Finance Case Studies

Question 1

McDonald’s - Strategic Role of Financial Management

Answer 1

McDonald’s uses a comprehensive accounting system to collate information into timely financial reports to make strategic decisions

Question 2

McDonald’s - Objectives of Financial Management

Answer 2

Objective of consistent operating margins in the mid-40% of the net profit; achieved (45%)

Objective of annual net profit of USD 6 billion; due to the COVID-19 lockdowns and the selling of stores in Russia at below market value, the objective was not achieved in 2020 (USD 4.7 billion) but was achieved in 2021 (USD 7.5 billion)

Objective of increasing systemwide sale growth from 3% to 5%; in 2020, sales declined by 7% then in 2021, rebounded 21%

Objective of return on investment to be in the mid-20%; in 2021, the return on investment was 21.5%, below the objective

Question 3

McDonald’s - Internal Sources of Finance - retained profits

Answer 3

1.6 billion was spent on capital

McDonald’s continues to rewards shareholders

Question 4

McDonald’s - External Sources of Finance

Answer 4

McDonald’s has the liberty to overdraft funds up to USD 3.5 billion, which is intact
McDonald’s issues “commercial paper” to raise funds and ease the financial pressures brought on by COVID-19 lockdowns; commercial paper can be considered a commercial bill

McDonald’s franchisees rarely ever own the land, making a traditional mortgage difficult to obtain

McDonald’s as a public company can raise equity through the New York Stock Exchange but appears more interested in using the stock exchange as a means to sustaining value

Question 5

McDonald’s - Financial institutions – banks, investment banks, finance companies, superannuation funds, life insurance companies, unit trusts and the Australian Securities Exchange

Answer 5

Discloses financial information publicly in line with the regulations of New York Stock Exchange

Financial rating agencies assign credit ratings influencing the financial ambition of McDonald’s

Question 6

McDonald’s - Influence of Government – Australian Securities and Investments Commission, company taxation

Answer 6

Multinational - legal inconsistencies

ASIC is an Australian government agency that enforces the Corporations Act 2001

McDonald’s Australia Holdings Limited is obliged to submit financial information to the public and ASIC

As McDonald’s operates under various jurisdictions, only 22% of profit was declared in the United States, creating a loophole
An 2018 trade union report entitled Unhappier Meal - Tax Avoidance Still on the Menu at McDonald’s accused McDonald’s of reducing taxation by transferring profits to a Singaporean entity group to circumnavigate Australia’s higher company tax rate

Question 7

McDonald’s - Global Market Influences – economic outlook, availability of funds, interest rates

Answer 7

The low interest rates ensured McDonald’s ease of access to funds, raising USD 5.5 billion of the start of the COVID-19 pandemic

McDonald’s had a trend of higher debt until they paid off USD 1.1 billion in 2021

Question 8

McDonald’s - Planning and Implementing – financial needs, budgets, record systems, financial risks, financial controls

Answer 8

In 2020, McDonald’s planned to outlay USD 2.4 billion in capital expenditure
The onset of the COVID-19 pandemic meant the budget had to be drastically altered, from USD 2.4 billion to USD 1.6 billion

McDonald’s franchisees agree to use McDonald’s methods of operation for bookkeeping and accounting

The Point of Sale (POS) system used at the front desk is called NP6
NP6 is used to:
- Record sales
- Assemble food
- Roster staff
- Order supplies

McDonald’s Annual Report 2021 confirms the business uses cross-currency swaps

McDonald’s uses Ernst and Young, an external auditor to assess the effectiveness of its financial controls

Question 9

McDonald’s - Debt and Equity Financing – advantages and disadvantages of each

Answer 9

Advantages of Debt Financing:
Historically low interest rates
Debt can be incurred in any currency of the country McDonald’s operates in, hedging foreign currency fluctuation risk – due to this strategy, McDonald’s debt fell USD 731 million in 2021

Advantages of Equity Financing:
The company can sacrifice paying dividends in a particular year, retaining cash – in 2021, McDonald’s paid USD 3.9 billion to shareholders in the form of dividends

