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Evaluation Project

Maria Jose Rodriguez

Dr. Ed Morris

FIN 5201032 Financial Policy

October 14, 2011

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McDonalds

McDonalds is the largest chain of fast food specially hamburgers restaurants in the

world. Serving around 60 million of people a day with the headquarters in Oak Brook,

Illinois, United States founded in 1955 by Ryan Kroc after the small hamburger business

from Richard and Maurice McDonald.

Its primary sell is hamburgers, cheeseburgers, chicken nuggets, French fries,

different items for breakfast, soft drinks, shakes and desserts, expanding its menu year by

year according to the costumers needs and wants adding the past years salads, wraps,

smoothies and fruit.

The business began in 1940 with a restaurant in California, introducing the

“Speedee Service System” (Travel Through Time With Us). In 1961 the company replaced

the speedee service system for “Drive-In Restaurant Service” (Travel Through Time With

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Us), in the same year the M became officially McDonalds property but was officially in use

for the company in 1968.

McDonalds is principally known for serve the favorite food in the world by having

the most famous Fries, Big Mac, Quarter Pounder, Chicken McNuggets and the famous and

original Egg McMuffin every breakfast.

Number of Global Restaurants: More than 33,000

Number of Countries: 18

Employees in the world: 1.7 millions

CEO: Jim Skinner

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Begin Final Statements

Income Statement McDonalds

(Yahoo Finance)

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Balance Sheet McDonalds

(Yahoo Finance)

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Statement of Cash Flows McDonalds

(Yahoo Finance)

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Competitor

Yum Brands is the major and principle competitor in every category with

McDonalds. Yum Brands is the largest restaurant company in the world owning more than

38,000 restaurants in more than 110 countries. Yum Brands consist in three different

restaurants such as, KFC, Pizza Hut and Taco Bell.

Since the separation with PepsiCo 12 year ago Yum Brands has been building

leading brands not only in the United States but also in China, creating international

expansion and getting new brands depending on the country. Yum Brands know that people

and customers do not just judge the success of the companies; they create their own

success.

Chine being one of the major competitors country for every fast food restaurant

coming for the United States is not the exception for Yum Brands. They thank their

foresight PepsiCo for invested in the market for over 40 year and built what Yum Brands

can take over in the international market, facing only McDonalds as their only principal

global competitor.

Taco Bell represented the 60% of operating profit; they are the second most

profitable brand behind McDonalds coming strong year by year with its already known

¨Why Pay More¨.

Pizza Hut represents the 30% of the profit coming from behind in their transposing

and reorganization in the business, coming from the worst to one of the first in its category

value rating.

Lastly KFC represents only the 3% of the Yum Brand company profit. This brands

job has been working in the international positioning and improving its menu depending on

where the new stores are going to be.

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Income Statement Yum Brands

(Yahoo Finance)

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Balance Sheet Yum Brands

(Yahoo Finance)

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Statement of Cash Flows Yum Brands

(Yahoo Finance)

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Financial Ratios

All the ratios are a very important tool for a company at the time of making a

decision specially when investing something. Many of the new people investing in the

different markets rather make their decisions through destiny and luck instead of spending

time and worrying too much about the ratios. Ratios are not that that hard to approach in the

right way, however this ones can help the companies make decisions with more sense than

just luck.

Liquidity

Yum 2008 2009 2010

Current Ratio 0.94 1.39 1.14 1.49

Quick Ratio 0.87 1.18 0.96 1.22

Liquidity Ratios are basically used to know how quickly a company´s asset can be

transformed into cash. Investors normally use these ratios to know the capability of a

company to raise the cash and purchase extra assets.

The Current Ratio is used extensively to check the liquidity of a company obtained

between the current assets and the current liabilities of the company. A high current ratio is

not always or necessarily good, and a low current ratio is not bad either. The idea is that the

company´s current assets can cover its current liabilities. McDonalds came up with a 1.49

Current Ratio and Yum Brands with a 0.94.

