(CBE6382) corporate financial management assignment exploring investment strategies for Mcdomalds

Question

Task: how to use various corporate financial management assignment valuation models to determine the best time to invest in Mcdomalds

Answer

corporate financial management assignmentPART A
Introduction
A brief description of the company.
This corporate financial management assignmentinvestigatesMcDonald’s to determine the best time for investment in McDonalds. Macdonald is a multi-national fast-food company that is famous for their burgers and fries. The company has operations in more than 50 countries and has more than 40,000 outlets as of 2021. The company was founded in 1940 and the company is best known for its hamburger. The company has been criticized for their unhealthiness of their food. The company has different restaurant structures through which they operate, more standalone chains, to drive through units, the company has all. It has one of the most successful franchise models in the world and many companies have tried to copy it since a long time. The company has also been able to maintain its authentic tastes over the years and have also introduced new times again and again based on the local region in which they are operating and based on overall taste of the people around. Like in November 2020, the company introduced their meat substitute line of products that are made from plant meat and has been quite popular since then. The overall revenue of the company comes from rent, royalties, fees that are paid by the franchises and as well as the sales that the company operates through its retail outlets. The company is the second largest employer in the world with more than 1.7 million employees in their list. If we go by brand valuation the company is the ninth largest company in the world. This company is a childhood favorite of many people and hence it is famous. In this assignment we will study about the company, its overall financials and its capital structure and the overall financial valuation of the company has been done. In this corporate financial management assignmentwe will use different valuation model to understand how the company has been performing and whether we should invest in the company or not.

corporate financial management assignmentStructure

The major revenue of the company comes from different sources that includes rent, royalties, and franchise fees from different franchises they have along with that they have their retail outlets sales also that accounts for a major share of their revenue. If we go through the business model, the company along with being a D2C model is also a B2B model through which they run their franchise model where they give the franchises to different businesses and earn fees from them. The company has standalone restaurants and drive in takeaway outlets all around the world. The annual reports of the company accessed during this corporate financial management assignment presents a detailed consolidated financial statement of the company that includes revenue from all this sources. It also includes details with regards to the accounting policies and statements that are followed by the company and how they are working as per the provisions of the corporate governance. The note to account highlights all the key findings and the assumptions made by the company and the annual report also includes a detailed note from the directors and an audit report from the auditors attached to it. The books of the company have been prepared in a very detailed manner.

corporate financial management assignmentCorporate Governance

The company has adopted certain guidelines that are reflecting the company’s commitment towards good corporate governance and highlights that the guidelines are in accordance with the policies of the New York stock exchange (NYSE) and other legal requirements. These policies of the company are reviewed on annual basis and the proposed modifications are sent to the board and are then incorporated as and when felt suitable. As per the guidelines the roles and responsibilities of the board, the chairman and the CEO are very clearly stated. Along with that it also includes details about the composition of the board, their members,qualification, and other necessary information that the readers of the financial statements must be aware of. A detailed information with regards to the overall process that the management follows and how the board and the management works together have also been given in the annual corporate social responsibility statement given by the company. The corporate financial management assignment also includes details regarding how the board shall function in case there is any conflict of interest regarding the members of the board, in case there is any change of circumstances, in case there is any conflict of interest between the directors. It also includes information on how the directors are appointed by the company and what are their main role. Thus, we see that proper transparency is maintained by the management in presenting their corporate governance report and they are very clear with their roles and responsibilities and thus the stakeholders are fully aware on how the company is functioning and thus there are no chances of any biasness between the members involved and everything is vey fair and transparent. Thus, the company has a strong corporate governance policy in place and in case they don’t follow it then they can be penalized because of that.

corporate financial management assignmentCorporate Social Responsibility
The company chosen for this corporate financial management assignmenthas a strong corporate social responsibility structure in place and has always been very mindful about its choices. In Greece the company was the first one to collaborate with other companies for using recycled paper, convert compost to gravel, for using bins in all its restaurants and for being one of the founding members of the green dot movement. It is also very employee friendly company and believes in timely rewarding its employee with advance promotions and movement in their career based on their performance and is famous for giving a work life balance to its employees. It also works towards the betterment of children and provide them with many opportunities to show their talent by developing and holding many sports program and games that helps the children to enhance their skill. In all its products it tries to maintain proper food safety and promotes better alternatives to unhealthier options like they have also launched products in multi-grain bread and whole wheat bread. Thus, we see that the company has a strong CSR policy in place in Greece and they are working towards it.

