fsa project mcdonalds v2.4

5/6/2014

MCDONALD’S

CORPORATION

FINANCIAL STATEMENT ANALYSIS

AND VALUATION – CASE STUDY OF A

FIRM

James DeChristy

Peter Foster

Saqib Shakil 156004799

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Executive Summary

The purpose of this report is to provide an investment recommendation on the stock of

McDonald’s Corporation. A variety of financial statement analyses and ratio analyses were

performed to arrive at a final recommendation to “hold” McDonald’s stock.

The key adjustment noted in the report was the potential capitalization of the company’s

operating leases. As a result, net operating assets and net operating profits after taxes would

increase by 29% and 12%, respectively. Negative impacts would be seen in the form of a 51%

increase in net non-operating liabilities and a 144% decrease in net non-operating expenses.

However, an arguably more important measure to investors is the return on equity (ROE).

Capitalization of the operating leases would trigger a decrease in ROE in excess of 10% (from

36% to 25%).

Another key finding of the report was the result of the disaggregation of ROE. When breaking

down ROE into its components of return on net operating assets (RNOA) and non-operating

return, it is clear that operating return is driving ROE. RNOA was nearly twice as much as non-

operating return for 2013 (23% versus 13%, equaling ROE of 35%). This indicates that

McDonald’s consistent, sustained success is very reliant on its operations.

Finally, as a result of forecasting the financial results for the next five years (1.95% assumed

growth rate) and calculating the present value, the calculated price per share equaled $99.50.

When comparing this OI-based price versus the current price of $101.25, it is clear that the

current price is inflated. A “buy” decision would not be ideal based on this. Pair that with the

rising stock price, a “sell” decision does not seem right at present either. In terms of price, the

price to earnings (P/E) ratio became an important factor. Having a P/E ratio consistent with the

S&P average (18% for both) along with the aforementioned factors, are what led to “hold” being

the final recommendation on McDonald’s stock.

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Table of Contents Executive Summary ........................................................................................................................ 1

1 Introduction.............................................................................................................................. 4

2 Company and Industry Analysis.............................................................................................. 4

2.1 External Business Environment ....................................................................................... 4

2.2 PESTEL Analysis of McDonald’s ................................................................................... 5

2.3 Porter 5 Forces Model ...................................................................................................... 8

2.4 Competitor Analysis......................................................................................................... 9

3 Analytical Adjustments ......................................................................................................... 10

3.1 Revenue Recognition Policy .......................................................................................... 10

3.2 Asset Recognition Policies............................................................................................. 10

4 Ratio Analysis, Historical Trends and Comparison to Competitors ...................................... 11

4.1 Profitability Analysis...................................................................................................... 11

4.2 Liquidity Analysis .......................................................................................................... 12

4.3 Debt Utilization .............................................................................................................. 13

4.4 Asset Utilization ............................................................................................................. 15

4.5 Valuation Ratios ............................................................................................................. 15

4.6 DuPont Analysis............................................................................................................. 18

5 ROE Disaggregation and Off-Balance Sheet Financing ....................................................... 20

6 Credit Risk Analysis .............................................................................................................. 23

7 Non-Owner Financing at MCD ............................................................................................. 24

8 Owner Financing and Recent Equity Activity ....................................................................... 25

9 Forecasting Financial Statements and OI-Based Valuation .................................................. 26

10 Analyst Recommendation and Consequences ................................................................... 29

Appendix A: MCD Income Statement 2013................................................................................. 30

Appendix B: MCD Balance Sheet 2013 ....................................................................................... 31

Appendix C: MCD Cash Flow Statement..................................................................................... 32

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Table of Figures Figure 1: Summary of PESTEL analysis of fast food industry ...................................................... 7

Figure 2: Porter 5 Forces Model ..................................................................................................... 8

Figure 3: Barriers to entry in international fast food market .......................................................... 9

Figure 4: Accumulated depreciation from MCD’s balance sheet ................................................. 11

Figure 5: MCD Profitability Analysis........................................................................................... 12

Figure 6: Liquidity analysis of MCD ............................................................................................ 13

Figure 7: Solvency of McDonald's ............................................................................................... 14

Figure 8: Debt Coverage of McDonald's ...................................................................................... 14

Figure 9: Cash Conversion Cycle of MCD ................................................................................... 15

Figure 10: Diluted EPS of MCD................................................................................................... 16

Figure 11: Stick repurchase and dividend..................................................................................... 17

Figure 12: EPS without stock repurchases.................................................................................... 17

Figure 13: PE Ratio of MCD and S&P500 ................................................................................... 18

Figure 14: 3- factor variant of DuPont Ratio ................................................................................. 19

Figure 15: Extended DuPont Ratio ............................................................................................... 19

Figure 16: ROE Disaggregation of MCD ..................................................................................... 21

Figure 17: PV of Operational Leases ............................................................................................ 21

Figure 18: Financial statement adjustments due to lease capitalization ....................................... 22

Figure 19: ROE disaggregation after adjustments ........................................................................ 22

Figure 20: Liabilities to Asset Ratio ............................................................................................. 23

Figure 21: Owner Financing ......................................................................................................... 25

Figure 22: Share repurchases ........................................................................................................ 26

Figure 23: Equity compensation plan for share dilution............................................................... 26

Figure 24: Variables for forecasting and ROPI calculation .......................................................... 27

Figure 25: OI-Based stock value of MCD .................................................................................... 28

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1 Introduction

The purpose of this report is to analyze and evaluate the financial performance of McDonald’s

Corporation (MCD) over last two years 2012-2013 in order to forecast its future performance.

The intended target audience for this report includes stock brokers and equity investors, who will

be advised to buy, sell, or hold MCD stock based on its past performance and future outlook.

2 Company and Industry Analysis

McDonald’s is the largest global fast food restaurant chain with more than 34,000 restaurants

serving nearly 70 million people in 118 countries every dayi. The global expansion strategy is

based on a franchise model with nearly 80% of McDonald's restaurants being owned and

operated by independent and local franchisees that operate their businesses in close coordination

with McDonald's Corporation, which charges a nominal management fee in return for allowing

the franchisees to use McDonald's branding and production processesii. Presently, the current

CEO of McDonald's Corporation is Don Thompson and the company has generated revenue of

$28.10 billion in 2013 with a net profit of $5.58 billion for the same yeariii. The company

employs almost 1.8 million people globally and its main competitors include Yum Brands Inc.

(KFC, Pizza Hut, Taco Bell, and Wing Street), Burger King, Subway, and Wendy's.

2.1 External Business Environment

Fast food restaurants generally provide quickly prepared meals to customers for either dine in or

take out, where customers pay up front at the time of placing an order. The economic drivers of

the fast food industry include consumer spending habits based on the sentiment towards fast

food, and the volatility in the prices of agricultural produce such as forestry, fishing, meat

industry and farm produceiv. The recent market projections suggest that the full-service

restaurant segment (in which McDonald’s operates) is posting a third consecutive year of real

sales growth during 2013, where total sales of this segment are expected to be $208 billion,

which is a 2.9% increase from $202.2 billion in 2012v. The answer to such an expansion can be

found in the economic theory of inferior goods that when the income level decreases, the

consumption of inferior goods increasesvi. During past five years, the world underwent a severe

economic recession resulting in low income levels globally, thereby triggering the consumption

of low price fast-food (i.e. the inferior good) that is not perceived as being healthy by today’s

consumer.

Moreover, the fast food chains are seeking growth from the emerging economies of Brazil, India,

Russia and China, which are deregulating their markets and welcoming foreign direct

investments as a result of international trade agreements. The fast food markets in developing

countries are facing saturation levels due to oversupply of fast food services, resulting in lower

revenues, intense price based competition and weaker revenue growth from these markets.