The quick ratio is also part of the liquidity but this one measure the ability of a

company to pay the short-term responsibilities with a big amount of liquid assets and this

comes to the conclusion that the higher the quick ratio the better the position of the

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company in the market. According to the ratios solved for both companies McDonalds in

2010 had a quick ratio of 1.22 and its principle competitor Yum Brands had a 0.87 in 2010,

according to this both companies are located in a good position but for the quick ratio

having similar result.

Asset Management

Yum 2008 2009 2010

Inventory Turnover 60.02 210.96 214.17 219.06

DSO 10.20 14.45 17.02 17.88

Fixed assets Turnover 1.89 0.94 0.85 0.87

Total Assets Turnover 1.4 0.83 0.75 0.75

Asset Management Ratios try to measure the company’s success in managing the

assets and generate sales. Whit these ratios the success of the firm and the inventory

management can be determined. Normally with a higher Inventory Turnover Ratio

indicated the better performance of the company showing that the inventory is quickly

being sold, but if this ratio is too high is telling the company that they are loosing sales with

the competitors because of the deficiencies in the inventory. McDonalds inventory turnover

for 2010 was 219.06 compared with Yum´s for 2010 that was 60.02 indicates that the

management of McDonalds and its inventory is much better than Yum´s, this means that

the company´s inventory is growing solid faster than its competitor.

The Days Sales Outstanding indicates on average the number of days that a

company takes to collect all of its receivables after being created. McDonalds waited

approximately 18 days to get the cash back from a company after making the sale while

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Yum Brands only wait approximately 10 days to receive the payment. However the DSO

tells us that if a competitor in the same industry in this case Yum Brands is collecting the

cash in less days then the potential for improvement in McDonalds company is more and it

will be often present until the day this number of days change.

The fixed assets turnover measures principally how god or bad the company is

managing its fix assets and this way start generating more sales. And the Total Assets

Turnover measures how efficiently the firm is generating its assets and this way generates

as well as the fix assets turnover more sales. The ratios of McDonalds and Yum in this case

are considerably similar because both companies are using the assets and fix assets at the

same percentage. However McDonalds should take in consideration that both of the ratios

are not going up how they should from 2008 to 2010 because this could put in a high risk

the efficiency in the assets of the company.

Debt Management

Yum 2008 2009 2010

Debt Ratio 0.81 0.53 0.54 0.46

Times Interest Earned 6.3 12.78 14.71 16.53

The debt ratio compares one company total debt and the total of its assets, it give us

a percentage of the funds provided by the liabilities and the long term debt, a lower

percentage than “1” indicate that the company is less dependent on control borrowed from

others, their level of assets compared to the level of debt is more, and higher level than 1

tell us that the company owns more money and is bad for its efficiency. According to

McDonalds and Yum Brands debt ratio both companies are situated in a great position with

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similar ratios being 0.46 and 0.81 respectively, which shows us that neither company owns

money or have any risk in this part of loosing its efficiency. The TIE ratio analyzes better

results than the ones given by the debt ratio. McDonalds TIE for the year of 2010 was

16.53% while Yum Brands ratio for the same year was 6.3%, this means that Yum’s level

of managing its interest charged are in a lower safety level than McDonalds and so on

having a higher level will not face problems when borrowing extra funds.

Profitability

Yum 2008 2009 2010

Gross Profit Margin 25.4% 37% 39% 40%

Net Profit Margin 10.21% 18% 20% 21%

Operating Profit Margin 14.05% 28% 31% 31%

ROA 13.92% 14.94% 15% 15.75%

ROE 75.4% 32% 32% 34%

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Profitability Ratios are a key piece of information with a very high percentage of

importance at the time of investing in any kind of company. The high revenue does not

transform itself into dividends until the time when the company is capable to pay off all of

the expenses and cost that it have.

Two of the main indicators of efficiency in a financial statement are the Return on

Equity (ROE) and the Return on Assets (ROA), the return on equity shows us the profit that

a company is getting from the owners of it obtained by the calculation between assets and

equity. This is a ratio works perfect to get a better understanding on how is the company

performing compared to its principle competitors. The ROA give results on how effective

the company is in what profitability and company´s assets availability, also let us know

where are the profits coming from and is calculated between the earnings and the total

assets. The main job for this profitability ratios are that they help people know if the

company will be profit and how this profit is going to be related with the industry.