corporate financial management assignmentFinancial Performance
Based on the financial statements that are presented in the annual reports of the company, in terms of revenue it has increased to $9,787 in 2021 from $8,139 to 2020. The net earnings and income per share have also increased considerably since past year. The overall cost has also increased. With respect to the overall assets, it can be seen that there is an increase $1.2 billion or 2% in 2021, and that is majorly due to the increase in cash and cash equivalents that is because of the improved operating results. There was a decrease of $0.2 billion in 2021 with respect to net property and equipment and that is due to depreciation and impact of foreign exchange rates. The total assets at the end of the year included 465 of net property and equipment and 26% of lease right to use assets. The ROIC of the company after tax was a measure of the effectiveness of capital allocation over time. The corporate financial management assignment findings show it increased from 14.95 in 2020 to 21.5% in 2021 and this was majorly due to the improvement in operating results due to recovery from Covid 19 impact and the average debt balance has also reduced in comparison to prior year.
With respect to financing and market risk is was observed on this corporate financial management assignmentthat debt obligations in 2021 were $35.6 billion compared to $37.4 billion in 2020, and this was majorly due to the payment made of $1.1 billion, and this was due to the impact of changes in exchange rates on foreign currency denominated debts of $731 billion. To manage the impact of foreign currency fluctuations, the company uses interest rates swaps and finances in the currencies in which the assets are denominated. Thus, we see that the company is managing its debts in the best ways possible. The company does not have any significant exposure to ay individual counterpart and the company has master agreement that contains netting arrangement and hence the net risks are managed accordingly. Since the company has many currencies in which they deal with, they are hedging the overall net exposures by dealing in all these currencies and hedging their risks overall.
With respect to the cash and cash equivalents the company is generating a large amount of cash from operating activities and the available cash would help them to combat foreseeable operating needs and other cash requirements of the company. The major business of the company happens outside US and from there around 65% of the total income of the company comes from. Another major source of liquidity and finance for the company is from its franchise arrangement from which it earns major income and is also a major source of revenue and liquid cash for the company. The corporate financial management assignmentalso observes the control that the company is having more real estate has helped the company in maintaining a standard for the functioning of its restaurants around the world and that has helped in maintaining quality in different parts of the world.
Also, if see different other aspects the financial statements of the company have been prepared based on the applicable accounting standards and policies and the management has followed the same. They have also made the necessary disclosures in the notes to account statements that highlights the major assumption done by the company with respect to property and equipment, leasing arrangements, long-lived assets impairment review, litigation accruals and income taxes. Thus, the users have all the necessary information that they need with respect to the company and its financials and to understand how the company is performing and whether they should invest in the company or not. It can also be seen that the net income per share has also increased thus we see that overall, the financial position of the company is stable, and the company has done well and thus many people can invest in the company and the annual reports of the company has been presented well.
Also, the auditors have mentioned in their audit report that the books of the company have been prepared and presented as per the accounting policies and statement and is a fair representation of the company’s books of account.