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Additionally, amid the health concerns regarding their food, the fast food restaurants are

responding by expanding their menu options to low calorie, fresh, organic, and less fatty, healthy

meals to capture the emerging market segmentvii.

Analyst Recommendation

Based on above mentioned analysis of the fast food industry, the analysts are of the view that

overall fast food industry is not only diversifying into new geographical markets but it is also

diversifying its product portfolio in the existing markets to capture the increasing demand for

healthier food choices. As a result, the recommendations of the three analysts working on this

project are as follows:

Sell Underperform Hold Buy Strong

Buy

External business

environment

2 1

2.2 PESTEL Analysis of McDonald’s

Macro-environmental factors greatly shape the way companies operate and perform in their

respective markets so it is important for business managers to perform thorough environmental

scanning of their businesses to gain valuable information about distinctive changes and their

impact on a firm’s strategy. The PESTEL analysis is one such framework that gives a holistic

view of a firm’s external environment and it stands for political, economic, social, technological,

legal and environmental elements that form the business ecosystem. The PESTEL analysis below

of McDonald’s Corporation can assist in understanding the operating strategy of this

organization.

Politically, the fast food industry is facing resistance from local political activists in Europe and

United States, who frequently highlight the negative health consequences of consuming fast food

and its implications for the government in the form of increasing health care burden that is borne

by taxpayersviii. These activists claim to link the increasing epidemic of obesity with the

increasing consumption of high sodium, high sugar, and calorie rich fast food and they try to

limit such consumption through policies related to taxation, employment and trade. By

increasing taxes, restricting working hours of employees, and increasing labor wages, the

opponents of fast food try to increase the overall cost of fast food in order to weaken demand in

the wake of increasing food prices.

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Economically, global organizations such as McDonald’s are deeply affected by fluctuations in

the inflation and exchange rates and have to implement risk management and hedging measures

to counter the effects of such fluctuations. Also, such economic factors as income levels,

customer utility, cost of living, government taxes, and subsidies to agri-businesses affect the

supply and demand of a firm’s goods to the market. Since McDonald’s relies on a vast number of

raw-material suppliers for its operations, minor changes in economic policies have deep impact

on its operationsix.

Socially, the fast food industry is facing staunch criticism for promoting junk food eating trends

and targeting young children through advertisements and promotions, which is increasingly

leading to obesity in our societyx. Over last 10 years, these concerns have resulted in decreased

fast food demand from elderly people and obese children, thereby forcing fast food operators to

diversify their product portfolio with healthy menu choices for both adults and kids, which may

lead to reduced profit margins. These changes are greatly affecting single product operators, such

as those who only sell hamburgers, but global brands like McDonald’s are already well placed to

capture the changing customer preference.

Technologically, the fast food industry has invested heavily in the food processing equipment

that has helped it reduce its reliance on human labor and increase the standardization of the food

manufacturing process. This technology is at its maturity stage and the industry is not expecting

any radical technological innovation that may provide any firm with a competitive advantage

over its rivals. However, the efficient implementation of supply chain management systems is

still assisting the fast food chains to monitor and control their operating costs. Environmentally,

the fast food restaurants, especially the ones that operate on a large global scale such as

McDonald’s, are frequently being held liable for polluting and damaging the environment

because of the extensive use of non- bio degradable material such as plastic and Styrofoam in its

food packaging. These allegations have led the fast food chains to utilize more bio-degradable

materials, such as paper for packaging and serving purposes, driving up the cost of raw materials

for these companiesxi. Legally, global fast food chains employee millions of people across the

globe, they face high legal costs in implementing and executing appropriate local laws and

regulations and often face lawsuits from employees, consumers and food activists in the wake of

diverging from any legal or ethical guidelines of the country.


Although the macro-environmental factors affect all industry participants equally, some

companies are better equipped with overcoming these hurdles and are better prepared to hedge

against these potential risks. A summary of these risks and McDonald’s position against them,

based on its market share and size, is highlighted in the Figure 1.

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Macro-

environmental

Factor

Overall

Outlook

MCD’s Position over its Competitors

Political Unfavorable Disadvantage, because of its high presence and junk

food image

Economic Unfavorable Advantage, because of high bargaining power over

suppliers to offset commodity price increases. Also,

due to high presence in the market and best value for

money, customers will still buy MCD products

despite reduction in purchasing power.

Social Neutral Advantage, because MCD is well placed to capture

changing consumer preferences towards healthy

food choices.

Technological Neutral Neutral, because same technology is available to

every fast food chain and it does not provide a

source of advantage to any single firm.

Environmental Unfavorable Neutral, because today every fast food operator

tends to act in an environmentally responsible

manner, which on one hand increases the cost of

operations, but can also result in cost savings if

carefully implemented.

Legal Unfavorable The legal and regulatory environment worldwide

exposes MCD to complex compliance, litigation and

similar risks that affects its operations and results in

material ways and has increased its cost of doing

business. In developing markets, MCD faces the

risks associated with new and untested laws and

judicial systems.

Figure 1: Summary of PESTEL analysis of fast food industry

So, based on this analysis, the following recommendations are put forth by the analysts.


Buy

PESTEL analysis 1 2

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2.3 Porter 5 Forces Model

Another important framework to assess the overall industry attractiveness was proposed by

Porterxii in the form of five market forces (see Figure 2) that shape up the industry dynamics in

any market.

Based on this framework and analysis of the fast food industry, this reveals that the threat of

competition is high, as the demand for fast food is increasing and fast food operators are

increasingly engaging in fierce competition with respect to price, food quality, consistency,

presentation, range and retail locations. Unlike the past couple of decades when fast food chains

used to limit their product offering to a limited number of items, these chains are now

consistently introducing a variety of foods with local tastes in order to capture the consumer

demand. Additionally, with easy access to technology and financing, new local competitors of

global fast food chains are emerging in every country, which offer similar product quality at a

lower price and their share of industry revenue is increasing every yearxiii. This essentially

translates into the fact that low start-up costs are resulting in threat of new entrants at a local

level. However, on a global scale, such a threat is minimal as the existing fast food chains are

almost maximizing the economies of scale and have captured a large segment of distribution

channels. A summary of barriers to entry is given in Figure 3.

Figure 2: Porter 5 Forces Model

Furthermore, the threat of substitutes is high. Other types of meals can easily replace fast food

meals; especially local ones such as home prepared meals, dine in restaurants, and meals

available at convenient stores. Also, with an increasing awareness about the health effects of fast

food, healthy alternatives are becoming more attractive among consumers. Furthermore, the

power of suppliers in front of global fast food chains is moderate as the buying power of global

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corporations like McDonald's is humongous, leaving moderate bargaining power with suppliers

over the prices of commodities. Still, the selection of suppliers to minimize the transportation

costs gives moderate bargaining power to local suppliers, which manage to receive the market

price of commodities. Lastly, although the individual consumers do not have the power to

influence the decisions of fast food chains directly, they influence it greatly by raising their

concerns through social media and other opinion outlets. The power of buyers is moderate and is

reflected in the increasing adherence of fast food industry to local social regulations and quality

standards to maintain their brand reputation.

Barriers to Entry Level/Impact Industry Competition High Industry Concentration Low

Life Cycle Stage Growing Capital Intensity Medium

Technology Change Medium

Regulation and Policy Heavy Industry Assistance None

Figure 3: Barriers to entry in international fast food market

2.4 Competitor Analysis

In the fast food industry, the two major market shareholders are McDonald’s with a 20.9%

market share in 2011, followed by Yum! Brands with an 11.9% market share, and then by

Subway, which commands only a 3.5% market sharexiv. These figures indicate that McDonald’s

strategy has served it well to become the largest fast-food chain in the world.


