Question

Assume that you are a Financial Manager of Starbucks Coffee, Inc., a multi-national corporation. You are in charge of determining the impact of exchange rate changes on the firm. Changes in currency exchange affect both the balance sheet and the income statement. The balance sheet impact occurs when the value of international assets are translated to U.S. dollars. The values of those assets change as the exchange rate changes. The value of costs, revenue, and profit also are impacted on the income statement because of exchange rate risk. Consider that Starbucks has the following investments in coffee bean production and processing:

Table One:

Country	Value (in millions of U.S. dollars)
Columbia	$75
Kenya	$100
Papua New Guinea	$80

            The expense of all the labor, production, and beans will require the following foreign currency amounts during the current year:

                        Table Two:

Country	Cash Flow (in millions)
Columbia	78,180 pesos
Kenya	3,200 shilling
Papua New Guinea	100 kina

            Starbucks Coffee has also invested in store facilities to sell coffee products. The countries and the value of the investments are as follows:

                        Table Three:

Country	Value (in millions of U.S. dollars)
Canada	$200
Japan	$100
United Kingdom	$150

            The “Net Profit” from these countries during the current year is as follows:

                        Table Four:

Country	Cash Flow (in millions)
Canada	80 Canadian dollars
Japan	7,200 Japanese yen
United Kingdom	30 British pounds

            The current spot exchange rates per one U.S. dollar are as follows:

                                    Table Five:

Country	Currency per one U.S. dollar:
Columbia	2,204.50 Columbian pesos
Kenya	69.480 Kenyan shilling
Papua New Guinea	3.0189 Papua New Guinea kina
Canada	1.1690 Canadian dollar
Japan	117.04 Japanese yen
United Kingdom	.5182 British pound

            As the Financial Manager for Starbucks, your task is to determine the following:

2) Convert the “Net Profit” generated in Canada, Japan, and the United Kingdom shown

                        in Table Four above to U.S. dollars to calculate the total profits realized by Starbucks,

                        Inc. during the current year in U.S. dollars.

a. Starbuck’s “Return on Investment” (ROI) can be calculated using the following formula

Net Profit in U.S. dollars from Question #2 above/Total Investment for Production and Store Facilities in Tables One and Three above

=      ROI

                                                                                                                                 

                                  What is Starbuck’s “Return on Investment” for the current year?

Answer 1

Question 2

  Country Net profit (Dollars)(in millions)

  Canada $47.337

Japan $61.517

United Kingdom $57.892

Calculation:

$1=1.1690 Canadian Dollar

Then 80 Canadian Dollar will be ((80*1)/1.1690) = $47.337 (millions)

$1=117.04 Japanese yen

Then 7200 Japanese yen will be ((7200*1)/117.04) = $61.517 (millions)

$1=0.5182 British Pound

Then 30 British Pound will be ((30*1)/0.5182) = $57.892 (millions)

Expenses Incurred in ( Columbia, Kenya, Papua New Guinea are $35.46, $46.056, $33.1246 (millions) respectively)

Total Profits Realized by Star Bucks = $(57.892+61.517+47.337-35.46-46.056-33.1246) = $52.1054 (millions)

A)

Return on Investment (ROI) = (net profit)/(Total Investment)

Total Investment = $(75+100+80+200+100+150) =$705 Figures given in Table ONE & THREE

Net Profit From above is $52.1054

ROI = ($52.1054)/($705) =0.0739

Hence ROI for starbucks for current Year is 7.39%