If a company ends up with a really low profit margin, this means the company will

end up in a bad position In the market, but if the company has a really high profit margin

the companies advances will not last longer either, the key is to have a good profit margin

enough to last long and to end up in a good position in the market.

When it comes to the ROE and the ROA of the two companies being evaluated in

the project the results find are that Yum Brands are being more effectively to the ROE with

a 73.5% compared to the 34% of McDonalds, this means that Yum Brands management are

doing a better usage of the investors money, growing the company´s value at a really high

rate compared to the acceptable rate from McDonalds. The ROA gives the company the

amount of profit the company will earn for every dollar that is in its assets, including all the

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cash saving in the banks, accounts receivables, equipment property and furniture.

Professionals in the management of the money consider that companies with a ROA of less

than 5% are not profitable in a way they should, and looking at the numbers of Yum Brands

they have 13.92% and McDonalds 15.75% being both of the companies lower than the

ROE and demonstrating that they do not carry a lot of debt and at the same time are giving

investors the right impression about its fortune.

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Cash Conversion Cycle

Yum 2008 2009 2010

Inventory Conversion Period 2 2 2 2

Average Collection Period 10 14 17 18

Payables deferral Period (7) (10) (10) (14)

Cash Conversion Cycle 5 6 9 6

The Cash Conversion Cycle occurs when a company purchase or produce inventory, then

hold it for a period of time and finally sell it to get the cash, all of this in order to increase

its customer sales. The calculation of this includes 3 different period, the inventory

Conversion Period (ICP), Average Collection period (ACP), and last the Payables Deferral

Period (PDP), adding the first two and then subtracting the last one helps us find the

number of days for when the cash conversion cycle is going to occur. If the CC is short,

increase the risk for the company but at the same time it bring benefits to the company

because the collection of the money is before the expected, increasing the pre-tax operating

profit margin, creating better annual stock returns and will give the company better

emphasis on working capital management. According to the companies studied McDonalds

has a 6 days CCC during the years, this one went up in 2009 but then came down again in

2010. Compared to Yum Brands which its CC is 5 days being pretty close and similar in

every point of the results for this calculation which makes no big difference when knowing

which company makes the costumers happier than the other.

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Du Pont Analysis

ROA

Yum 2008 2009 2010

Profit Margin 10.21 18 20 21

X

Total Assets Turnover 1.4 0.83 0.75 0.75

ROA 13.92 14.94 15 15.75

Equity Multiplier

Yum 2008 2009 2010

Total Assets 8316000 28461500 30224900 31975200

/

Common Equity 1576000 13382600 14033900 14634200

Equity Multiplier 5.28 2.13 2.15 2.18

ROE = (PROFIT MARGIN) (TOTAL ASSETS T/O) (EQUITY MULTIPLIER)

Yum 2008 2009 2010

Profit Margin 10.21 18 20 21

Total Assets Turnover 1.4 0.83 0.75 0.75

Equity Multiplier 5.28 2.13 2.15 2.18

ROE 75.47 31.82 32.25 34.34

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Projection

After all the research done for McDonalds, its financial performance, the

competitors, the ratios, balance sheet, income statement and cash flow the

conclusions and suggestion in the projection for the year of 2011 will be.

McDonalds is been for a long time one of the most important companies of Wall

Street, for 30 consecutive quarters the company showed an increase of 6% even with

the 2008 recession. The industry of fast food is been successful for almost everyone,

making changes in its menus, offering new products attracting all kind of costumers

instead of focusing in just one kind.

The expectation for McDonalds Company is that will grow up about $1.15 per

share, about 12% from last year. For the last three years their stocks has been risen

close to 40% and this next upcoming year is not going to be the exception.

When it comes to food prices the projection is going to be around 2% to 3%

taking in consideration the Department of Agriculture comments. This will help the

company keep up with the increment on the prices for beef and ingredients use to

make its products. McDonalds needs to take in consideration all of its competitors

because if the others companies are not going to rise the prices in their products, this

could be risky and probably affect the company´s profit and would make it difficult for

future expansions. The projection for the earning growth is around 10% a little less of

what the projected was for the year before.