According to Porter’s theory of competitive advantage xii an organization can gain competitive

edge over its customers either by cost leadership or differentiation. As the Porter five forces

analysis reveal the presence of intense industry competition, it translates into the business

strategy of high cost saving along with localization of products to local tastes for increased

market share. So, in this highly competitive market, MCD holds a competitive advantage over its

competitors due to its dominant market share that earns it a higher bargaining power over its

competitors in terms of a lower cost of operations and strong franchising opportunities. So, based

on competitor and Porter 5 forces analyses, the analysts put forth the following recommendation:


Buy

Porter Five Forces and

Competitor analysis

1 2

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3 Analytical Adjustments

3.1 Revenue Recognition Policy

According to the McDonald’s annual report “The Company’s revenues consist of sales by

Company-operated restaurants and fees from franchised restaurants operated by conventional

franchisees, developmental licensees and foreign affiliates. Sales by Company-operated

restaurants are recognized on a cash basis. The Company presents sales net of sales tax and other

sales related taxes. Revenues from conventional franchised restaurants include rent and royalties

based on a percent of sales with minimum rent payments, and initial fees. Revenues from

restaurants licensed to foreign affiliates and developmental licensees include a royalty based on a

percentage of sales and may include initial fees. Continuing rent and royalties are recognized in

the period earned. Initial fees are recognized upon opening of a restaurant or granting of a new

franchise term, which is when the Company has performed substantially all initial services

required by the franchise arrangement.”

The revenue recognition policy of MCD is in compliance with GAAP, as it recognizes the

revenue when it is earned and the responsibilities are substantially performed. There are two

revenue streams for the company a) restaurant sales from MCD operated restaurants and b) rent

payments and franchising fees from restaurants licensed to foreign affiliates. MCD appropriately

follows the ‘revenue recognition’ principal and hence no analytical adjustment is needed in this

regard.

3.2 Asset Recognition Policies

Revenue generated from MCD owned restaurants is earned in the form of cash payments

received from customers and since no sales are made on credit, the chances of asset write-offs

related to accounts receivable are nil. For this reason, one cannot find an allowance for doubtful

accounts on the MCD balance sheet. Since there is no aging analysis for accounts receivable and

managerial estimation to determine the allowance for doubtful accounts is absent, no appropriate

analytical adjustment is needed with respect to accounts receivable.

Furthermore, McDonald’s states “Property and equipment at cost, with depreciation and

amortization provided using the straight-line method over the following estimated useful lives:

buildings - up to 40 years; leasehold improvement - the lesser of useful lives of assets or lease

terms, which generally include option periods; and equipment - three to 12 years.” The point to

note is that the useful lives of the assets are based on management’s estimates of the period over

which the assets will generate revenue; however, the effective lives are not to exceed lease term

plus options for leased property. Although, one may suspect managerial discretion in estimating

useful life of the long term assets, the useful lives are determined using historical experience

with similar assets, taking into account anticipated technological or other changes.

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The experience of past assets seems to be reasonable basis for determining the lives of future

assets and not much variation is expected as the technology in fast food industry is at a mature

stage. Furthermore, MCD periodically reviews the lives relative to physical factors, economic

factors and industry trends. If there are changes in the planned use of property and equipment, or

if technological changes occur more rapidly than anticipated, the useful lives assigned to these

assets are shortened, resulting in the accelerated recognition of depreciation and amortization

expense or write-offs in future periods. An overview of the accumulated depreciation account on

the balance sheet is presented in the Figure 4; it can be logically interpreted that no write-offs or

accelerated depreciation has been recognized in past three years and accumulated depreciation

has remained stable around 39% of total assets. So, for the purpose of calculating operating

income, no analytical adjustment is needed with regards to property, plant and equipment.

Figure 4: Accumulated depreciation from MCD’s balance sheet

4 Ratio Analysis, Historical Trends and Comparison to

Competitors

For analytical purposes this project will use the financial statements of the company, which are

reproduced in Appendices A, B and C. The common size income statement and the balance sheet

have also been developed to assist in the analysis. Furthermore, for benchmarking the analysts

will utilize the industry averages provided by Bloombergxv and Morningstarxvi.

4.1 Profitability Analysis

McDonald’s has two revenue streams – one from company owned restaurants and another from

franchising operations. For the calculation of gross profit margin, the relevant cost and revenue

values were chosen (i.e. COGS is only valid for company owned operations and franchising

related expenses are only attributable to revenues from franchising). However, this

disaggregation was not possible for the calculation of operating profit margin and the net profit

margin as the footnotes do not disclose the SG&A expenses attributable to each line of business.

Since both franchising and company owned restaurants are parts of MCD’s mainstream

operations, such disaggregation may provide little useful knowledge. However, the profitability

analysis of MCD’s wholly owned and franchising operations is carried out separately and is

presented in Figure 5.

In millions, except per share data December 31,2013 2012 2011 2013 2012 2011

Accumulated depreciation and amortization (14,608.30) (13,813.90) (12,903.10) -39.88% -39.04% -39.11%

Consolidated Balance Sheet Common Size Balance Sheet

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Figure 5: MCD Profitability Analysis

The operating profit margin and net profit margin of MCD hover around 31% and 19%

respectively. The operating profit margin or gross profit margin of MCD is lower than industry

average of 37.46%. However, this cannot be considered a weakness of MCD as there are two

outliers in the dataset - Burger King and Dunkin Brands with 74.61% and 81% gross profit

margins respectively. If these outliers are removed this ratio for the rest of the industry falls to

27.3%. Moreover, the net profit margin of the entire fast food industry is 8.7% on average, but

removing the very low performing players in the industry (with 1%-3% net profit margins) result

in this average to increase up to 14.7%. In terms of net profit margin, the analysis supports the

overall position of MCD in the industry as cost leader, because, despite the modest operating

margins as compared to some of its competitors, MCD boasts on average 5% more net profit

margin than its competitors.

4.2 Liquidity Analysis

The liquidity analysis of MCD is presented in Figure 6. The trends in the current, quick and cash

ratios are encouraging as all the ratios are improving over past 3 years. The current ratio of fast

food industry in 2013 was 1.6 and MCD is roughly similar to the industry average. Furthermore,

the quick ratio of MCD (1.3x) is also better than the industry average (1.2x) and it also maintains

an adequate amount of cash to cover its short-term obligations as evidenced by a 0.88x cash ratio

in 2013. It can be observed that over last 3 years, MCD has increased the amount of cash on

hand in order to be responsive during the economic recession and lack of high yield investment

opportunities over last few years. A downside of holding excessive cash is on the return on

2011 2012 2013

Gross profit margin of

company-operated restaurants18.89% 18.16% 17.46%

Gross profit margin from

franchising operations83.00% 82.97% 82.40%

Operating Profit Margin 31.58% 31.21% 31.18%

Net Profit Margin 20.38% 19.82% 19.87%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

Profitability Analysis

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average assets as the inclusion of cash balances in average assets reduced return on average

assets by about two percentage points for all years presented. However, for calculating the

operating performance of the company, ‘cash and cash equivalents’ have been removed from the

calculations.

Figure 6: Liquidity analysis of MCD

So, from an overall liquidity analysis it can be interpreted that MCD maintains an adequate level

of liquidity to support its current liabilities.