corporate financial management assignmentRisk Profile
If we look at the present financial structure of the company, the company is managing its risk well by taking help of foreign exchange hedge facilities by investing and diversifying their portfolio in multiple currencies since they have business operations in so many countries around the world. With respect to financing and market risk is was seen that debt obligations in 2021 were $35.6 billion compared to $37.4 billion in 2020, and this was majorly due to the payment made of $1.1 billion, and this was due to the impact of changes in exchange rates on foreign currency denominated debts of $731 billion. To manage the impact of foreign currency fluctuations, the company uses interest rates swaps and finances in the currencies in which the assets are denominated. Thus, we see that the company is managing its debts in the best ways possible. The corporate financial management assignmentresearch shows the company does not have any significant exposure to any individual counterpart and the company has master agreement that contains netting arrangement and hence the net risks are managed accordingly. Since the company has many currencies in which they deal with, they are hedging the overall net exposures by dealing in all these currencies and hedging their risks overall. The company was also able to remove the issues that they faced due to covid 19 and was able to recover their losses by improving their overall operating performance and that has also helped them in generating cash that helps them in debt financing and repayment of the same. It can also be seen that the company is performing well as they have been able to reduce their debt components by repaying around $1.1 billion and thus the overall risk has also been reduced. Thus, in this manner the company has been able to maintain its risk profile and has made progress in combating the risk. To diversify the risk, the company is using major capital markets, bank financing and derivatives that would help them in meeting its financial requirements. The company is managing its debt portfolio in response to changes in interest rates and foreign currency rates by periodically redeeming, repurchasing, and retiring debt, terminating swaps, and making use of derivatives. For trading purpose, the company does not deal in derivatives but only for the purpose of the hedging the risk the company uses them. The swaps that are used by the company are over-the counter instruments. The company does not have any significant exposure to any individual counterparty or any such agreements, but the company has a master agreement that would help in netting the arrangements. As at December 31, 2021 neither the company nor its counter parties were required to post collateral securities on any of the derivatives position, other than on the hedges for which the company had supplemental benefit plan liabilities in which case that the counterparties were required to post collateral on their liability positions. The company is exposed to credit related risk in the business by its derivative counterparts in the business but in 2021 the company did not face any such issue. No collaterals were needed and the overall position of the company on financial basis was safe and secure. The company has also made sure that it is following all the legal compliances while dealing over these hedge funds and over the counter funds and there are no issues with regards to that. The company has diversified its funds in such a manner that there are no risk to its overall liquidity. Thus, we see that the company is trying different options to combat the risk by making use of hedge funds and swap agreements. The net exposure of the company has been diversified into multiple foreign currencies that includes British pound sterling, Canadian dollars, Australian dollars, Russian rubble, and polish zloty among others. Thus, this diversification of the currencies helps the management in maintaining a stable risk profile, along with good investment option that in the end helps the company to have a secure liquid position. As per corporate financial managementassignment findings, liquidity helps the management in payment of their debts on timely basis and reduce the major risks that they might face given the large number of operations that they have.

Optimality of Capital Structure Choices
If we look at the capital structure of the company as per the financial statements, it can be seen that the company has a mix of debt and equity in order to raise optimum capital for its operations. The long-term debt stands for $35,622.7 million and the total common stock that only consists of equity shares and no preference shares stands for around 16.6 million of $0.1 par value for each share. The company also has a large share of long-term lease liability in its portfolio as the company makes large amount of investment in retail property as in case these outlets are owned by the company then the quality of the restaurant is better along with it making more money. Thus, we see that the total amount of lease liability for 2021 was $13,020 million in 2021. In 2021 the company repaid around $1.1 billion of total debts and thus that led to reduction in the overall debt component that the company was having and this was also that due to covid that company had to take so much money in the market but due to improvement in its overall operating activities the company was able to fight the same.

corporate financial management assignmentPART B
In the given corporate financial management assignmentbusiness scenario, an organisation named Tyers INC.is considering undertaking a new investment proposal of producing and marketing new type of tires named supertyre. For the same, it shall make an initial investment of €500 million in procuring a production equipment with a life of four years and a salvage value of €50 million at the end of his life. The organisation has two alternatives for selling these tires either in the original equipment manufacturer market or in the replacement market. Both have different demands and selling price while the variable cost of production of each tire remains the same. Capital budgeting techniques are undertaken to assess the feasibility of the investment and to decide which market should be selected for maximum profitability situation.

Conclusion:
from the net present value analysis conducted as above, both the alternatives deliver negative net present value to the organisation during the life of the project. This implies that when financial forecasts are discounted, they are likely to accrue losses to the organisation in the long run. Hence it is suggested that the internal management of the finance department should refuse in making such an investment in either of the two alternatives.

Capital budgeting is one of the critical financial management tools identified on this corporate financial management assignmentthat allows organization to choose valuable products for the business. This process comprises of acquisition of land, purchase of fixed assets, etc. Every business organisation intends to undertake such projects that would enhance its profitability quotient in the long run and add to the wealth of its shareholders. Hence, it is considered as one of the important financial techniques that creates measurability as well as accountability. (Abduallah Al-Mutairi, 2018) It ensures that the organisation invest in appropriate resources by undertaking proper analysis of the project to evaluate and compare its associated risks and returns. On the contrary, if the business management fails to measure the effectiveness of such an investment, it is likely that it would not survive in the market. Business organisation exist for owning profits and hence capital budgeting process adds value to such existence by determining the feasibility and viability of any investment proposal. Hence, it is a process that considers a financial commitment as well as an investment. Depending upon the nature, size and scale of business operations, organisation may undertake different valuation techniques to evaluate the viability of the capital budgeting project. Some of the most popular ones include calculating net present value, payback period, accounting rate of return, discounted payback period and internal rate of return.

