In the spring of 2009, an article from Bloomberg News summed up the situation that Starbucks was in: “After more than a decade of sensational buzz, Starbucks is struggling nationwide as it faces slowing sales growth and increased competition.” The initial success and later struggles of Starbucks are a familiar pattern for firms in monopolistically competitive markets. When Starbucks began rapidly expanding, CEO Howard Schultz knew that fresh-brewed coffee was widely available in restaurants, diners, and donut shops. He believed, though, that he had a strategy that would differentiate Starbucks from competitors: Starbucks would offer a European espresso bar atmosphere, with large, comfortable chairs, music playing, and groups of friends dropping in and out during the day. From the mid-1990s through the mid-2000s, this strategy worked very well, and Starbucks opened nearly 17,000 stores worldwide. But the profitability of Starbucks attracted competitors. Other nationwide chains, such as Caribou Coffee, Peet’s Coffee, and Diedrich Coffee, and regional chains, such as Dunn Brothers Coffee, provided stores with similar atmospheres, as did many individually owned coffeehouses. In addition, McDonald’s and Dunkin’ Donuts began competing more directly with Starbucks. Dunkin’ Donuts began building more upscale restaurants, and McDonald’s began selling espresso-based coffee drinks for prices considerably below those at Starbucks. Schultz was also worried that in opening thousands of coffeehouses worldwide, Starbucks had made the customers’ experience less distinctive and easier for competitors to copy. Beginning in 2010, Schultz managed a remarkable turnaround, with Starbucks’ sales and profits increasing. Some of the success was attributable to an expansion in overseas markets, where competition was not as strong as in the United States. By 2013, the firm had sales of more than $1 billion in Asia and planned to open thousands of additional stores in China. But the firm’s focus remained on staying one step ahead of its competition in the United States. The revival of Starbucks in the United States was based on several factors: The firm gave customers more freedom to customize drinks; it started a loyalty program that included free refills and other perks for regular customers; it started a mobile payment system that allowed customers to pay with a smartphone; and it provided stores with machines that brewed higher-quality coffees. Stephen Gillett, the firm’s chief information officer, improved in-store Wi-Fi so customers could use it without having to go through a logon screen and could get free access to content from sources such as the Wall Street Journal and USA Today, as well as see exclusive movie trailers. The objective was to keep customers in the store longer so they would buy more coffee. The customer loyalty program, by reducing the average price for frequent customers, helped fight the impression that Starbucks coffee was too expensive to buy a cup every day. By 2015, Starbucks strategy seemed to be working. The firm had expended to 22,000 stores in 66 countries. “Anyone who suggested in ’08 or ’09 that Starbucks was reaching saturation in the U.S. was just flat out wrong.” In a monopolistically competitive industry, maintaining profits in the long run is very difficult. Only by constantly innovating has Starbucks been able to return to profitability after several years of struggling with intense competition from other firms. Question An article in Forbes magazine in 2013 discussed the reasons for the ability of Starbucks to remain profitable despite competition. The author argued the most important reason for the firm’s success was “Right market segmentation. The company has stayed with the upper-scale of the coffee market, competing on comfort rather than convenience....”

a. What does the author mean by “market segmentation”?

b. What does the author mean by the “upper-scale” of the coffee market? Why might it be more difficult for other firms to compete with Starbucks in that segment of the coffeehouse market?

Why do you think the Ford-Mazda partnership has been so successful, while many others (including those at the beginning of the case) haven’t been? Case Study - A Successful Partnership at Ford-Mazda. Please anwers the question in minimun 200 words.

Case for Analysis:

A Successful Partnership at Ford-Mazda

While international joint ventures among auto manufacturers make great sense, often they don’t make great profits. For example, for many years, auto giant General Motors bailed out loss-plagued Isuzu, in which at one point it owned a 49 percent stake. The list of cross cultural disappointments goes on: Chrysler-Mitsubishi, Daimler-Chrysler, and Fiat-Nissan have all produced as much rancor as rewards.

