Kingfisher School of Business and Finance

Mac Arthur Highway, Lucao District, Dagupan City

A Perfomance Task No. 1

McDonald’s Corporation

In partial fulfilment of the requirements in Business Finance of Senior High School

Submitted by:

Ma. Virginia Bautista

Marcus Antonio Caalim
Aira Joy De Guzman
Excel Jan Malicdem
Jonilyn Mirador
Ma. Klarisse Ann Sioco

On September 28, 2019 during the 2nd Quarter of School Year 2019-2020

Submitted to:

Ms. Noreen G. Pagdanganan, CPA

 McDonald’s Corporation

Table of Contents

Company Background ...................................................................................................... 3

Comparative Financial Statements ................................................................................. 4

Analysis of Financial Statements ................................................................................... 8

Interpretation of Financial Ratios ................................................................................... 9

a. Liquidity Ratios ......................................................................................................................9

b. Activity Ratios ........................................................................................................................9

c. Profitability Ratios .................................................................................................................9

d. Leverage Ratios .....................................................................................................................9

e. Coverage Ratios.....................................................................................................................9

Forecasting Method .......................................................................................................... 9

Common Size Income Statement .................................................................................. 12

Bautista V., Caalim, M.A., De Guzman, A.J., Malicdem, E,J., Mirador, J., Sioco, M.K.A. 2
 McDonald’s Corporation

Company Background

McDonald's Corporation (or ‘the company’), is one of the world’s largest foodservice

retailing chains. It is a centralized and an international company, which has been known for its

hamburgers and fries which sells through 121 countries and has over 30,000 restaurants

worldwide.

The company utilized an intense and rapid expansion into foreign countries through

three primary methods – franchising, company-owned restaurants, and joint ventures. Majority

of international restaurants stemming from franchising agreements and McDonalds’

management relied on this method to aid in the acceptance of a new style of eating into

unfamiliar markets. With minimal risk and maximum gains, franchising continues to contribute

heavily to McDonald's international success by keeping a tight grasp on operations, cost, and

most importantly quality. The company has always utilized four major principles throughout its

history to expand rapidly, increase sales and remain the market leader.

To control its overseas operation, McDonald’s uses a combination of two approaches.

The majority would fall under the rules approach, meaning that control lies with headquarters

creating procedures and policies for the subsidiaries to follow. However, there is also a little of

the cultural approach that has surfaced and is being utilized judging by the adaptation that has

occurred in some of the overseas restaurants. This has occurred even with the tight

internalized norms that are constantly presented and enforced by headquarters.

By leveraging their enormous cash flow, brand power, real estate, and customer

spending habits, McDonald’s has not only emerged as the worldwide leader, but it has also

changed the way the world eats.

Bautista V., Caalim, M.A., De Guzman, A.J., Malicdem, E,J., Mirador, J., Sioco, M.K.A. 3
 McDonald’s Corporation

Comparative Financial Statements

McDonalds Corporation
Consolidated Statement of Financial Performance

2018 2017 2016

REVENUES
Sales by Company-operated $ 10,012.7 $ 12,718.9 $ 15,295
restaurants
Revenues from franchised 11,012.5 10,101.5 9,326.9
restaurants
Total revenues 21,025.2 22,820.4 24,621.9
OPERATING COSTS AND
EXPENSES
Food & paper 3,153.8 4,033.5 4,896.9
Payroll & employee benefits 2,937.9 3,528.5 4,134.2
Occupancy & other operating 2,174.2 2,847.6 3,667.7
expenses
Franchised restaurants-occupancy 1,973.3 1,790 1,718.4
expenses
Selling, general & administrative 2,200.2 2,231.3 2,384.5
expenses
Other operating (income) expense, (236.8) (1,163.2) 75.7
net
Total operating costs and expenses 12,202.6 13,267.7 16,877.4
Operating income 8,822.6 9,552.7 7,744.5
Interest expense-net of capitalized 981.2 921.3 884.8
interest of $5.6, $5.3 and $7.1
Nonoperating (income) expense, net 25.3 57.9 (6.3)
Income before provision for income 7,816.1 8,573.5 6,866
taxes
Provision for income taxes 1,891.8 3,381.2 2,179.5
Net income $ 5,924.3 $ 5,192.3 $ 4,686.5
Earnings per common share–basic $ 7.61 $ 6.43 $ 5.49
Earnings per common share–diluted 7.54 6.37 5.44
Dividends declared per common $ 4.19 $ 3.83 $ 3.61
share
Weighted-average shares 778.2 807.4 854.4
outstanding–basic
Weighted-average shares 785.6 815.5 861.2
outstanding–diluted

Bautista V., Caalim, M.A., De Guzman, A.J., Malicdem, E,J., Mirador, J., Sioco, M.K.A. 4
 McDonald’s Corporation

