McDonald's Investment Analysis: Applying Financial Models and Ratios

This case study provides a financial analysis of McDonald's to determine its investment potential, employing several valuation methods including the Dividend Discount Model (DDM), Discounted Cash Flow (DCF) model, and comparable company analysis. The analysis begins with a background of McDonald's, highlighting its global presence and scale. The DDM is applied to estimate the stock's intrinsic value, followed by the DCF model, which forecasts unlevered free cash flows to determine present value. The comparable method benchmarks McDonald's against industry peers like Starbucks, Compass Group PLC, and Yum Brands, using metrics such as Price-to-Earnings (P/E), Price-to-Sales (P/S), and Price-to-Book (P/B) ratios. Liquidity metrics are also assessed to evaluate the company's short-term financial health. The results from each valuation method are summarized, indicating whether the stock is undervalued or overvalued, and a final recommendation is made to invest in McDonald's based on the overall findings. Desklib offers similar solved assignments and resources for students.

Financial management
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Good company to invest in –
Once the company has adequate funds
the next thing is deciding about the
company in which to invest the funds.
To analyse any company before
investing, its background, financial
dealings, management type and various
other things are required to be
considered.

Company background –
McDonald’s is the fast food company
limited by service restaurant that has
more than 35000 restaurants over
more than 100 nations. It serves more
than 75 million customers each day
with having more than 4 million
employees.

Dividend discount model (DDM) –
DDM is used for valuing the stocks
that uses the theory that the worth
of a stock is sum of all the future
dividends. Using the cost of capital,
stock price and next year’s value of
dividend the intrinsic value of the
stock can be determined.

Major advantage of DDM model is
that is is most widely used method
for computing the share prices and
therefore is easiest method to
understand. It is used for valuing
the stock of the company without
considering the market conditions.
Hence, it is easier to compare the
entities of different sizes and from
different industries.

Discounted cash flow model (DCF)
DCF model is particular type of the
financial model that is used for valuing the
business. It is simply the forecast of
entity’s unlevered free cash flow that is
discounted back to present value. DCF is
process of computing present value of
investment’s future cash flows for arriving
at estimation of current fair value.
DCF = CF1/(1+r)1 + CF2/(1+r)2 +
CF3/(1+r)3 ...+ CFn/(1+r)n

Main advantages of DCF method is that
is offers closest estimate for the
intrinsic value of a stock. It is
considered as most appropriate method
for valuation if analyst is confident
about the assumption. Further, unlike
the other valuation DCF depends on the
free cash flow that is considered as
reliable for estimating the subjective
policies for accounting.

Comparable method
Comparable analysis process is used
for evaluating the company’s value
through using metrics of the other
businesses of the similar size from the
same industry. It is done on the
assumption that the similar entities
will have same valuation multiples like
Price earnings ratio.

The main advantage of this method is
that it can be used for comparing the
peers from the same industry.
Further, it is easier to understand and
it uses fewer assumptions as
compared to other methods like DCF.
Further, it captures the present mood
of the market.

Dividend discount model

Value of the stock = D1 / (r – g) = D0 * (1+g)/ (r –
g)
Expected rate of the return = E(r) = Rf + β (Rm –
Rf)
= 3.11 + 0.64
(12.47 – 3.11)
= 9.10%Value of stock = D1 / (r – g) = D0 * (1+g)/ (r – g)
= 4.19 * (1+0.075) /
(9.10 – 7.45)
= 272.98
(Finance.yahoo.com, 2018).