Disadvantages of Equity Financing:
Shareholders expects adequate return on funds otherwise the share price will fall
McDonald’s dividend yield of 3.6% is more expensive than debt finance
The raising of more equity dilutes ownership and the stake of existing shareholders

Question 10

McDonald’s - Monitoring and Controlling – cash flow statement, income statement, balance sheet

Answer 10

McDonald’s provides annual reports that include a cash flow statement, income statement, and balance sheet

Question 11

McDonald’s - Limitations of Financial Reports – normalised earnings, capitalising expenses, valuing assets, timing issues, debt repayments, notes to the financial statements

Answer 11

McDonald’s Australia openly stated in its 2021 Annual Report that the business capitalises expenses

On the 31st of December, 2020, McDonald’s Australia valued its goodwill at AUD 295 million
Limitations of valuing goodwill:
Does McDonald’s overpay on the buy back of stores
Is the goodwill figure relevant – McDonald’s carries out an annual check for decline (impairment)

McDonald’s regards the rate of depreciation as a straight-line basis
Straight-line basis spreads the expense of property and equipment through straight-line depreciation, which does not reflect economic reality and overstates true value

Question 12

McDonald’s - Cash flow management

Answer 12

McDonald’s is a cash business

McDonald’s maximises profit to ensure positive cash flows which is then spent on capital infrastructure, dividends, share buy-backs and payment of debt

Question 13

McDonald’s - working capital management

Answer 13

McDonald’s has contracts with franchisees for regular payment of rent and royalties - delayed payment of rent and royalties attracts high interests

As a response to COVID-19, McDonald’s delayed the collection of USB 1 billion from franchisees

McDonald’s only assembles burgers following an order, reducing wastage at the point of sale

Sophisticated inventory software program predicts sales based on data of the past 2 years

Question 14

McDonald’s - Strategies - leasing, sale and lease back

Answer 14

In the 2018 Annual Report, McDonald’s was the lessee of 12k restaurant locations
McDonald’s leases USD 13.2 billion worth of buildings
McDonald’s has consistent cash flow from the leasing of restaurants to franchisees

Question 15

McDonald’s - profitability management

Answer 15

The royalty and rental percentages are written into contracts and therefore, are fixed
Inventory systems that reduce wastage of foods and inputs controls the variable cost
Fixed costs are difficult to control
A highly franchised business model creates stable revenue streams

Question 16

McDonald’s - global financial management

Answer 16

McDonald’s has a policy of financing local asset purchases with debt in local currency as well as purchasing goods and services in local currency, acting as a natural hedge: Unhappier Meal - Tax Avoidance Still on the Menu

McDonald’s stated in the 2021 Annual Report that models suggest that an 1% p.a. rise in interest rates would not have a material impact on the business’ results or cash flow

Question 17

Apple - Interdependence with other key business functions

Answer 17

Finance with operations:
Apple enters into contracts with its outsourcing partners to assemble the iPhones based on budgets set by finance. Operations will need to design and develop future models of the iPhone based on the funds allocated by finance for research, development and production

Finance with marketing:
Marketing will depend on finance to provide various secondary market research data, such as sales trends for each of the geographical regions in which the iPhone is sold

Finance with Human Resources:
In recent years, unions have formed to represent Apple Retail Employees and factory employees in India placing pressure on Apple and its outsourcing partners to improve salaries and working conditions. Finance would need to consider the costs of replacing dissatisfied employees, such as the recruitment and training of new staff

Question 18

Apple - internal sources of finance - retained profits

Answer 18

The value of Apple’s retained profits has significantly declined in recent years – in 2018, 66% of shareholder’s equity to 9% in 2021

In recent years, Apple’s Board of Directors has implemented a share repurchase scheme, aiming to reduce the company’s shareholdings

The share repurchase plan was expanded from $175 billion to $225 billion

In 2018, the value of Apple shares increase by approximately 40%, surging the company’s stock market value to a record USD 1 trillion, which since has climbed to over USD 2.2 trillion in 2022

