Page 506 - Introduction to Business

480 PART 5 Finance

Case in Point

Are the Golden Arches Turning Red?

McDonald’s has a global appetite for its borrowing from banks and the financial markets
using debt. The following summarizes through bonds:

Currency Denomination 2001 (in millions 2002 (in millions
of Debt of U.S. dollars) of U.S. dollars)
Total U.S. dollars 3828.7 3457.1
Total Euros 2354.6 2632.5
Total British pounds 849.1 1338.7
Total other European currencies 335.8 393.3
Total Japanese yen 811.9 900.4
Total other Asia/Pacific currencies 617.6 871.5
Total other currencies 26.4 21.1
Total debt obligations 8,824.1 9,614.6

With total assets in 2002 of about $24 billion, this kind of long-term debt is covered by issuing
McDonald’s was financing about 40 percent of its bonds into the financial marketplace. Second, there
investments with debt funds. Common stockholders are timing problems in the payments for raw
contributed another $1.8 billion, the book value of materials and labor services and the receipt of sales.
common stock on the balance sheet, to finance the Farmers must be paid for meat, potatoes, vegetables,
firm. Credit is a major source of money used to and so on. Transportation firms must be paid for
maintain McDonald’s operations, and it acquires shipping. Distribution firms bill for their warehousing
credit on a global scale by tapping international debt and management services. These and other expenses
markets and banks around the world. all take place before a single hamburger is sold at a
Why borrow so much money? Is it bad? After all, if retail facility. In fact, as sales increase, the gap
the firm earned healthy profits on retail food sales, between expenses and revenues increases. Thus,
there would seem to be enough money to pay for most successful businesses need to finance these
goods and services needed to produce and sell its working capital expenses. For this short-term
hamburgers, French fries, and other products. However, financing need, firms normally use bank loans.
this common reasoning has two major flaws. First,
Source: Financial statements for McDonald’s,
investment in land, buildings, and equipment is so http://www.mcdonalds.com/corporate/investor/financialinfo/
expensive that the costs must be spread out over a investorpub/financial.
long time. By borrowing money using 5-, 10-, 15-, and
even 30-year long-term bonds and paying out a fixed Questions
amount on the debt every month, the high costs of 1. What are the top four countries from which
fixed plant and equipment can be distributed over McDonald’s acquired its debt?
time and paid gradually. Otherwise, the firm would 2. Why does McDonald’s need to finance up to
have to wait a long time to accumulate a large 40 percent of its assets with debt?
enough amount of profits before it could grow into 3. What kinds of assets are financed with long-term
new facilities and expand its physical units. Most of bonds versus bank loans?

With increased usage of electronic trading by organized exchanges over time,
the differences between organized and OTC markets have been gradually dimin-
ishing. For instance, the NYSE’s SuperDOT system is an electronic system used to
place orders for stocks that are listed as trading on the NYSE. Of course, ECNs are a
technological innovation that is reducing the transactions costs of buying and sell-
ing securities, not to mention allowing more global movement of investment funds.

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