Finance Case Studies Flashcards
strategic role of financial management
MCDONALD’S
McDonald’s uses a comprehensive accounting system to collate information into timely financial reports to make strategic decisions
objectives of financial management
MCDONALD’S
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
internal sources of finance – retained profits
APPLE
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
external sources of finance
MCDONALD’S
McDonald’s has the liberty to overdraft funds up to USD 3.5 billion, which is intact
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
financial institutions – banks, investment banks, finance companies, superannuation funds, life insurance companies, unit trusts and the Australian Securities Exchange
APPLE
Discloses financial information publicly in line with the regulations of NASDAQ
Financial rating agencies assign credit ratings influencing the financial ambition of Apple
influence of government – Australian Securities and Investments Commission, company taxation
MCDONALD’S
Multinational - legal inconsistencies
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
Unhappier Meal - Tax Avoidance Still on the Menu at McDonald’s - a trade union report - accused McDonald’s of reducing taxation by transferring profits to a Singaporean entity group to circumnavigate Australia’s higher company tax rate
global market influences – economic outlook, availability of funds, interest rates
APPLE
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
planning and implementing – financial needs, budgets, record systems, financial risks, financial controls
MCDONALD’S
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
monitoring and controlling – cash flow statement, income statement, balance sheet
APPLE
Public companies must publish financial data
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
limitations of financial reports – normalised earnings, capitalising expenses, valuing assets, timing issues, debt repayments, notes to the financial statements
MCDONALD’S
McDonald’s Australia openly stated that the business capitalises expenses
McDonald’s Australia valued its goodwill at AUD 295 million
Limitations of valuing goodwill:
- Does McDonald’s overvalue the buyback 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
cash flow management
MCDONALD’S
McDonald’s maximises profit to ensure positive cash flows which are then spent on capital infrastructure, dividends, share buy-backs and payment of debt
working capital management
MCDONALD’S
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 USD 1 billion from franchisees
Sophisticated inventory software program predicts sales based on data
profitability management
APPLE
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
Apple moved some of its operations to India to be partially exempt from import tax and reduce dependence on China - US China tensions
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 – Apple replaced Samsung with TSMC to supply memory and processors
- Vertical integration – Apple purchased Intel, a supplier
[working capital management] - strategies – leasing, sale and lease back
MCDONALD’S
In an 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
debt and equity financing – advantages and disadvantages of each
MCDONALD’S
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
Advantages of Equity Financing:
- The company can sacrifice paying dividends in a particular year, retaining cash – 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