Question 19

Apple - external sources of finance

Answer 19

A debt-to-equity ratio of around 1:1 is considered ideal in the technology industry as it provides a balance between the advantages and disadvantages of the usage of debt and equity finance

Apple has become more reliant on debt finance opposed to equity finance – Apple’s total liability increased since 2019 however there was an 31% decrease in owner’s equity

Question 20

Apple - Influence of Government - Australian Securities and Investment Commission, company taxation

Answer 20

Apple is an American-based multinational corporation, therefore the business is subject to USA’s corporate tax – 35% of company profits

In 2014, the European Commission commenced an investigation into Apple’s use of Ireland as a tax haven, where Apple paid less than 1%
In 2016, the European Commission declared that Ireland has been providing Apple with tax aid illegal under EU rules and Apple was instructed to pay Ireland €13 billion
Following an appeal, a resolution has yet to be reached

Question 21

Apple - Global Market Influences – economic outlook, availability of funds, interest rates

Answer 21

China and India’s economies have experienced significant growth

The COVID-19 lockdown, the Russian invasion of Ukraine, rising interest rates, and general supply chain flaws has stagnated the growth of economies

Question 22

Apple - Debt and Equity Financing – advantages and disadvantages of each

Answer 22

As a response to record low interest rates prior to the COVID-19 pandemic, Apple capitalised and therefore, became more highly geared
In the past decade, Apple’s total liabilities increased by nearly 400%
In the past decade, Apple’s owner’s equity nearly halved
Apple have used share repurchase schemes as a response to the sluggish global economy

Question 23

Apple - Monitoring and Controlling - cash flow statement, income statement, balance sheet

Answer 23

The monitoring and controlling process involves the compilation of financial statements – cash flow statement, income statement, and balance sheet
In both the USA and Australia, public companies, such as Apple, have to report their annual reports on the respective stock markets, United States Securities and Exchange Commission and Australian Stock Exchange (ASX)
In 2021, Apple’s net sales increased by 33% or USD 91.3 billion, driven by the demand for home based accessories stemming from the COVID-19 lockdowns
In 2020, the total net sales increased by 6% or USD 14.3 billion, primarily driven by sales of Services and Wearables, Home and Accessories

Question 24

Apple - Comparative Ratio Analysis – over different time periods, against standards, with similar businesses

Answer 24

From 2020 to 2021, Apple’s current assets decreased by 6% and current liabilities increased by 19%

Apple’s market cap exceeded $2.2 trillion, becoming the most valuable company listed on the stock market

Question 25

Apple - cash flow management

Answer 25

Cash inflows from operating activities improved in 2020 and 2021, spurred by the increased revenue during COVID-19 lockdowns
Cash outflows related to investing activities increased substantially during 2019 – 2021
Cash outflows related to financing activities continued to be significant due to Apple’s share repurchase scheme

Question 26

Apple - working capital management

Answer 26

Apple pre-purchases stock from suppliers to ensure availability

The anticipation of demand of the iPhone is a key challenge

Apple is heavily reliant on suppliers that also source competitors, threatening shortage of stock

Question 27

Apple - profitability management

Answer 27

The American and European markets have become saturated
Apple has increasingly targeted emerging markets, such as China and India
Apple has struggled with expanding to India with its expensive products not in demand
Apple accounted for 3% of smartphone sales in India
In 2017, Apple moved some of its operations to India to be partially exempt from import tax and reduce dependence on China
Tensions between the USA and China made operating in China more difficult

Apple has reduced the variable costs of production through:
- Designing low-cost models with cheaper components
- Replacing suppliers with in-house development of components, such as graphics and audio chips
- Switching to cheaper suppliers – in 2014, Apple replaced Samsung with TSMC to supply memory and processors
- Vertical integration – in 2019, Apple bought a supplier, Intel

Question 28

Apple - global financial management

Answer 28

As Apple is a multinational company, the volatility of currencies causes fluctuations in product value
In 2014, when the Russian Ruble appreciated, Apple increased the price of iPhones by 25%, in line with the European market
In 2021, Apple increased its use of derivatives by 32%