FSA Project McDonalds v2.4

5/6/2014
MCDONALD’S
CORPORATION
FINANCIAL STATEMENT ANALYSIS
AND VALUATION – CASE STUDY OF A
FIRM
James DeChristy
Peter Foster
Saqib Shakil 156004799

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Executive Summary
The purpose of this report is to provide an investment recommendation on the stock of
McDonald’s Corporation. A variety of financial statement analyses and ratio analyses were
performed to arrive at a final recommendation to “hold” McDonald’s stock.
The key adjustment noted in the report was the potential capitalization of the company’s
operating leases. As a result, net operating assets and net operating profits after taxes would
increase by 29% and 12%, respectively. Negative impacts would be seen in the form of a 51%
increase in net non-operating liabilities and a 144% decrease in net non-operating expenses.
However, an arguably more important measure to investors is the return on equity (ROE).
Capitalization of the operating leases would trigger a decrease in ROE in excess of 10% (from
36% to 25%).
Another key finding of the report was the result of the disaggregation of ROE. When breaking
down ROE into its components of return on net operating assets (RNOA) and non-operating
return, it is clear that operating return is driving ROE. RNOA was nearly twice as much as non-
operating return for 2013 (23% versus 13%, equaling ROE of 35%). This indicates that
McDonald’s consistent, sustained success is very reliant on its operations.
Finally, as a result of forecasting the financial results for the next five years (1.95% assumed
growth rate) and calculating the present value, the calculated price per share equaled $99.50.
When comparing this OI-based price versus the current price of $101.25, it is clear that the
current price is inflated. A “buy” decision would not be ideal based on this. Pair that with the
rising stock price, a “sell” decision does not seem right at present either. In terms of price, the
price to earnings (P/E) ratio became an important factor. Having a P/E ratio consistent with the
S&P average (18% for both) along with the aforementioned factors, are what led to “hold” being
the final recommendation on McDonald’s stock.

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Table of Contents
Executive Summary........................................................................................................................ 1
1 Introduction.............................................................................................................................. 4
2 Company and Industry Analysis.............................................................................................. 4
2.1 External Business Environment ....................................................................................... 4
2.2 PESTEL Analysis of McDonald’s ................................................................................... 5
2.3 Porter 5 Forces Model...................................................................................................... 8
2.4 Competitor Analysis......................................................................................................... 9
3 Analytical Adjustments ......................................................................................................... 10
3.1 Revenue Recognition Policy.......................................................................................... 10
3.2 Asset Recognition Policies............................................................................................. 10
4 Ratio Analysis, Historical Trends and Comparison to Competitors...................................... 11
4.1 Profitability Analysis...................................................................................................... 11
4.2 Liquidity Analysis.......................................................................................................... 12
4.3 Debt Utilization.............................................................................................................. 13
4.4 Asset Utilization............................................................................................................. 15
4.5 Valuation Ratios............................................................................................................. 15
4.6 DuPont Analysis............................................................................................................. 18
5 ROE Disaggregation and Off-Balance Sheet Financing ....................................................... 20
6 Credit Risk Analysis .............................................................................................................. 23
7 Non-Owner Financing at MCD ............................................................................................. 24
8 Owner Financing and Recent Equity Activity....................................................................... 25
9 Forecasting Financial Statements and OI-Based Valuation .................................................. 26
10 Analyst Recommendation and Consequences ................................................................... 29
Appendix A: MCD Income Statement 2013................................................................................. 30
Appendix B: MCD Balance Sheet 2013 ....................................................................................... 31
Appendix C: MCD Cash Flow Statement..................................................................................... 32

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Table of Figures
Figure 1: Summary of PESTEL analysis of fast food industry ...................................................... 7
Figure 2: Porter 5 Forces Model ..................................................................................................... 8
Figure 3: Barriers to entry in international fast food market .......................................................... 9
Figure 4: Accumulated depreciation from MCD’s balance sheet................................................. 11
Figure 5: MCD Profitability Analysis........................................................................................... 12
Figure 6: Liquidity analysis of MCD............................................................................................ 13
Figure 7: Solvency of McDonald's ............................................................................................... 14
Figure 8: Debt Coverage of McDonald's ...................................................................................... 14
Figure 9: Cash Conversion Cycle of MCD................................................................................... 15
Figure 10: Diluted EPS of MCD................................................................................................... 16
Figure 11: Stick repurchase and dividend..................................................................................... 17
Figure 12: EPS without stock repurchases.................................................................................... 17
Figure 13: PE Ratio of MCD and S&P500 ................................................................................... 18
Figure 14: 3-factor variant of DuPont Ratio ................................................................................. 19
Figure 15: Extended DuPont Ratio ............................................................................................... 19
Figure 16: ROE Disaggregation of MCD ..................................................................................... 21
Figure 17: PV of Operational Leases............................................................................................ 21
Figure 18: Financial statement adjustments due to lease capitalization ....................................... 22
Figure 19: ROE disaggregation after adjustments ........................................................................ 22
Figure 20: Liabilities to Asset Ratio ............................................................................................. 23
Figure 21: Owner Financing ......................................................................................................... 25
Figure 22: Share repurchases ........................................................................................................ 26
Figure 23: Equity compensation plan for share dilution............................................................... 26
Figure 24: Variables for forecasting and ROPI calculation.......................................................... 27
Figure 25: OI-Based stock value of MCD .................................................................................... 28

