Analyzing McDonalds 1. Forecast: Use the parsimonious approach to ...

Question

Analyzing McDonalds
1. Forecast: Use the parsimonious approach to provide forecast of the inputs needed in the valuation analysis for McDonalds' business. Compare your growth forecast with the estimates provided by Value Line and list them both.

2. Valuation: Use the residual operating income model to produce an estimate of firm value. Focus on the value of a share of common stock in that company and compare your valuation to the market valuation, providing possible explanations for any differences. You may also want to conduct a sensitivity analysis by varying your earnings- and growth number applied and by using a simple multiple (e.g. P/E ratio).

3. Investment Summary: Summarize your analysis by giving an investment recommendation (e.g. string buy, buy, hold, sell, strong sell). How does your recommendation compare with other analysts? Is there something in addition to the accounting that made you give that recommendation?

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Estimating cost of equity
Cost of equity = Risk free rate of return + Beta × (market rate of return - risk free rate of return)
Market rate of return from S&P 500 = 7%
Risk free rate of return (10-year treasury rate) = 2.42%
McDonalds beta (Yahoo! Finance 2017) = 0.78
Therefore, McDonalds’ cost of equity:
Cost of equity = 2.42% + 0.78 x (7.00% - 2.42%)
Cost of equity = 2.42% + 3.5724%
Cost of equity = 5.99%
A summary of McDonalds’ estimated value based on the above cost of equity appears on the next page.
Alternative cost of equity based on McDonalds stated risk free rate:
Risk free rate (McDonalds 2017 financial report) = 1.20%
Therefore;
Cost of equity = 1.20% + 0.78 x (7.00% - 2.42%)...

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