4.3 Debt Utilization

The solvency and debt coverage analyses of MCD are presented in Figure 7 and Figure 8

respectively. It can be seen that nearly 56% of MCD’s assets are being financed by liabilities

(both long and short term) and this ratio is slightly higher than the overall fast food industry

(55%). Additionally, the debt to equity ratio of the company is 88% as compared to 117% of the

rest of the industry and it indicates that MCD is well balanced in terms of financing its

operations and assets relative to its competitors, which mainly rely on debt financing to fund

their operations. No industry average has been provided for free operating cash flow to debt

ratio, but MCD has been keeping this ratio stable around 30%. Under more typical

circumstances, a high double-digit percentage ratio would be a sign of financial strength, while a

low percentage ratio could be a negative sign that indicates too much debt or weak cash flow

generation. It is important to investigate the larger factor behind a low ratio. A high or increasing

free cash flow to total debt ratio is usually a positive sign, showing that the company is in a less

risky financial position and better able to pay its debt load and, in the case of MCD, the company

can repay its entire debt within 3 years, provided it uses its entire free cash flow to repay its

interest bearing debt. A company with a decreasing ratio results in a riskier financial position, as

2011 2012 2013

Current Ratio 1.25 1.45 1.59

Quick Ratio 1.05 1.09 1.30

Cash Ratio 0.67 0.69 0.88

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

Liquidity of MCD

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declining cash flow and/or a rising debt load reveals a company that is less able to manage its

debt.

Figure 7: Solvency of McDonald's

Moreover, the average times interest earned and EBITDA coverage ratios for the entire fast food

industry are not available for benchmarking, but it can be observed that these two ratios are

stable in the case of MCD over last three years. MCD can cover its interest almost 17 times using

its EBIT and this coverage increases to almost 20 times after accounting for depreciation and

amortization, which are noncash accounts. Still, a comparison can be made with respect to the

nearest competitor of MCD, Yum brands, which has a TIE ratio of 13x and EBITDA coverage of

21x.

Figure 8: Debt Coverage of McDonald's

2011 2012 2013

Total Liabilities / Total Assets 0.56 0.57 0.56

Total Debt/Equity 0.867 0.89 0.88

Free Operating Cash Flow to

Debt0.35 0.29 0.30

- 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00

Solvency of MCD

2011 2012 2013

Times Interest Earned 17.31 16.66 16.79

EBITDA Coverage 20.18 19.54 19.83

0.00

5.00

10.00

15.00

20.00

25.00

Debt Coverage of MCD

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From an overall analysis of debt utilization it can be concluded that MCD is not only well

equipped to fulfil its short-term obligations but it is also generating adequate amounts of cash

and income from operations to cover its interest bearing debt obligations. One cannot conclude

that MCD is doing an outstanding job with debt utilization as compared to its competitors, but so

far the company has portrayed a stable outlook and strong operations that steer away any worries

of bankruptcy arising from failure to cover debt obligations.

4.4 Asset Utilization

The asset utilization of MCD is depicted in the form of its cash conversion cycle in Figure 9. In

2013, the accounts receivable turnover and inventory turnover of MCD were 14.01 and 126.96

respectively. Additionally, the company has cut down its cash conversion time by 33% since last

year due to better accounts receivable collection and increased short-term financing through

accounts payable. Improvements in these two areas have reduced the cash conversion time to

merely 2.84 days and the company was able to achieve this due to rapid inventory turnover, the

ability to adjust menu prices and effective cost controls.

Figure 9: Cash Conversion Cycle of MCD

Based on an improved cash conversion cycle and better asset utilization, the analysts consider

MCD as a strong buy.

4.5 Valuation Ratios

Diluted earnings per common share are calculated using net income divided by diluted weighted-

average shares. Diluted weighted average shares include weighted-average shares outstanding

plus the dilutive effect of share-based compensation calculated using the treasury stock method

(in millions of shares): 2013–7.6; 2012–10.1; 2011–12.8. Stock options that were not included in

2012 2013

Days sales outstanding 26.59 26.06

Days payable outstanding 25.21 26.10

Days inventory outstanding 2.86 2.87

Cash Conversion Cycle 4.23 2.84

0.00

5.00

10.00

15.00

20.00

25.00

30.00

Cash Conversion Cycle of MCD

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diluted weighted average shares because they would have been anti-dilutive were (in millions of

shares): 2013–4.7; 2012–4.7; 2011–0.0. The diluted EPS for MCD are shown in Figure 10.

Figure 10: Diluted EPS of MCD

EPS presents an encouraging figure of MCD because of 4% growth in per share earnings, which

can result from either stock repurchases or from increased earnings. The company’s footnote

further discloses information about the calculation of EPS as in 2013 the net income increased

2% (3% in constant currencies) to $5.6 billion. However, foreign currency translation and lower

company-operated gross margin had a negative impact of $0.05 on diluted earnings per share, it

was more than offset by growth in net income that was positively impacted by higher franchised

margin dollars, and to a lesser extent, lower selling, general and administrative expenses.

Additionally, a decrease in diluted weighted average shares outstanding also contributed to the

diluted earnings per share growth in 2013.

As a comparison, in 2012, net income decreased 1% (increased 3% in constant currencies) to

$5.5 billion and diluted earnings per common share increased 2% (5% in constant currencies) to

$5.36. Foreign currency translation had a negative impact of $0.17 on diluted earnings per share.

Net income and diluted earnings per share growth in constant currencies were positively

impacted by growth in franchised margin dollars, partly offset by a higher effective income tax

rate and higher selling, general and administrative expenses in 2012. The Company repurchased

18.7 million shares of its stock for $1.8 billion in 2013 and 28.1 million shares of its stock for

$2.6 billion in 2012, driving reductions in weighted-average shares outstanding on a diluted basis

in both periods.

From this information it can be concluded that a number of important factors that affect the EPS

of MCD include SG&A expenses, net income, earnings from franchise operations, foreign

currency translation, income taxes and stock repurchases. However, MCD has been consistently

2011 2012 2013

Earnings per common

share–diluted$5.27 $5.36 $5.55

$5.10

$5.15

$5.20

$5.25

$5.30

$5.35

$5.40

$5.45

$5.50

$5.55

$5.60

Axis

Tit

leEarnings per common share–diluted

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inducing growth in its EPS through regular stock repurchases. Indeed, for the last three years, the

Company returned a total of $16.4 billion to shareholders through a combination of share

repurchases and dividends. The repurchase and dividend details of MCD are shown in the Figure

11.

Figure 11: Stick repurchase and dividend

So, in the opinion of analysts, the stock repurchase is not an operational decision of a company

and the EPS from the operations of the company can be identified by negating the impact of

stock repurchases as shown in Figure 12. It can be seen that the EPS was inflated by 10bps in

2013, while this impact has been higher in past years reaching up to 20bps in 2011. On average

EPS in fast food industry was 1.304 in 2013 and MCD has performed much better than rest of its

competitors.

Figure 12: EPS without stock repurchases

2011 2012 2013

EPS without

repurchases$5.06 $5.21 $5.45

$4.80

$4.90

$5.00

$5.10

$5.20

$5.30

$5.40

$5.50

Axis

Tit

le

EPS without stock repurchases

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The change in EPS also affects the P/E ratio of MCD. The price to earnings ratio (PE Ratio) is

the measure of the share price relative to the annual net income earned by the firm per share. PE

ratio shows current investor demand for a company share. A high PE ratio generally indicates

increased demand because investors anticipate earnings growth in the future. The PE ratio has

units of years, which can be interpreted as the number of years of earnings to pay back purchase

price. However, the PE ratio cannot be seen and interpreted in isolation and usually a comparison

is made with the composite index to understand the confidence of investors in the company as

compared to the overall market. So, the P/E ratio of MCD and S&P 500 is presented in Figure 13

and it can be interpreted that the overall stock market considers MCD a reasonable buy with PE

ratio similar to that of the overall industry.