Ford-Mazda is the exception. Their marriage has weathered disagreements over specific projects, trade disputes between Japan and the United States, and even allegations by the Big Three that Mazda and other Japanese rivals were dumping minivans in the United States. The alliance, founded when Ford stepped in to rescue the struggling Japanese carmaker in 1979, has stood firm for over 30 years. With Ford owning 11 percent of Mazda, the two companies have cooperated on several new vehicles and exchanged valuable expertise—Ford in international marketing and finance, Mazda in manufacturing and product development.

Ford and Mazda have worked jointly on several auto models; usually Ford would do most of the styling and Mazda would make key engineering contributions. Jointly worked cars include the Ford Escort and Mercury Tracer models, the subcompact Festiva, the sporty Ford Probe and Mercury Capri, and the Tribute and Explorer SUVs. The Ford-aided Mazdas are the MX-6, 323, Protégé, and Navajo. In all, approximately one of every four Ford cars sold in the United States has benefitted from some degree of Mazda involvement everything from manufacturing methods to steering designs whereas two of every five Mazdas has some Ford influence. The Ford-Mazda relationship extends beyond U.S. borders. In 2010, a joint venture between Ford and Mazda in Thailand began producing passenger cars export to several Asian countries. Ford and Mazda can call on some hard-learned principles for managing a successful strategic alliance, many of which would apply to ties in any industry. The secrets to the Ford-Mazda success are

Keep top management involved. The boss must set a tone for the relationship. Otherwise, middle managers will resist ceding partial control of a project to a partner.

Meet often, and often informally. Meetings should be at all levels and should include time for socializing. Trust can’t be built solely around a boardroom table.

Use a matchmaker. A third party can mediate disputes, suggest new ways of approaching the partner, and offer an independent sounding board.

Maintain your independence. Independence helps both parties hone the areas of expertise that made them desirable partners in the first place.

Allow no “sacrifice deals.” Every project must be viable for each partner. Senior management must see that an overall balance is maintained.

Appoint a monitor. Someone must take primary responsibility for monitoring all aspects of the alliance.

Anticipate cultural differences. Differences may be corporate or national. Stay flexible and try to place culturally sensitive executives in key posts.

Underlying these principles is the idea that benign neglect is no basis for a partnership. Or, as Ford president Phillip E. Benton Jr. stated, “There’s a lot of hard work in making it work.”

Assignment 2

CHAPTER 5

INTERNATIONAL PARITY RELATIONSHIPS AND

FORECASTING FOREIGN EXCHANGE RATES

PROBLEMS

PROBLEMS

1. Suppose that the treasurer of General Electric has an extra cash reserve of $10,000,000 to invest for six months. The six-month interest rate is 8 percent per annum in the United States and 7 percent per annum in France. Currently, the spot exchange rate is $1.40/€ and the six-month forward exchange rate is $1.44/€. The treasurer of General Electric does not wish to bear any exchange risk. Where should he/she invest to maximize the return?

2. While you were visiting Frankfurt, you purchased a BMW for €50,000, payable in three months. You have enough cash in U.S. dollars at your bank in New York City, which pays 0.35% interest per month, compounding monthly, to pay for the car. Currently, the spot exchange rate is $1.35/€ and the three-month forward exchange rate is $1.30/€. In Frankfurt, the money market interest rate is 2.0% for a three-month investment. There are two alternative ways of paying for your BMW.

(a) Keep the funds at your bank in the U.S. and buy €50,000 forward.

(b) Buy a certain euro amount spot today and invest the amount in Germany for three months so that the maturity value becomes equal to €50,000.

Evaluate each payment method. Which method would you prefer? Why?

3. Currently, the spot exchange rate is $1.50/£ and the three-month forward exchange rate is $1.53/£. The three-month interest rate is 8.0% per annum in the U.S. and 5.8% per annum in the U.K. Assume that you can borrow as much as $1,500,000 or £1,000,000.

a. Determine whether the interest rate parity is currently holding.

b. If the IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit.

c. Explain how the IRP will be restored as a result of covered arbitrage activities.

4. Suppose that the current spot exchange rate is €0.80/$ and the three-month forward exchange rate is €0.7813/$. The three-month interest rate is 8 percent per annum in the United States and 5.40 percent per annum in France. Assume that you can borrow up to $1,000,000 or €800,000.

a. Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars. Also determine the size of your arbitrage profit.

b. Assume that you want to realize profit in terms of euros. Show the covered arbitrage process and determine the arbitrage profit in euros.

