenance strategies of the growth of which are global in nature. France is a country with a number of European and global players including Carrefour, which since its merger with Promodes, is the leader and as the second largest worldwide (in terms of sales) sector and European leader. Reference Grant, Tina. International Directory of Company Histories: Volume 90. Chicago: St. James Press, 2008. Internet resource. Read More