Figure 13: PE Ratio of MCD and S&P500

4.6 DuPont Analysis

To perform DuPont analysis, the analysts have used two variants of the DuPont ratio. The first

variant utilizes profit margin, total asset turnover and equity multiplier and is shown in Figure 14

for basic DuPont analysis.

2011 2012 2013

PE Ratio with stock repurchases 19.82 17.23 17.79

S&P PE Ratio for the year end 14.87 17.03 18.19

0.00

5.00

10.00

15.00

20.00

25.00

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Figure 14: 3-factor variant of DuPont Ratio

It can be seen from Figure 14 that despite better profitability and the same equity multiplier, the

lower total asset turnover in 2013 has resulted in lower ROE and this originates from a higher

percentage increase in average equity as compared to that of average assets. Lower asset

turnover means that the volume of sales that MCD generated from each dollar invested in assets

in 2013 is lower than that of 2012 and it can increase its asset turnover by increasing sales

volume without increasing its assets and/or by reducing asset investment without reducing sales.

Figure 15: Extended DuPont Ratio

2012 2013

NI/Revenue 19.82% 19.87%

Revenue/Average Assets 0.81 0.78

Average Assets/Average OE 2.30 2.30

DuPont ROE 36.82% 35.69%

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

2012 2013

NI/EBT 0.68 0.68

EBT/EBIT 0.94 0.94

EBIT/Revenue 0.31 0.31

Revenue/Average Assets 0.81 0.78

Average Assets/Average OE 2.30 2.30

DuPont ROE 36.82% 35.69%

0.00

0.50

1.00

1.50

2.00

2.50

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Our analysis of the DuPont ratio can be further strengthened by using an extended DuPont ratio

as presented in Figure 15, which clearly shows that a lower asset turnover is the primary reason

for the lower ROE of MCD in 2013. Both the three- and five-step equations provide a deeper

understanding of a company's ROE by examining what is really changing in a company rather

than looking at one simple ratio. As always with financial statement ratios, the results should be

examined against the company's history and its competitors, so, the average asset turnover of the

fast food industry has been 0.68 in 2013. This means that MCD has performed better than the

overall industry, but in 3% change in asset turnover has resulted in 3% reduction in the ROE of

the company and asset turnover should be monitored closely for MCD as it is dependent on the

operating activities of the company.

5 ROE Disaggregation and Off-Balance Sheet Financing

ROE disaggregation is used as a foundation to analyze the operating and non-operating

components of MCD’s return on equity. As it can be seen in the disaggregation of ROE (Figure

16), operating return (RNOA) is nearly twice as high as the non-operating return for both 2013

and 2012. For 2013, RNOA was 23.05% and non-operating return was 12.64%. For 2012,

RNOA was 23.87% and non-operating return was 12.94%. The fact that MCD has excellent

returns on its operations means that the company can rely heavily on its operations to support the

business. A further analysis of the MCD income statement (Appendix A) reveals that non-

operating expenses totaled $559.8M versus operating expenses of $19,341.40M for 2013.

Similarly, 2012 totals for the same measures were $525.60M and $18,962.40M, respectively.

The bulk of the non-operating expenses appear to be interest on MCD’s long-term debt. With the

company’s debt to equity ratio (Section 4.3) being nearly 1 for 2011, 2012 and 2013, MCD is

well balanced from a financing standpoint. Because MCD is so reliant on its operating return, it

is crucial to analyze its profitability ratios especially the operating profit margin. This measure is

a good indication of how well the company performs by analyzing its income and expenses from

operations. As seen in profitability analysis, the MCD’s operating profit margin is high –

consistently around 31% for the three previous years. To conclude, MCD relies heavily on its

operations but with such profitable operations, it is not a concern. A greater concern would be if

the company was more reliant on non-operating sources because that is not as sustainable in the

long-term.

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Figure 16: ROE Disaggregation of MCD

Although the ROE of 35.69% for MCD seems to be an achievable figure because it is an industry

leader, a deeper analysis of the footnotes indicate that MCD carries a huge number of its assets

as operating leases, and if these leases are capitalized then it adversely affects the ROE of the

company. The present value of operating leases comes out to be $10,590M as shown in figure

17.

Figure 17: PV of Operational Leases

Furthermore, the adjustments in the financial statements are shown in figure 18.

ROE Disaggregation 2013 2012 2011

Total interest expense 559.80 525.60 517.50

Effective Tax Rate 31.92% 32.36% 31.32%

Tax Shield 178.67 170.07 162.06

Tax from Operations 2,797.27 2,784.27 2,671.16

NOPAT 5,967.03 5,820.33 5,858.54

Average NOA 25,889.90 24,386.30

RNOA 23.05% 23.87%

Average Stockholder's Equity 15,651.650 14,841.900

NNO 10,343.600 10,132.900 8,935.900

Average NNO 10,238.250 9,534.400

FLEV 0.654 0.642

NNE 381.131 355.527 355.440

NNEP 3.72% 3.73%

Spread 19.33% 20.14%

Non-operating return 12.64% 12.94%

ROE = RNOA + Non-operating Return 35.69% 36.80%

ROE (Direct Method) = NI/Average Stockholder's

Equity

ROE 35.69% 36.82%

In millions Operating leases PV of operating leases

2014 1,440 $1,338.12

2015 1,334 $1,151.91

2016 1,218 $977.33

2017 1,099 $819.45

2018 990 $685.95

Thereafter 7,632

Total 13713 $10,590.26

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Figure 18: Financial statement adjustments due to lease capitalization

As a result of these adjustments, the ROE for 2013 drops almost 10% with a 5% drop in both

operating and non-operating returns. The operating return has dropped due to a 41% increase in

operating assets, which have more than offset the increase in NOPAT due to the removal of rent

expense. The non-operating return has dropped due to more than 100% increase in non-operating

expenses and non-operating liabilities. The ROE calculation after adjustments is shown in Figure

19.

Figure 19: ROE disaggregation after adjustments

Adjustments in Balance Sheet 2013

Mcdonald's Reported Figures Adjustments

Adjusted

Figures % Increase

Net operating assets 25,889.90 $10,590.26 36,480 40.90%

Net non-operating liabilities 10,238.250 $10,590.26 20,829 103.44%

Equity

Adjustments in Income Statement

Remove rent expense $1,892.6

Add depreciation expense $833

Add interest expense $806

Tax rate 31.92%

Mcdonald's Reported Figures Adjustments

Adjusted

Figures % Increase

NOPAT 5,967.03 $721 6,688.25 12.09%

Net non-operating expense 381.131 548.98 930.11 144.04%

ROE Disaggregation 2013

Total interest expense 559.80

Effective Tax Rate 31.92%

Tax Shield 178.67

Tax from Operations 2,797.27

NOPAT 6,688.25

Average NOA $36,480.16

RNOA 18.33%

Average Stockholder's Equity 15,651.650

NNO 10,343.600

Average NNO 20,828.513

FLEV 0.654

NNE 1,651.331

NNEP 7.93%

Spread 10.41%

Non-operating return 6.81%

ROE = RNOA + Non-operating Return 25.14%

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So, based on a complete analysis of MCD ratios, the analysts have the following

recommendations for MCD’s stock.


Buy

Profitability analysis 1 1 1

Liquidity analysis 1 2

Debt utilization 1 1 1

Asset utilization 1 1 1

Valuation ratios 1 1 1

DuPont/ROE Analysis 3

6 Credit Risk Analysis

McDonald’s is a globally diversified company with worldwide sales in excess of $90 billion.