McDonalds Corporation
Consolidated Statement of Financial Position

USD ($) $ in Millions 2018 2017 2016

Current assets
Cash and equivalents $ 866 $ 2,463.8 $ 1223.4
Accounts and notes receivable 2,441.5 1,976.2 1,474.1
Inventories, at cost, not in excess of market 51.1 58.8 58.9
Prepaid expenses and other current assets 694.6 828.4 1, 527
Total current assets 4,053.2 5,327.2 4, 848.6
Other assets
Investments in and advances to affiliates 1,202.8 1,085.7 725.9
Goodwill 2,331.5 2,379.7 2, 336.5
Miscellaneous 2,381 2,562.8 1, 855.3
Total other assets 5,915.3 6,028.2 4, 917.7
Property and equipment
Property and equipment, at cost 37,193.6 36,626.4 36, 059.2
Accumulated depreciation and amortization (14,350.9) (14,178.1) (14, 801.6)
Net property and equipment 22,842.7 22,448.3 21, 257.6
Total assets 32,811.2 33,803.7 31, 023.9
Current liabilities
Accounts payable 1,207.9 924.8 756.0
Income taxes 228.3 265.8 267.2
Other taxes 253.7 275.4 266.3
Accrued interest 297 278.4 247.5
Accrued payroll and other liabilities 986.6 1,146.2 1,159.3
Total current liabilities 2,973.5 2,890.6 3, 468.3
Long-term debt 31,075.3 29,536.4 25, 878.5
Long-term income taxes 2,081.2 2,370.9 1,010.6
Deferred revenues - initial franchise fees 627.8 0 0
Other long-term liabilities 1,096.3 1,154.4 1,053.7
Deferred income taxes 1,215.5 1,119.4 1,817.1
Shareholders' equity (deficit)
Preferred stock, no par value; authorized – 165.0 0 0 0
million shares; issued – none
Common stock, $.01 par value; authorized – 3.5 16.6 16.6 16.6
billion shares; issued – 1,660.6 million shares
Additional paid-in capital 7,376 7,072.4 6,757.9
Retained earnings 50,487 48,325.8 46, 222.7
Accumulated other comprehensive income (2,609.5) (2,178.4) (3, 092.9)
Common stock in treasury, at cost; 893.5 and (61,528.5) (56,504.4) (52,108.6)
866.5 million shares
Shareholders' equity (deficit) (6,258.4) (3,268) (2, 204.3)
Total liabilities and shareholder’s equity (deficit) 32,811.2 33,803.7 31,023.9

Bautista V., Caalim, M.A., De Guzman, A.J., Malicdem, E,J., Mirador, J., Sioco, M.K.A. 5
 McDonald’s Corporation

McDonalds Corporation
Consolidated Statement of Cash Flows

Cash Flows $ in Millions 2018 2017 2016

Operating activities
Net income $ 5,924.3 $ 5,192.3 $ 4,686.5
Charges and credits:
Depreciation and amortization 1,482 1,363.4 1,516.5
Deferred income taxes 102.6 (36.4) (538.6)
Share-based compensation 125.1 117.5 131.3
Net gain on sale of restaurant businesses (308.8) (1,155.8) (310.7)
Other 114.2 1,050.7 407.6
Changes in working capital items:
Accounts receivable (479.4) (340.7) (159)
Inventories, prepaid expenses and other current (1.9) (37.3) 28.1
assets
Accounts payable 129.4 (59.7) 89.8
Income taxes (33.4) (396.4) 169.7
Other accrued liabilities (87.4) (146.4) 38.4
Cash provided by operations 6,966.7 5,551.2 6,059.6
Investing activities
Capital expenditures (2,741.7) (1,853.7) (1,821.1)
Purchases of restaurant businesses (101.7) (77) (109.5)
Sales of restaurant businesses 530.8 974.8 975.6
Proceeds from sale of businesses in China and Hong 0 1,597 0
Kong
Sales of property 160.4 166.8 82.9
Other (302.9) (245.9) (109.5)
Cash provided by (used for) investing activities (2,455.1) 562 (981.6)
Financing activities
Net short-term borrowings 95.9 (1,050.3) (286.2)
Long-term financing issuances 3,794.5 4,727.5 3,779.5

Bautista V., Caalim, M.A., De Guzman, A.J., Malicdem, E,J., Mirador, J., Sioco, M.K.A. 6
 McDonald’s Corporation

Long-term financing repayments (1,759.6) (1,649.4) (822.9)

