Finance Case Studies Flashcards
McDonald’s - Strategic Role of Financial Management
McDonald’s uses a comprehensive accounting system to collate information into timely financial reports to make strategic decisions
McDonald’s - Objectives of Financial Management
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
McDonald’s - Internal Sources of Finance - retained profits
1.6 billion was spent on capital
McDonald’s continues to rewards shareholders
McDonald’s - External Sources of Finance
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
McDonald’s - Financial institutions – banks, investment banks, finance companies, superannuation funds, life insurance companies, unit trusts and the Australian Securities Exchange
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
McDonald’s - Influence of Government – Australian Securities and Investments Commission, company taxation
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
McDonald’s - Global Market Influences – economic outlook, availability of funds, interest rates
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
McDonald’s - Planning and Implementing – financial needs, budgets, record systems, financial risks, financial controls
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
McDonald’s - Debt and Equity Financing – advantages and disadvantages of each
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
McDonald’s - Monitoring and Controlling – cash flow statement, income statement, balance sheet
McDonald’s provides annual reports that include a cash flow statement, income statement, and balance sheet
McDonald’s - Limitations of Financial Reports – normalised earnings, capitalising expenses, valuing assets, timing issues, debt repayments, notes to the financial statements
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
McDonald’s - Cash flow management
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
McDonald’s - working capital management
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
McDonald’s - Strategies - leasing, sale and lease back
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
McDonald’s - profitability management
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