Even with a slight decrease in same store sales from year prior, their credit ratings remain stable.

In addition to the financial data that is explicitly stated on the company’s financial documents,

the analyst also has to consider the non-financial statement information about the brand equity

that McDonald’s carries. Everything else being equal and with no outlandish findings about the

way McDonald’s processes their food or treats their employees, they will remain a quick service

restaurant wildly trusted by consumers. The trust from consumers is the backing to strong

financial data that is reflected through ratio analysis and financial statement analysis. This strong

brand equity gives McDonald’s the ability to have over 35,000 locations worldwide, and over

$90 billion in sales. Over the past three years of financial data, McDonald’s has maintained a

consistent balance of total liabilities to total assets, averaging $0.5633 over the past three years.

Figure 20: Liabilities to Asset Ratio

$0.55

$0.56

$0.56

$0.57

$0.57

$0.58

$0.58

2011 2012 2013

Total Liabilities / Total Assets

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The situation for McDonald’s to utilize debt-financing needs to be considered. If McDonald’s

needed to take out a loan in order to cover their existing interest payments, this would draw a red

flag for an unstable credit rating. However, McDonald’s has times interest earned ratios of 16.79,

16.66, and 17.31 for the past three years. This means the company has enough earnings to cover

their interest expense almost 17 times over. A high number for times interest earned signals a

low risk of default to the market. Given the strong brand equity of McDonald’s, their consistent

and strong earnings, and their stable and consistent debt levels, they can be qualified with a

strong credit rating.

In terms of credit related losses, McDonald’s is exposed by counterparties to its hedging

instruments in the event of non-performance. The counterparties to these agreements consist of a

diverse group of financial institutions and market participants. MCD continually monitors its

positions and the credit ratings of its counterparties and adjusts positions as appropriate.

Fortunately, MCD does not have significant exposure to any individual counterparty.

Furthermore, at December 31, 2013, neither the Company nor its counterparties were required to

post collateral on any derivative position, other than on hedges of certain of the Company’s

supplemental benefit plan liabilities where its counterparties were required to post collateral on

their liability positions. This shows that the company has a prudent policy of hedging its risk

positions and so far it has not been required by the lenders to post any collateral for short and

long-term borrowing.

7 Non-Owner Financing at MCD

At December 31, 2013, MCD had a $1.5 billion line of credit agreement expiring in November

2016 with fees of 0.065% per annum on the total commitment, which remained unused. Fees and

interest rates on this line are based on the Company’s long-term credit rating assigned by

Moody’s and Standard & Poor’s. The current credit rating of McDonald’s senior unsecured debt

in both foreign and domestic markets is A2 from Moody’sxvii, A for foreign and local long terms

debt, and A-1 for foreign and local short-term debt from S&Pxviii. MCD’s subsidiaries had

unused lines of credit that were primarily uncommitted, short-term and denominated in various

currencies at local market rates of interest. The weighted-average interest rate of short-term

borrowings was 5.1% at December 31, 2013 (based on $609.7 million of foreign currency bank

line borrowings) and 4.1% at December 31, 2012 (based on $581.3 million of foreign currency

bank line borrowings and $200.0 million of commercial paper).

The Company has incurred debt obligations principally through public and private offerings and

bank loans. There are no provisions in MCD’s debt obligations that would accelerate repayment

of debt as a result of a change in credit ratings or a material adverse change in the Company’s

business. Certain of the Company’s debt obligations contain cross-acceleration provisions, and

restrictions on Company and subsidiary mortgages and the long-term debt of certain subsidiaries.

Under certain agreements, the Company has the option to retire debt prior to maturity, either at

of 34

par or at a premium over par. The Company has no current plans to retire a significant amount of

its debt prior to maturity.

Borrowings related to the leveraged Employee Stock Ownership Plan ("ESOP") at December 31,

2013, which include $23.2 million of loans from the Company to the ESOP, are reflected as debt

with a corresponding reduction of shareholders’ equity (additional paid-in capital included a

balance of $19.9 million and $27.2 million at December 31, 2013 and 2012, respectively). The

ESOP is repaying the loans and interest through 2018 using Company contributions and

dividends from its McDonald’s common stock holdings. As the principal amount of the

borrowings is repaid, the debt and the unearned ESOP compensation (additional paid-in capital)

are reduced.

8 Owner Financing and Recent Equity Activity

The Company’s common stock trades under the symbol MCD and is listed on the New York

Stock Exchange in the U.S. The following table sets forth the common stock price ranges on the

New York Stock Exchange and dividends declared per common share:

Figure 21: Owner Financing

The number of shareholders of record and beneficial owners of the company’s common stock as

of January 31, 2014 were estimated to be 1,824,000. MCD’s management believes it is prudent

to reinvest in the business in markets with acceptable returns and/or opportunity for long-term

growth and use excess cash flow to return cash to shareholders through dividends and share

repurchases. The company has dividend policy based on consistent payouts and has paid

dividends on common stock for 38 consecutive years through 2013 and has increased the

dividend amount at least once every year. As in the past, future dividend amounts will be

considered after reviewing profitability expectations and financing needs, and will be declared at

the discretion of its Board of Directors. Furthermore, MCD believes in paying out to its

shareholders in the form of equity repurchases as shown from the following table:

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Figure 22: Share repurchases

The following table summarizes information about the MCD’s equity compensation plans as of

December 31, 2013. All outstanding awards relate to the MCD’s common stock. Shares issued

under all of the following plans may be from the MCD’s treasury, newly issued or both.

Figure 23: Equity compensation plan for share dilution

The impact of share dilution has already been incorporated in earning per share calculation of the

company and it has not been further utilized for analytical purposes in this report.

9 Forecasting Financial Statements and OI-Based Valuation

To forecast the financial performance of MCD for next five years the analysts have utilized the

parsimonious method of forecasting. All the important ratios, such as NOPM and NOAT, have

been calculated using the adjusted ROE calculation table (Figure 19). Furthermore, these

projected numbers have also been utilized to perform the operating income based (OI-based)

valuation of the company. However, to calculate the ROPI based stock price of MCD a number

of other variables were calculated first (see Figure 24) and the details of their calculations are as

follows:

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i. Weighted Average Cost of Capital (WACC) was calculated by first identifying the

weights of debt and equity financing utilized by MCD. Since, MCD has never issued any

preferred stock, so, the calculation was limited to common stock and debt.

ii. The cost of equity was calculated through the dividend discount model and the historical

data available in MCD’s financial statements (income statement) was utilized.

iii. The effective cost of debt was provided in the footnotes of 10K filing of MCD.

iv. Effective tax rate was already calculated in ROE disaggregation.

v. Sales growth has been computed based on the year-over-year sales trend.

vi. Terminal growth rate was calculated from World Bank’sxix report on global economic

growth rates. Since, MCD operates in more than 100 countries; an average of all GDP

growth rates was taken as a terminal growth rate.

Figure 24: Variables for forecasting and ROPI calculation

Finally, the OI-based stock calculation is presented in Figure 25 and according to our analysis

the true price of MCD stock should be $99.50 as compared to the current slightly inflated price

of $101.25xx.

