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Set in 2002, the Carrefour SA
case discusses financing and operations in one of Europe’s largest
retailers. The case is, at its heart, a math problem in a business setting
and is used in introductory corporate finance courses to teach students how
to use analysis to support making complex business decisions.
Carrefour, a France-based
retailer with operations all over the word, was large and growing quickly
through both expansion and acquisitions in 2002, and it needed to raise
significant capital. They planned to issue €750 million in corporate bonds
and had asked Morgan Stanley to assist with the issuance. The case focuses
on a very specific question: in which currency should the bonds be issued?
In the past, Carrefour had issued securities in the local currencies of
where they were expanding, which had meant mostly in Euros. But with a
nearly billion-dollar bond round, and with the Euro depreciating against
other currencies, the decision of which currency to issue the bonds in
could make a significant difference in corporate profits.
The case gives data regarding the
coupon rates for corporate bonds in Euros, British pounds, Swiss Francs,
and US Dollars. It also provides data about recent inflation trends,
government bond yields, and exchange rates.
To solve the case, students must
convert the €750 million to foreign currencies, forecast interest rates and
exchange rates for the next ten years in each currency, and calculate
coupon payments in each currency. Students then find the present value of
the coupon payments and convert back to Euros to determine which currency
will be the most cost-effective for Carrefour’s financing.
The surprising result is that
British pounds actually provide the cheapest cost of capital. Indeed, this
was the same conclusion that was ultimately reached by Morgan Stanley.
While this case tends to generate
less discussion than cases about marketing or strategy (where there is
often no “correct” answer), the Carrefour case is an important exercise in
defining and testing assumptions, forecasting macroeconomic trends, and
mitigating risk, all while applying rigorous analysis to business problems.
As a result, it has become a mainstay in many business schools.
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