Treasury stock purchases (5,207.7) (4,685.7) (11,171)
Common stock dividends (3,255.9) (3,089.2) (3,058.2)
Proceeds from stock option exercises 403.2 456.8 299.4
Other (20) (20.5) (3)
Cash used for financing activities (5,949.6) (5,310.8) (11,262.4)
Effect of exchange rates on cash and equivalents (159.8) 264 (103.7)
Cash and equivalents increase (decrease) (1,597.8) 1,066.4 (6,288.1)
Change in cash balances of businesses held for sale 0 174 (174)
Cash and equivalents at beginning of year 2,463.8 1,223.4 7,685.5
Cash and equivalents at end of year 866 2,463.8 1,223.4
Supplemental cash flow disclosures
Interest paid 959.6 885.2 873.5
Income taxes paid $ 1,734.4 $ 2,786.3 $ 2,387.5

Bautista V., Caalim, M.A., De Guzman, A.J., Malicdem, E,J., Mirador, J., Sioco, M.K.A. 7
 McDonald’s Corporation

Analysis of Financial Statements

Financial Ratios 2018 2017 2016

Liquidity Ratios

Current Ratio 1.36 1.84 1.40

Quick Ratio 1.35 1.82 1.38

Activity Ratios

Accounts Receivable Turnover (ARTO) 8.61 11.55 16.70

Inventory Turnover (INTO) 411.45 388.10 418.03

Total Assets Turnover (TATO) 0.64 0.68 0.79

Fixed Assets Turnover (FATO) 0.92 1.02 0.94

Average Collection Period (ACP) 42.38 31.61 21.86

Average Age of Inventory (AAI) 0.89 0.94 0.87

Average Payment Period (APP) Not applicable Not applicable Not applicable

Profitability Ratios

Gross Profit Margin (GPM) 51.30% 46.54% 41.45%

Operating Profit Margin (OPM) 41. 96% 41.86% 31.45%

Net Profit Margin (NPM) 28.18% 22.75% 19.03%

Return on Assets (ROA) 18.06% 15.36% 15.11%

Return on Equity (ROE) -94.66% -158.88% -212.61%

Leverage Ratios

Debt to Asset Ratio (DAR) 1.19 1.20 1.07

Debt to Equity Ratio (DER) -6.24 -11.34 -15.07

Coverage Ratios

Time Interest Earned Ratio (TIER) 8.99 10.37 8.75

Earnings Per Share (EPS) 7.54 6.37 5.44

Bautista V., Caalim, M.A., De Guzman, A.J., Malicdem, E,J., Mirador, J., Sioco, M.K.A. 8
 McDonald’s Corporation

Interpretation of Financial Ratios

a. Liquidity Ratios
b. Activity Ratios
c. Profitability Ratios
d. Leverage Ratios
e. Coverage Ratios

Forecasting Method
McDonalds Corporation had sales of $21,025,200,000 and has the following a net profit

margin of 28.18% in 2018. Management expects to increase its sales by 20% and retains all of

its earnings in the following year. The McDonald’s balance sheet is as follows:

McDonald’s Corporation
Statement of Financial Position
December 31, 2018

Current assets $ In Millions

Cash and equivalents $ 866
Accounts and notes receivable 2,441.5
Inventories, at cost, not in excess of market 51.1
Prepaid expenses and other current assets 694.6
Total current assets 4,053.2
Other assets
Investments in and advances to affiliates 1,202.8
Goodwill 2,331.5
Miscellaneous 2,381
Total other assets 5,915.3
Property and equipment
Property and equipment, at cost 37,193.6
Accumulated depreciation and amortization (14,350.9)
Net property and equipment 22,842.7
Total assets 32,811.2
Current liabilities
Accounts payable 1,207.9
Income taxes 228.3
Other taxes 253.7
Accrued interest 297
Accrued payroll and other liabilities 986.6
Total current liabilities 2,973.5
Long-term debt 31,075.3
Long-term income taxes 2,081.2
Deferred revenues - initial franchise fees 627.8
Other long-term liabilities 1,096.3
Deferred income taxes 1,215.5

Bautista V., Caalim, M.A., De Guzman, A.J., Malicdem, E,J., Mirador, J., Sioco, M.K.A. 9
 McDonald’s Corporation

Shareholders' equity (deficit)

Preferred stock, no par value; authorized – 165.0 million shares; 0
issued – none
Common stock, $.01 par value; authorized – 3.5 billion shares; 16.6
issued – 1,660.6 million shares
Additional paid-in capital 7,376
Retained earnings 50,487
Accumulated other comprehensive income (2,609.5)
Common stock in treasury, at cost; 893.5 and 866.5 million shares (61,528.5)
Total shareholders' equity (deficit) (6,258.4)
Total liabilities and shareholders' equity (deficit) $ 32,811.2

The new balance sheet entries for those assets and liabilities that spontaneously change with
the level of sales using the percent of sales technique includes:
Forecasted sales (in Millions)= $21025.2 x 1.20= $25230.24