2013

Dividends declared per common share 3.12$

Stock Price on Dec 31 96.91

Dividend yield 3.22%

Dividend growth 8.71%

Cost of equity capital 11.93%

Cost of debt 4%

Effective Tax Rate 31.9%

After tax cost of debt 2.7%

Weight of debt 47%

Weight of equity 53%

WACC 7.6%

Avg. NOA 36,480.2

Avg. NNO 20,828.5

NOPM 23.80%

NOAT 0.8

Sales growth 1.95%

Terminal growth rate 3.0%

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Figure 25: OI-Based stock value of MCD

Total number of shares outstanding (million) 1,006.00

MCD Reported

($ millions) 2013 2014 2015 2016 2017

Sales 28,105.70 $28,655 $29,215 $29,786 $30,368 $30,961

NOPAT 6,688.2 6,818.9 6,952.2 7,088.1 7,226.6 7,367.8

NOA 36,480.2 37,193.0 37,919.8 38,660.9 39,416.3 40,186.6

Year 1 2 3 4 5

WACC x NOA 2777.6 2831.9 2887.2 2943.6 3001.1

ROPI 4,041 4,120 4,201 4,283 4,367

PV of ROPI $3,755.43 $3,557.92 $3,370.80 $3,193.52 $94,640.3

PV of Horizon $13,877.67

PV of terminal $70,567.01

Total value of the firm (NNO+OE) $120,924.84

Total value of the firm's equity $100,096.33

Price per share $99.50 vs. $101.25

Forecast Horizon Terminal

Period

Author:

Value of terminal in 2017

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10 Analyst Recommendation and Consequences

When aggregating the analyst recommendations from each section of the report, the final

consensus is a Hold position on the MCD stock (see below). As presented in Figure 13, the MCD

P/E ratio is consistent with the P/E ratio of the S&P 500 indicating that MCD is a stock worth

having in an investment portfolio. Before concluding to hold MCD stock, it is best to analyze the

alternatives to determine if they are better. The OI-based valuation in Figure 25 indicates that the

MCD price is currently inflated at $101.25 (versus the calculated price of $99.50). Conversely,

selling MCD stock would not be an ideal choice either as the stock price has been steadily

climbing over the past several weeks. In conclusion, based on the analyses from the report

(summarized below) and after weighing the alternatives, the evidence clearly indicates that a

Hold position is best for the MCD stock.


Buy

External business environment

1 2

PESTEL analysis

1 2

Porter five forces and competitor analysis

1 2

Profitability analysis

1 1 1

Liquidity analysis

1 2

Debt utilization

1 1 1

Asset utilization

1 1 1

Valuation ratios

1 1 1

DuPont/ROE Analysis

3

Stock Valuation

3

Total 0 3 15 10 2

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Appendix A: MCD Income Statement 2013

In millions, except per share data Years ended December 31,2013 2012 2011 2013 2012 2011

REVENUES

Sales by Company-operated restaurants 18,874.20$ 18,602.50$ 18,292.80$

Revenues from franchised restaurants 9,231.50 8,964.50 8,713.20

Total revenues 28,105.70 27,567.00 27,006.00

OPERATING COSTS AND EXPENSES

Company-operated restaurant expenses

Food & paper 6,361.30 6,318.20 6,167.20 22.63% 22.92% 22.84%

Payroll & employee benefits 4,824.10 4,710.30 4,606.30 17.16% 17.09% 17.06%

Occupancy & other operating expenses 4,393.20 4,195.20 4,064.40 15.63% 15.22% 15.05%

Franchised restaurants-occupancy expenses 1,624.40 1,527.00 1,481.50 5.78% 5.54% 5.49%

Selling, general & administrative expenses 2,385.60 2,455.20 2,393.70 8.49% 8.91% 8.86%

Other operating (income) expense, net (247.20) (243.50) (236.80) -0.88% -0.88% -0.88%

Total operating costs and expenses 19,341.40 18,962.40 18,476.30 68.82% 68.79% 68.42%

Operating income 8,764.30 8,604.60 8,529.70 31.18% 31.21% 31.58%

Interest expense-net of capitalized interest of

$15.5, $15.9 and $14.0 521.90 516.60 492.80 1.86% 1.87% 1.82%

Nonoperating (income) expense, net 37.90 9.00 24.70 0.13% 0.03% 0.09%

Income before provision for income taxes 8,204.50 8,079.00 8,012.20 29.19% 29.31% 29.67%

Provision for income taxes 2,618.60 2,614.20 2,509.10 9.32% 9.48% 9.29%

Net income 5,585.90$ 5,464.80$ 5,503.10$ 19.87% 19.82% 20.38%

Earnings per common share–basic 5.59$ 5.41$ 5.33$

Earnings per common share–diluted 5.55$ 5.36$ 5.27$

Dividends declared per common share 3.12$ 2.87$ 2.53$

Weighted-average shares outstanding–basic 998.40 1,010.10 1,032.10

Weighted-average shares outstanding–diluted 1,006.00 1,020.20 1,044.90

Consolidated Statement of Income

Common Size income

Statement

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Appendix B: MCD Balance Sheet 2013

In millions, except per share data December 31,2013 2012 2011 2013 2012 2011

ASSETS

Current assets

Cash and equivalents 2,798.70$ 2,336.10$ 2,335.70$ 7.64% 6.60% 7.08%

Accounts and notes receivable 1,319.80 1,375.30 1,334.70 3.60% 3.89% 4.05%

Inventories, at cost, not in excess of market 123.70 121.70 116.80 0.34% 0.34% 0.35%

Prepaid expenses and other current assets 807.90 1,089.00 615.80 2.21% 3.08% 1.87%

Total current assets 5,050.10 4,922.10 4,403.00 13.79% 13.91% 13.35%

Other assets

Investments in and advances to affiliates 1,209.10 1,380.50 1,427.00 3.30% 3.90% 4.33%

Goodwill 2,872.70 2,804.00 2,653.20 7.84% 7.92% 8.04%

Miscellaneous 1,747.10 1,602.70 1,672.20 4.77% 4.53% 5.07%

Total other assets 5,828.90 5,787.20 5,752.40 15.91% 16.35% 17.44%

Property and equipment

Property and equipment, at cost 40,355.60 38,491.10 35,737.60 110.18% 108.77% 108.33%

Accumulated depreciation and amortization (14,608.30) (13,813.90) (12,903.10) -39.88% -39.04% -39.11%

Net property and equipment 25,747.30 24,677.20 22,834.50 70.30% 69.74% 69.22%

Total assets 36,626.30$ 35,386.50$ 32,989.90$

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities

Accounts payable 1,086.00$ 1,141.90$ 961.30$ 5.27% 5.68% 5.17%

Income taxes 215.50 298.70 262.20 1.05% 1.49% 1.41%

Other taxes 383.10 370.70 338.10 1.86% 1.84% 1.82%

Accrued interest 221.60 217.00 218.20 1.07% 1.08% 1.17%

Accrued payroll and other liabilities 1,263.80 1,374.80 1,362.80 6.13% 6.84% 7.33%

Current maturities of long term debt 366.60 1.97%

Total current liabilities 3,170.00 3,403.10 3,509.20 15.38% 16.94% 18.89%

Long-term debt 14,129.80 13,632.50 12,113.80 68.54% 67.85% 65.20%

Other long-term liabilities 1,669.10 1,526.20 1,612.60 8.10% 7.60% 8.68%

Deferred income taxes 1,647.70 1,531.10 1,344.10 7.99% 7.62% 7.23%

Shareholders’ equity

Preferred stock, no par value; authorized – 165.0 million

shares; issued – none

Common stock, $.01 par value; authorized – 3.5 billion shares;

issued – 1,660.6 million shares 16.60 16.60 16.60 0.10% 0.11% 0.12%

Additional paid-in capital 5,994.10 5,778.90 5,487.30 37.44% 37.79% 38.13%

Retained earnings 41,751.20 39,278.00 36,707.50 260.79% 256.83% 255.09%

Accumulated other comprehensive income 427.60 796.40 449.70 2.67% 5.21% 3.13%

Common stock in treasury, at cost; 670.2 and 657.9 million shares (32,179.80) (30,576.30) (28,270.90) -201.00% -199.93% -196.46%