1. Payback period - payback period estimates the duration required to recover the initial investment made into the project. For instance, if a proposal has a requirement of an initial investment of about $1 million, the payback period shall reflect the number of years required for the inflows to recover $1 million investment made into the project. Hence, a shorter payback period is generally preferred as it would imply more profits during the life of the project. This corporate financial management assignmentassessment technique is usually undertaken when the organisation has issues about its liquidity aspects. Hence, an organisation with limited funds may undertake investment proposals one at a time. The management heads would immensely rely on recovering their initial outlay as soon as possible so that they can continue with their subsequent projects and investments. Since it is easy to calculate and a simple process, it is one of the most popularly accepted management technique by many business organisations. It is simply dependent upon the cash flow estimates been established by the internal management of the organisation. This is also one of the drawbacks of the technique as it fails to account the time value of money. It is simply based upon the cash flow forecast without discounting them to estimate its present value. It is hence considered as one of the principles violating the code financial objectives. Therefore, a discounted payback period model was developed to consider its drawbacks and discount the cash flow forecast during the life of the project. Another drawback to the payback period method includes the probability that investment of cash maybe made at any stage during the project, and he needs its life should be considered. Therefore, if the lives of the asset is not more than its payback period, the organisation will not be able to reap sufficient profits from this investment proposal and hence would not add any value to the business.

2. Internal rate of return - internal rate of return is described as the discounting rate at which the net present value of the investment would be nil. This would mean that the net present value of the cash inflows would equal its initial investment. The NPV of a given investment proposal is always inversely correlated with its discounting rate. Hence, if the discounting rate increases, the estimates of cash flows of the project become more uncertain and less worthy in value. An internal rate of return that is higher than the average Cost of capital of the project depicts a favourable and profitable investment while a lower internal rate of return than its cost of capital would allow and recommend the management to reject the same. One of the primary advantages of implementing such a capital budgeting technique is undertaken an effective decision-making tool. The corporate financial managementassignment research shows It is a benchmark rate that would allow the project to be assessed with respect to the capital structure of the organisation. It hence allows the organisation to compare different available investment projects. However, if the projects are mutually exclusive, the internal rate of return would not ensure appropriate comparison of the same.

3. Net present value - net present value is one of the most popular, accurate and intuitive valuation approaches under capital budgeting. It comprises to discount the after-tax cash flows of the investment proposal using the weighted average cost of capital rate thereby allowing the internal managers to undertake effective decision whether to accept or reject a proposal. It reveals the profitability quotient of an investment proposal when compared with other capital budgeting techniques. It is clearly based on the idea that a project delivering positive net present value should be accepted by the business while those generating negative results should clearly be rejected. (Woodruff, 2019) Since business funds are scarce and limited, life of the available investment projects are different, it is clear that all positive generating projects cannot be accepted. Hence, those projects that deliver highest positive discounted net present value should be selected an undertaking. Not only does this corporate financial management assignmentapproach ensures comparison between multiple mutually exclusive investment proposals, it also enhances the overall usefulness of the project.

4. Profitability index - Another major financial metric under the capital budgeting technique is the profitability index of the proposal. It is calculated by dividing the present value of cash inflows with the initial outlay. If the profitability index is greater than one, it is indicative of the fact that the proposal would generate positive net present value and vice versa.

Bibliography
Abduallah Al-Mutairi, K. N. (2018). Capital budgeting practices by non-financial companies listed on Kuwait Stock Exchange (KSE). Cogent Economics & Finance, 6:1, DOI: 10.1080/23322039.2018.1468232 .corporate financial management assignment
Woodruff, J. (2019). Advantages & Disadvantages of Net Present Value in Project Selection. https://smallbusiness.chron.com/advantages-disadvantages-net-present-value-project-selection-54753.html .corporate financial management assignment