Accounts Receivable =
Inventory =
Accounts Payable =

McDonalds’s External Financing Requirement (EFR) is ($ 7205.56 ) whereas:

EFR =

EFR = [(2441.5/21025.2×4205.04)+(51.1/21025.2×4205.04)] -
[(1207.9/21025.2×4205.04)+(228.3/21025.2×4205.04)+(253.7/21025.2×4205.04)+
(297/21025.2×4205.04)+(986.6/21025.2×4205.04)] - (25230.24×28.178%)
= (488.3+10.22) - (241.58+45.66+50.74+59.4+197.32) - (25230.24×28.178%)
= (498.52) - (594.7) - (7109.38)
= ($ 7,205.56) in millions

A negative External Financing Requirement (EFR) simply means that the company has
an excess cash. McDonalds Corporation can invest it into Marketable Securities to earn an
additional income or use it to retire its debt.

Bautista V., Caalim, M.A., De Guzman, A.J., Malicdem, E,J., Mirador, J., Sioco, M.K.A. 10
 McDonald’s Corporation

McDonald’s Corporation
Pro Forma Statement of Financial Position
December 31, 2018

Current assets in Millions

Cash and equivalents $ 866
Accounts and notes receivable 2,929.8
Inventories, at cost, not in excess of market 61.32
Prepaid expenses and other current assets 694.6
Marketable Securities 7205.56
Total current assets $11757.28
Other assets
Investments in and advances to affiliates 1,202.8
Goodwill 2,331.5
Miscellaneous 2,381
Total other assets $5,915.3
Property and equipment
Property and equipment, at cost $37,193.6
Accumulated depreciation and amortization (14,350.9)
Net property and equipment 22,842.7
Total assets $40,515.28
Current liabilities
Accounts payable $1,449.48
Income taxes 273.96
Other taxes 304.44
Accrued interest 356.4
Accrued payroll and other liabilities 1183.92
Total current liabilities $3568.2
Long-term debt $31,075.3
Long-term income taxes 2,081.2
Deferred revenues - initial franchise fees 627.8
Other long-term liabilities 1,096.3
Deferred income taxes 1,215.5
Shareholders' equity (deficit)
Preferred stock, no par value; authorized – 165.0 million shares $0
; issued – none
Common stock, $.01 par value; authorized – 3.5 billion shares; i 16.6
ssued – 1,660.6 million shares
Additional paid-in capital 7,376
Retained earnings 57596.38
Accumulated other comprehensive income (2,609.5)
Common stock in treasury, at cost; 893.5 and 866.5 million sha (61,528.5)
res
Total shareholders' equity (deficit) $850.98
Total liabilities and shareholders' equity (deficit) $ 40,515

Bautista V., Caalim, M.A., De Guzman, A.J., Malicdem, E,J., Mirador, J., Sioco, M.K.A. 11
 McDonald’s Corporation

Common Size Income Statement

McDonald’s Corporation
Common-Size Consolidated Statement of Financial Performance

2018 2017 2016

REVENUES
Sales by Company-operated 47.62% 55.73% 62.12%
restaurants
Revenues from franchised 52.38% 44.27% 37.88%
restaurants
Total revenues 100.00% 100.00% 100.00%
OPERATING COSTS AND -15.00% -17.67% -19.89%
EXPENSES
Food & paper -13.97% -15.46% -16.79%
Payroll & employee benefits -10.34% -12.48% -14.90%
Occupancy & other operating -39.31% -45.62% -51.58%
expenses
Franchised restaurants-occupancy -9.39% -7.84% -6.98%
expenses
Selling, general & administrative 51.30% 46.54% 41.45%
expenses
Other operating (income) expense, -10.46% -9.78% -9.68%
net
Total operating costs and expenses 1.45% 1.29% 1.15%
Operating income 0.72% 0.80% 0.22%
Interest expense-net of capitalized 0.06% -0.08% -0.29%
interest of $5.6, $5.3 and $7.1
Nonoperating (income) expense, net -1.10% 3.08% -1.39%
Income before provision for income 1.13% 5.10% -0.31%
taxes
Provision for income taxes 41.96% 41.86% 31.45%
Net income -4.67% -4.04% -3.59%
Earnings per common share–basic -0.12% -0.25% 0.03%
Earnings per common share–diluted 37.17% 37.57% 27.89%
Dividends declared per common -9.00% -14.82% -8.85%
share
Weighted-average shares 28.18% 22.75% 19.03%
outstanding–basic
Weighted-average shares 47.62% 55.73% 62.12%
outstanding–diluted

Bautista V., Caalim, M.A., De Guzman, A.J., Malicdem, E,J., Mirador, J., Sioco, M.K.A. 12
 McDonald’s Corporation

Bautista V., Caalim, M.A., De Guzman, A.J., Malicdem, E,J., Mirador, J., Sioco, M.K.A. 13