5. In the issue of October 23, 1999, the Economist reports that the interest rate per annum is 5.93% in the United States and 70.0% in Turkey. Why do you think the interest rate is so high in Turkey? Based on the reported interest rates, how would you predict the change of the exchange rate between the U.S. dollar and the Turkish lira?

8. Suppose that the current spot exchange rate is €1.50/₤ and the one-year forward exchange rate is €1.58/₤. The one-year interest rate is 6.0% in euros and 5.2% in pounds. You can borrow at most €1,000,000 or the equivalent pound amount, i.e., ₤666,667, at the current spot exchange rate.

1. Show how you can realize a guaranteed profit from covered interest arbitrage. Assume that you are a euro-based investor. Also determine the size of the arbitrage profit.
2. Discuss how the interest rate parity may be restored as a result of the above

      transactions.

3. Suppose you are a pound-based investor. Show the covered arbitrage process and

      determine the pound profit amount

Considering the calculations you have done so far, you need to attend to a number of import and export transactions for goods that companies in the United States expressed interest in.

The first transaction is for the import of good quality wines from Australia, since a retail liquor trading chain customer in the United States, for who you have been doing imports over the past five years has a very large order this time. The producer in Australia informed you that the current cost of the wine that you want to import is AUD$2,500,000. The producer in Australia will only ship goods in three months’ time due to seasonal differences but payment will have to be conducted six months from now.

The second transaction is for the export of 3d printers manufactured in the U.S.A. The country where it will be exported to is Canada. The payment of CAD 2,500,000 for the export to Canada will be received nine months from now.

You consider different transaction hedges, namely forwards, options and money market hedges.

You are provided with the following quotes from your bank, which is an international bank with branches in all the countries:

Forward rates:

Bank applies 360 day-count convention to all currencies (for this assignment apply 360 days in all calculations).

Annual borrowing and investment rates for your company:

Bank applies 360 day-count convention to all currencies. Explanation – e.g. 3 month borrowing rate on $ = 2.687%. This is the annual borrowing rate for 3 months. If you only borrow for 3 months the interest rate is actually 2.687%/4 = 0.67175% (always round to 5 decimals when you do calculations). Furthermore, note that these are the rates at which your company borrows and invests. The rates are not borrowing and investment rates from a bank perspective.

Option prices:

Bank applies 360 day-count convention to all currencies. (Students also have to apply 360 days in all calculations). Option premium calculations should include time value calculations based on US $ annual borrowing interest rates for applicable time periods e.g. 3 month $ option premium is subject to 2.687%/4 interest rate.)

a. Calculate the cost of money market hedges for the imports from Australia (Complete Table 3 on the separate answer sheet)

Table 3: Australia import cost with money market hedge:

Review the Point/Counterpoint at the end of Chapter 45. Do you agree with the Yes or No groups? Why?

McDonald’s Corporation

When most firms were struggling in 2008, McDonald’s increased its revenues from $22.7 billion in 2007 to $23.5 billion in 2008. Headquartered in Oak Brook, Illinois McDonald’s net income nearly doubled during that time from $2.4 billion to $4.3 billion—quite impressive. Fortune magazine in 2009 rated McDonald’s as their 16th “Most Admired Company in the World” in terms of their management and performance.

McDonald’s added 650 new outlets in 2009 when many restaurants struggled to keep their doors open. McDonald’s low prices and expanded menu items have attracted millions of new customers away from sit-down chains and independent eateries. Jim Skinner, CEO of McDonald’s, says, “We do so well because our strategies have been so well planned out.” McDonald’s served about 60 million customers every day in 2009, 2 million more than in 2008. Nearly 80 percent of McDonald’s are run by franchisees (or affiliates).

McDonald’s in 2009 spent $2.1 billion to remodel many of its 32,000 restaurants and build new ones at a more rapid pace than in recent years. This is in stark contrast to most restaurant chains that are struggling to survive, laying off employees, closing restaurants, and reducing expansion plans. McDonald's restaurants are in 120 countries. Going out to eat is one of the first activities that customers cut in tough times. A rising U.S. dollar is another external factor that hurts McDonald’s. An internal weakness of McDonald’s is that the firm now offers upscale coffee drinks like lattes and cappuccinos in over 7,000 locations just as budget conscious consumers are cutting back on such extravagances.