The net income has shown an increase during the years from 2008 through

2010, and according to the statements from the first quarters of 2011 the profit is

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been going up and the projection is that is going to continue the positive movement on

approximately 16%.

Total revenues compared through the years between 2008 and 2009 had a

decrease but went back up in 2010 and according to the quarter of 2011 the

projection as well is going to positive and keep increasing by the end of 2011 with an

increment of 12%

McDonalds is and it will keep being the top fast food restaurant not only in the

United States but in the world too, the sales according to the first two quarters already

release show an increment of 15% in its gross profit.

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Cost of Capital

In the whole Fast Food Industry McDonalds is considered the company with

the highest revenue almost doubling the total of its principal competitor Yum. The

Profit Margin is as well one of the highest for the industry permitting the company to

give more return to every shareholder with the dividends having a really competitive

ROIC because of its large capital investment.

The Valuation of McDonalds cost of capital was guided using regular models

finding the Cash Flow and coming up with a number of $87.73 per share as the intrinsic

value per share.

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NOPAT and Free Cash Flow

Over the years McDonalds has been generating a positive and big Free Cash Flow,

this has been growing annually at a rate of 4.25% and its NOPAT as well but historically

growing at an average rate of 11.33%.

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Economic and Market Value Added

The Economic Value Added was $3.24 by 2009 and was projected to decrease and

so it did in 2010 to $2.80, and it will be continue the decreasing due to the conservatism at

the time of adding money from the MacDonald Company. While the Market Value Added

went completely different and went up from $76.84 billions in 2009 to $79.16 billions for

2010 and is projected to continue this growing at a rate for 2011 of 2.8%

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After-Tax Cost of Debt, Cost of Preferred Stock and Cost of Equity

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After-Tax Cost of Debt: 5.2 %

Cost of Preferred Stock: 23.8 / 10.4 = 2.29 %

Cost of Equity (CAPM): 4.5 + (5)*1.17 = 10.4 %

WACC: 9 %

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ROIC

In 2009 MacDonald generated its highest return on capital with a 21.8%, and by the

year went through for 2010 this one went down just the percentage that was projected at the

end of 2009 and created an average of 19.4%

WACC

It was calculate above and MacDonald came up with a WACC of 9%, calculate

through the risk free rate, beta and market risk premium.

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Current Stock Price: $89.40

Daily Range $89.14 - $89.98

52 Week Range $72.14 - $91.22

Dividend Trends $2.80 (3.1%)

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P/E Ratio 18.08

Beta 0.45

3 Years Beta 0.36

Market Capitalization 92,145.74 Millions

(Price*shares outstanding)

Shares Outstanding 1,031.75 Millions

Due to McDonalds strong dividend, its constant balance sheet, and its consistent

capability to increase the shareholder value, The Company is rated as an appealing buy and

hold stock for the investment fund.

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The Long Run Growth

In the figure at the end of this, McDonalds validates expands the frame of 20 years

to the current forecast. 20 years ago the company started with a really low beginning and

according to the great and faster growth end up creating more dividends income and high

total return for all of the shareholders.

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In the Long Run, the shareholders return is a big key for the income statement for

the company to generate earnings. Capital Appreciation as well as the Dividend Income

will be determined by the earnings. Companies tend to be extremely consistent with the

payout ratios and McDonalds is not staying behind of all of this using the general rule that

consists on slowing the growing to try to create a higher payout ratio and grow faster.

McDonalds sales momentum continues as the company is focusing more and more

in the menu with the right products offering, renovating all the restaurants giving the

customers new experiences every day, upgrading the customer service offered.

The demand that McDonalds is been creating keeps growing, showing the success

of every worker effort, and give the customers the amazing experience every customer is

waiting for in the stores around the world.

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The estimate stock Price according to all the calculation and to the projections made

through the Project is that the EPS is going to grow between 8% and 10% for the next five

years.

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