MCDONALD S CORPORATION. Harmony Lynn Lazore ACG

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1 MCDONALD S CORPORATION Harmony Lynn Lazore ACG

2 Executive Summary McDonald s Corporation spent 2006 expanding their number of restaurants world wide, disposing of Chipotle Mexican Grill, and converting company owned restaurants to developmental licensees. While assets grew slower than liabilities (due to the disposal of an entire chain of restaurants versus opening more of its own), McDonald s now sells more food, at more locations. It increased it s profit of those sales by three cents on every dollar. The asset turnover increased slightly, conveying an increase in the efficiency of how the company operates its assets. What s more, while the company is owned by investors, it s debt to equity decreased by more than seven percent. Finally, investors confidence in McDonald s Company has increased. McDonald's ascended to new heights in 2006, producing a record 21.6 billion dollars, and increasing its dividend from $0.67 in 2005 to $1.00 in The company is doing very well for itself.

3 Part A. Introduction Chief Executive Officer: Jim Skinner Home Office: McDonald s Plaza Oak Brook, Illinois Ending Date of Last Fiscal Year: December 31, 2006 Products / Services Provided: The company operates restaurants and franchises in the informal eating out industry. (18685 of are franchises) Main Geographic area of operations: Company Headquarters are based in the U.S. though company operates in 118 countries.

4 Part A. Audit Report McDonald's independent auditors: Ernst & Young LLP In your own words, what did the auditors say about the company? Auditors state that McDonald's has presented all financial statements in a fair manner, and mention two main changes; in 2005 it switched methods of accounting to share-based compensation (stock options), and in 2006 it switched methods of accounting for retirement plans.

5 Part A. Stock Market Information Most recent price of the McDonald's stock: $57.96 Twelve month trading range of the McDonald's stock: November 26, $41.40 November 26, $56.82 Dividend per common share: $1.00 Date of the above information: November 28, 2007 Your opinion about the company stock as an investment? McDonald's dividends are climbing (from 0.66 in 2005), and it is continuing to improve its restaurants, service and quality. My suggestion is to buy stock in McDonald's.

6 Part B. Industry Situation and Company Plans Currently McDonald's is focusing on expansion of its restaurants worldwide through company owned facilities and franchises. For example on 01/19/07 McDonald s in partnership with Sinopec, a petroleum and chemical corporation, opened China s first collaborative drive-thru restaurant and gas station complex. (ChinatownConnection.com) McDonald s has expanded it s menu with Premium Roast coffee, the Asian Chicken Salad and assorted Snack Wraps. Dividends are increasing yearly and the company continues through advertising to promote their focus on well balanced meals, food quality and nutrition. Evidence of these goals present themselves in the 01/31/07 article from NewsTarget.com, stating that more than 1000 U.S. based facilities have switched to trans-fat-free oil. In addition, McDonald s has converted 121 company-operated restaurants to developmental licensees in Their focus on the future includes staying on course with their Plan to Win strategy; which includes ongoing disciplined financial management, an intensified focus on customers, and converting company owned restaurants to developmental licensees. (McDonald s Annual Report, pg. 22)

7 Part C. Income Statement Is the format most like a single-step or multistep format? McDonald's utilizes the multistep format. (Dollars in Millions) Percent Increase Gross Profit 12% Income From Operations 11% Net Income 36% Comment: McDonald's Company continues to ascend financially in all areas

8 Part C. Balance Sheet (Dollars in Millions) Change Asset = (965.0) Stockholders Liability + Equity (1099.7) Comment: Assets have decreased due to increased dividends, repayment of debt, and the disposal of the Chipotle Mexican Grill chain. The Chipotle shares were converted to McDonald's Common Stock.

9 Part C. Statement of Cash Flows NET INCOME VS. CASH FLOW FROM OPERATIONS (Dollars in Millions) Net Income Cash Flow From Operations $ $ $ $ Are cash flows from operations more or less than net income for the past two years? Cash flows from operations have exceeded Net Income for the past two years. Is the company growing through investing activities, i.e., buying property, plant and equipment and other long lived assets? The company has grown through the 2006 disposal of Chipotle Mexican Grill, and expanding with 744 new McDonald's restaurants worldwide. What is the company s primary source of financing, i.e., long-term loans, stock sales? McDonald's primarily utilizes public/private offerings and bank loans to secure financing and its present plan is to pay loans until maturity. Overall, has cash increased or decreased over the past two years? Cash has increased over the past two years.

10 Part D. Accounting Policies What are the significant accounting policies, if any, relating to revenue recognition, cash, short-term investments, inventories, and property and equipment? Revenues derive from company owned and franchised restaurants through sales net of tax. Useful lives (calculated through straight line method) of property and equipment are subject to change with regards to physical factors, economic factors and industry trends.

11 Part D. Accounting Policies List the topics of the notes to the financial statement 1. Nature of Business 2. Consolidation 3. Estimates in Financial Statement 4. Reclassifications 5. Revenue Recognition 6. Foreign Currency Translation 7. Advertising Costs 8. Share Based Compensation 9. Goodwill 10. Property and Equipment 11. Long Lived Assets 12. Financial Instruments 13. Sales of Stock by Subsidiaries and Affiliates 14. Income Tax Contingencies 15. Per Common Share Information 16. Statement of Cash Flows 17. Employers Account for defined benefit pension and other post retirement plans. 18. Sabbatical Leave

12 Part E. Financial Analysis Liquidity Ratios WORKING CAPITAL CURRENT RATIO RECEIVABLE TURNOVER Current Asset Current Asset Net Sales Current Liability Current Liability Accounts Receivable Dollars in Millions Times Times Working Capital has decreased. The company s assets grew slower than its liabilities this was probably due to the loss from disposal of the Chipotle chain. Receivable Turnover reflects a decline in the effectiveness of the companies credit policies, thus McDonald's gained a day of uncollected sales. The company is selling its products at a rate of 6.4 days faster than it did in Therefore products depleted more rapidly this year illustrated in average days inventory on hand. AVERAGE DAYS SALES UNCOLLECTED Days In Year Accounts Receivable Turnover Days INVENTORY TURNOVER Cost of Goods Sold Average Inventory Times AVERAGE DAYS INVENTORY ON HAND Days In Year Accounts Receivable Turnover Days

13 Part E. Financial Analysis Profitability Ratios ASSET TURNOVER Net Sales Average Total Assets Times PROFIT MARGIN Net Income Net Sales Percent 16.4% 13.1% The profit margin increased more than three percent, equating to a 16 cent profit on every dollar. There was a small improvement on asset turnover (the efficiency of how assts are used to produce sales). The company experienced a three percent increase in earning power. Stockholders earnings on investment increased from 17.7 percent to 23.2 percent RETURN ON ASSETS RETURN ON EQUITY Net Income Average Total Assets Net Income Average Total Stockholders Equity Percent 12% 9% Percent 23.2% 17.7%

14 Part E. Financial Analysis Solvency Ratio DEBT TO EQUITY RATIO Total Liability Total Stockholders Equity Times The company is owned by investors, and the debt to equity decreased to 20 percent from 27 percent in 2005.

15 Part E. Financial Analysis Market Strength Ratios PRICE EARNINGS RATIO DIVIDEND YIELD Market Price of Stock Dividend Per Share $ 1.00 $ 0.67 Earnings Per Share Market Price of Stock $ $ Times % 1.99 % Investors confidence has increased in McDonald's Corporation. Dividend yield increased 0.27% this year.

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