About half of McDonald’s 31,000 locations are outside the United States. But McDonald’s top management team says everything the firm does is for the long term. McDonald’s for several years referred to their strategic plan as “Plan to Win.” This strategy has been to increase sales at existing locations by improving the menu, remodeling dining rooms, extending hours, and adding snacks. The company has avoided deep price cuts on its menu items. McDonald’s was only one of three large U.S. firms that saw its stock price rise in 2008.

The other two firms were Wal-Mart and Family Dollar Stores.

Other strategies being pursued currently by McDonald’s include replacing gasoline-powered cars with energy-efficient cars, lowering advertising rates, halting building new outlets on street corners where nearby development shows signs of weakness, boosting the firm’s coffee business, and improving the drive-through windows to increase sales and efficiency.

McDonald’s receives nearly two thirds of its revenues from outside the United States. The company has 14,000 U.S. outlets and 18,000 outlets outside the United States. McDonald’s feeds 58 million customers every day. The company operates Hamburger University in suburban Chicago. McDonald's reported that first quarter 2009 profits rose 4 percent and same-store sales rose 4.3 percent across the globe. Same-store sales in the second quarter of 2009 were up another 4.8 percent.

Questions:

1.      Which theory of organizational adaptation is applied at McDonald's (Theories to choose from: Institution Theory, Strategic choice perspective, and Organizational Learning Theory) ? Discuss.

2.      Conduct the environmental scanning of McDonald's through SWOT analysis.

3.      Discuss any 2 strategies used at McDonald's ( Strategies to choose from : Corporate strategy, Business Strategy, and Functional Strategy) . Elaborate.

4.      Under which strategic type (according to Miles and Snow) can McDonald’s be classified? Elaborate.

Michael’s Corporation Data for 2020

1. Depreciation reported on the tax return exceeded depreciation reported on the income statement by $75,000. This

difference will reverse in equal amounts of $25,000 over the years 201–202 .

2. Interest received on municipal bonds was $24,000.

3. Rent collected in advance on January 1, 2020, totaled $45,000 for a 3- year period. Of this amount, $30,000 was reported as unearned at December 31, 2020, for book purposes.

4. The tax rates are 30% for 2020 and 20% for 2021 and subsequent years.

5. Income taxes of $270,000 are due per the tax return for 2020.

6. No deferred taxes existed at the beginning of 2020.

Required

(a) Compute taxable income for 2020.

(b) Compute pretax financial income for 2020.

(c) Prepare the journal entries to record income tax expense, deferred income taxes, and income taxes payable for 2020 and

2021. Assume taxable income was $760,000 in 2021.

(d) Prepare the income tax expense section of the income statement for 20 , beginning with “Income

before income taxes.”

In which case did the taxpayer derive assessable income during the year ended 30 June 2020?

Ms. Taylor is 21 years old and she just obtained her MBA degree. She is considering the following two career options:

(a)Start working now, earning an annual salary of $60,000 in each of next 44 years.

(b)Enroll in a PhD program, in 4 years and subsequent work for 40 years, earning each year the salary of $120,000.

Assume that her educational expenses at the end of each of 4 years will be $30,000. Also, assume that the relevant annual interest rate is 6% throughout, and all the annuities in the question are ordinary annuities. Based on the above information, find the implied or imputed monetary value of her PhD as of now.

Suppose the market demand and supply functions are Qd= 32,000-20P and Qs=30P+750. You have just graduated and moved to this city; as a new MBA and an entrepreneur, you are considering entering the market for this product.
a. Determine the equilibrium price and quantity in this market.

b. TC=5000+1000Q-12Q^2+0.08Q^3. Determine whether or not you should enter this market.

c. Due to unforeseen delays, you don’t enter the market. However, a year later the market supply has changed to Qs=30P+1500. Are you surprised at this shift in supply?

d. Given the new supply conditions, determine whether or not you should enter the market.