Total shareholders’ equity 16,009.70 15,293.60 14,390.20

Total liabilities and shareholders’ equity 36,626.30$ 35,386.50$ 32,969.90$

Consolidated Balance Sheet Common Size Balance Sheet

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Appendix C: MCD Cash Flow Statement

In millions Years ended December 31, 2013 2012 2011

Operating activities

Net income 5,585.90$ 5,464.80$ 5,503.10$

Adjustments to reconcile to cash provided by operations

Charges and credits:

Depreciation and amortization 1,585.10 1,488.50 1,415.00

Deferred income taxes 25.20 134.50 188.40

Share-based compensation 89.10 93.40 86.20

Other 26.80 (92.00) (82.60)

Changes in working capital items:

Accounts receivable 56.20 (29.40) (160.80)

Inventories, prepaid expenses and other current assets (44.40) (27.20) (52.20)

Accounts payable (60.70) 124.10 35.80

Income taxes (154.40) (74.00) 198.50

Other accrued liabilities 11.90 (116.60) 18.70

Cash provided by operations 7,120.70 6,966.10 7,150.10

Investing activities

Capital expenditures (2,824.70) (3,049.20) (2,729.80)

Purchases of restaurant businesses (181.00) (158.50) (186.40)

Sales of restaurant businesses and property 440.10 394.70 511.40

Other (108.20) (354.30) (166.10)

Cash used for investing activities (2,673.80) (3,167.30) (2,570.90)

Financing activities

Net short-term borrowings (186.50) (117.50) 260.60

Long-term financing issuances 1,417.20 2,284.90 1,367.30

Long-term financing repayments (695.40) (962.80) (624.00)

Treasury stock purchases (1,777.80) (2,615.10) (3,363.10)

Common stock dividends (3,114.60) (2,896.60) (2,609.70)

Proceeds from stock option exercises 233.30 328.60 334.00

Excess tax benefit on share-based compensation 92.60 142.30 112.50

Other (11.80) (13.60) (10.60)

Cash used for financing activities (4,043.00) (3,849.80) (4,533.00)

Effect of exchange rates on cash and equivalents 58.70 51.40 (97.50)

Cash and equivalents increase (decrease) 462.60 0.40 (51.30)

Cash and equivalents at beginning of year 2,336.10 2,335.70 2,387.00

Cash and equivalents at end of year 2,798.70 2,336.10 2,335.70

Supplemental cash flow disclosures

Interest paid 532.70 533.70 489.30

Income taxes paid 2,546.00 2,447.80 2,056.70

Consolidated Statement of Cash Flows

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References

i McDonald’s’s Corporate (2014). McDonald’s – The Leading Global Food Service Retailer ::

AboutMcDonald’s.com. [ONLINE] Available at: http://www.aboutMcDonald’s .com/mcd/our_company.html.

[Accessed 15 February 2014].

ii McDonald’s Franchising (2014). FAQs :: AboutMcDonald’s.com. [ONLINE] Available

at:http://www.aboutMcDonald’s .com/mcd/franchising/FAQs.html. [Accessed 15 February 2014].

iii McDonald’s Financials (2014). Financial Highlights :: AboutMcDonald’s.com. [ONLINE] Available

at:http://www.aboutMcDonald’s .com/mcd/investors/financial_highlights.html. [Accessed 15 February 2014].

iv McDonald’s Annual Report (2012). [ONLINE] Available at:

http://www.aboutMcDonald’s .com/content/dam/AboutMcDonald’s /Investors/Investor%202013/2012%20Annual%2

0Report%20Final.pdf. [Accessed 15 February 2014].

v Ibid

vi Salvatore, D. (2012). Introduction to International Economics. Wiley.

vii ibid

viii The Washington Post (2013). Low fast-food wages come at high public cost, reports say - The Washington Post.

[ONLINE] Available at:http://www.washingtonpost.com/business/economy/low-fast-food-wages-come-at-high-

public-cost-report-say/2013/10/15/3fc5a608-34e7-11e3-80c6-7e6dd8d22d8f_story.html. [Accessed 15 February

2014].

ix Ibid

x Davis, B., & Carpenter, C. (2009). Proximity of fast-food restaurants to schools and adolescent obesity. Journal

Information, 99(3), 505-510.

xi O'Kane, G. (2012). What is the real cost of our food? Implications for the environment, society and public health

nutrition. Public health nutrition, 15(2), 268-276.

xii Porter, M. E. (2011). Competitive advantage of nations: creating and sustaining superior performance . Simon

and Schuster.

xiii McDonald’s Annual Report (2012). [ONLINE] Available at:

http://www.aboutMcDonald’s .com/content/dam/AboutMcDonald’s /Investors/Investor%202013/2012%20Annual%2

0Report%20Final.pdf. [Accessed 15 February 2014].

xiv MCD Competitors (2014). MCD Competitors | McDonald's Corporation Common S Stock - Yahoo! Finance.

[ONLINE] Available at: http://finance.yahoo.com/q/co?s=MCD+Competitors . [Accessed 15 February 2014].

xv Businessweek (2014). MCDONALD'S CORP (MCD:New York): Financial Statements - Businessweek . [ONLINE]

Available at:http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=MCD. [Accessed 18

April 2014].

http://www.aboutmcdonalds.com/mcd/our_company.html

http://www.aboutmcdonalds.com/mcd/franchising/FAQs.html

http://www.aboutmcdonalds.com/mcd/investors/financial_highlights.html

http://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Investors/Investor%202013/2012%20Annual%20Report%20Final.pdf


http://www.washingtonpost.com/business/economy/low-fast-food-wages-come-at-high-public-cost-report-say/2013/10/15/3fc5a608-34e7-11e3-80c6-7e6dd8d22d8f_story.html

http://www.washingtonpost.com/business/economy/low-fast-food-wages-come-at-high-public-cost-report-say/2013/10/15/3fc5a608-34e7-11e3-80c6-7e6dd8d22d8f_story.html



http://finance.yahoo.com/q/co?s=MCD+Competitors

http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=MCD

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xvi Morningstar (2014). Price Ratios and Valuation for McDonald's Corporation (MCD) from Morningstar.com.

[ONLINE] Available at:http://financials.morningstar.com/valuation/price-ratio.html?t=MCD. [Accessed 18 April

2014].

xvii McDonald's Corporation Credit Rating - Moody's (2014). McDonald's Corporation Credit Rating - Moody's.

[ONLINE] Available at:https://www.moodys.com/credit-ratings/McDonald’s-Corporation-credit-rating-479500.

[Accessed 31 March 2014].

xviii Standard & Poor's | MCD. 2014. Standard & Poor's | MCD Credit Rating. [ONLINE] Available

at: http://www.standardandpoors.com/prot/ratings/entity-details/en/us/?entityID=101460§orCode=CORP. [Accessed

31 March 2014]. xix World Bank (2014). GDP growth (annual %) | Data | Table. [ONLINE] Available at

:http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG. [Accessed 03 May 2014].

xx NYSE:MCD (2014). McDonald's Corporation: NYSE:MCD quotes & news - Google Finance. [ONLINE]

Available at: https://www.google.com/finance?cid=22568. [Accessed 07 May 2014].

http://financials.morningstar.com/valuation/price-ratio.html?t=MCD

https://www.moodys.com/credit-ratings/McDonalds-Corporation-credit-rating-479500

http://www.standardandpoors.com/prot/ratings/entity-details/en/us/?entityID=101460&sectorCode=CORP

http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG

https://www.google.com/finance?cid=22568

fsa project mcdonalds v2.4

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