Introduction
This is the cash flow that McDonald's management can utilize to pay off its credit lines , cover operating expenses, distribute to stockholders of dividends or stock buybacks, or retain in the firm for future business growth and expansion. In the DCF analysis, the free cash flow will be the exponent. It will be beneficial to review the concepts of discounted cash flow analysis before going to value McDonald's operating income.
WACC Calculation
The weighted average cost of capital denotes the average rate of return that a company must provide to its shareholders in order for them to forego other similar investments as denoted by Laitinen (2019). The metric denotes the opportunity cost of the average return of the investment shareholders incur when they chose one investment over the other. The cost of raising one additional dollar from the firms perspective is the average cost of capital. The WACC was calculated using the following formula:
Delegate your assignment to our experts and they will do the rest.
The cost of debt = rd
The cost of equity =re
Market value of equity=E
Market value of debt =D
The corporate tax rate =Tc
To evaluate McDonald’s weighted average cost of capital, the study have acquired the WACC from the Bloomberg market reports .The study calculated the free cash flow growth rate using the S&P 500 projection of $3 percent for 2020.
Terminal Value
Lee & Lee,(2020) denoted that the residual free cash flow beyond the forecasted period, referred to as the terminal or continuation value of the project. This figure shows the market worth of the firms free cash flow at all future dates as of the last forecasted timeframe. The study utilized the formula below to calculate the terminal value .
McDonalds Enterprise Value
The enterprise value is the overall cost an investor will incur by purchasing and controlling interest of the McDonald's corporation. The discounted value of a company's future free cash flows and its terminal value denote the enterprise value( Trejo-Pec & Thompson, 2021). In addition, enterprise value is defined as the net cost of buying a firm's equity, acquiring its cash, writing off its debt, and owning the unlevered enterprise. According to this mathematical formula the enterprise value represent the sum of all ownership interests in McDonalds as well as claims on its assets from both equity and debt holders, . The following formula was used to compute the enterprise value in the study:
Midyear Discounting
The NPV calculation assumes that the cash flows are collected at the end of the year when discounted the free cash flow accruing to the McDonalds. The study has utilized the following calculation to update the NPV formula to reflect that cash is generated throughout the financial year.
To determine the asset value, multiply the enterprise value by the cash amount in 2020. Before equity investors may take over the company, all debt holders, such as bondholders, credit lines guarantors and preferred shareholders, must be paid back. The cash and cash equivalents on the statement of financial position can be used by equity investors to pay down the company's debt. The study manipulated the enterprise value formula by subtracting debt( credit line guarantors, debt holders, creditors, preferred stockholders, and adding back the 2020 cash balance ( Funds that can be used to pay off the debt obligations shown on the statement of financial position) - to compute the equity value in McDonalds's Corporation. The study has add the cash balance and subtracted the debt value from the market capitalization to arrive at the market value of equity.
McDonalds Intrinsic Value
The intrinsic value of McDonalds Corporation is calculated by dividing the implied equity value by the number of outstanding shares. Intrisic value was forecasted using data from McDonald’s stock prices from 2018 to the present. According to yahoo finance estimates, the fair value, which denotes the result of McDonald's discounted cash-flow valuation, is $105.00, which is $6.65 less than the pre-determined intrinsic value. The study only considered the cash flows created by the operating financial assets and liabilities when determining the free cash flow created by McDonald's operations. McDonald's activities do not produce cash flow from short-term or long-term debt financing. The amount of debt financing due within one year to creditors such as banks and financial institutions, as well as private loan placements, is the current share of long-term debt for McDonalds. For this analysis the study has eliminated short-term debt from current liabilities and bundle it in with long-term debt when estimating McDonald's debt financing levels and free cash flow. In McDonald's pro forma model, short term liabilities do not include Short-Term Debt or else the current Part of Long-Term Debt financing. This is due to the fact that these are financial liabilities, not operational liabilities, are so are unrelated to McDonald Sales
Conclusion
If McDonald's wants to raise its sales, the company will have to devote a significant amount of capital to working capital and capital expenditures (such as franchise construction), reducing the cash flow accessible for all capital expenditures . Rather than increasing its investment in new outlets, McDonald's may need to redesign its existing locations' operations (which would be less capital expensive) by adding additional ‘drive-thru ‘capacity to suit more customers. According to a statement in McDonald's annual report, “More than 1,600 restaurants throughout the world are planned to be reimagined, including outlets in franchised and developmental licensee regions where the company will not have to make an investment. McDonald's stockholders will have more free cash flow because the company will not be responsible for capital expenditures.
References
Laitinen, E. K. (2019). Discounted Cash Flow (DCF) as a Measure of Startup Financial Success.
Lee, U., Kang, N., & Lee, I. (2020). Choice data generation using usage scenarios and discounted cash flow analysis. Journal of choice modelling , 37 , 100250.
Trejo-Pech, C. J., & Thompson, J. M. (2021). Discounted cash flow valuation of conventional and cage-free production investments. International Food and Agribusiness Management Review , 24 (2), 197-214.
