Finc 3304 - Mcdonalds Fcf & Wacc

Introduction

The purpose of this assignment is to fundamentally arrive at stock price of McDonald Corporation (NYSE: MCD) as of December 31, 2011. The stock price is derived based on free cash flow to the equity method and dividend growth model. All the input parameter for each method are obtained from public sources like 10-K, Annual report and Yahoo finance. In case, where the input parameter were not directly obtained (like beta), statistically formula were used.

The stock price derived based on free cash flow to the equity method is lower than current market price. However, because of inherent limitation of the dividend growth model, the stock price based on this method could not be obtained.

Methodology

Part 1:

The Free Cash Flow to McDonalds (MCD) is computed for each period 2009-2011 based on formula Free Cash Flow (FCF) = Cash flow from operation plus interest expenses less capital expenditure (Capex).

Part 2

This part relates to computing Weighted Average Cost of Capital (WACC). The WACC or the overall cost of capital is defined as rate of return that must be earned by McDonalds to satisfy the requirement of each class of investors. It is computed as weighted average cost of different source of capital.

WACC = Wd Kd + We Ke

Wd: Proportion of Debt in capital structure

Kd: Cost of Debt

We: Proportion of Equity in capital structure

Ke: Cost of Equity

To determine the weights (i.e. proportion) of debt and equity in capital structure, the market value of equity and market value debt is considered. The market value of equity is computed as number of shares outstanding at year end multiply by closing price of shares, whereas for debt the market value is assumed to be same as book value. The market value weight are regarded as a good estimate to determine cost of capital as they reflect investors required rate of return.

The cost of equity (Ke) is computed based on CAPM approach. Ke represents the rate of return that equity...