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1 Introduction
The purpose of this report is to analyze and evaluate the financial performance of McDonald’s
Corporation (MCD) over last two years 2012-2013 in order to forecast its future performance.
The intended target audience for this report includes stock brokers and equity investors, who will
be advised to buy, sell, or hold MCD stock based on its past performance and future outlook.
2 Company and Industry Analysis
McDonald’s is the largest global fast food restaurant chain with more than 34,000 restaurants
serving nearly 70 million people in 118 countries every dayi. The global expansion strategy is
based on a franchise model with nearly 80% of McDonald's restaurants being owned and
operated by independent and local franchisees that operate their businesses in close coordination
with McDonald's Corporation, which charges a nominal management fee in return for allowing
the franchisees to use McDonald's branding and production processesii. Presently, the current
CEO of McDonald's Corporation is Don Thompson and the company has generated revenue of
$28.10 billion in 2013 with a net profit of $5.58 billion for the same yeariii. The company
employs almost 1.8 million people globally and its main competitors include Yum Brands Inc.
(KFC, Pizza Hut, Taco Bell, and Wing Street), Burger King, Subway, and Wendy's.
2.1 External Business Environment
Fast food restaurants generally provide quickly prepared meals to customers for either dine in or
take out, where customers pay up front at the time of placing an order. The economic drivers of
the fast food industry include consumer spending habits based on the sentiment towards fast
food, and the volatility in the prices of agricultural produce such as forestry, fishing, meat
industry and farm produceiv. The recent market projections suggest that the full-service
restaurant segment (in which McDonald’s operates) is posting a third consecutive year of real
sales growth during 2013, where total sales of this segment are expected to be $208 billion,
which is a 2.9% increase from $202.2 billion in 2012v. The answer to such an expansion can be
found in the economic theory of inferior goods that when the income level decreases, the
consumption of inferior goods increasesvi. During past five years, the world underwent a severe
economic recession resulting in low income levels globally, thereby triggering the consumption
of low price fast-food (i.e. the inferior good) that is not perceived as being healthy by today’s
consumer.
Moreover, the fast food chains are seeking growth from the emerging economies of Brazil, India,
Russia and China, which are deregulating their markets and welcoming foreign direct
investments as a result of international trade agreements. The fast food markets in developing
countries are facing saturation levels due to oversupply of fast food services, resulting in lower
revenues, intense price based competition and weaker revenue growth from these markets.

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Additionally, amid the health concerns regarding their food, the fast food restaurants are
responding by expanding their menu options to low calorie, fresh, organic, and less fatty, healthy
meals to capture the emerging market segmentvii.
Analyst Recommendation
Based on above mentioned analysis of the fast food industry, the analysts are of the view that
overall fast food industry is not only diversifying into new geographical markets but it is also
diversifying its product portfolio in the existing markets to capture the increasing demand for
healthier food choices. As a result, the recommendations of the three analysts working on this
project are as follows:
Sell Underperform Hold Buy Strong
Buy
External business
environment
2 1
2.2 PESTEL Analysis of McDonald’s
Macro-environmental factors greatly shape the way companies operate and perform in their
respective markets so it is important for business managers to perform thorough environmental
scanning of their businesses to gain valuable information about distinctive changes and their
impact on a firm’s strategy. The PESTEL analysis is one such framework that gives a holistic
view of a firm’s external environment and it stands for political, economic, social, technological,
legal and environmental elements that form the business ecosystem. The PESTEL analysis below
of McDonald’s Corporation can assist in understanding the operating strategy of this
organization.
Politically, the fast food industry is facing resistance from local political activists in Europe and
United States, who frequently highlight the negative health consequences of consuming fast food
and its implications for the government in the form of increasing health care burden that is borne
by taxpayersviii. These activists claim to link the increasing epidemic of obesity with the
increasing consumption of high sodium, high sugar, and calorie rich fast food and they try to
limit such consumption through policies related to taxation, employment and trade. By
increasing taxes, restricting working hours of employees, and increasing labor wages, the
opponents of fast food try to increase the overall cost of fast food in order to weaken demand in
the wake of increasing food prices.

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Economically, global organizations such as McDonald’s are deeply affected by fluctuations in
the inflation and exchange rates and have to implement risk management and hedging measures
to counter the effects of such fluctuations. Also, such economic factors as income levels,
customer utility, cost of living, government taxes, and subsidies to agri-businesses affect the
supply and demand of a firm’s goods to the market. Since McDonald’s relies on a vast number of
raw-material suppliers for its operations, minor changes in economic policies have deep impact
on its operationsix.
Socially, the fast food industry is facing staunch criticism for promoting junk food eating trends
and targeting young children through advertisements and promotions, which is increasingly
leading to obesity in our societyx. Over last 10 years, these concerns have resulted in decreased
fast food demand from elderly people and obese children, thereby forcing fast food operators to
diversify their product portfolio with healthy menu choices for both adults and kids, which may
lead to reduced profit margins. These changes are greatly affecting single product operators, such
as those who only sell hamburgers, but global brands like McDonald’s are already well placed to
capture the changing customer preference.
Technologically, the fast food industry has invested heavily in the food processing equipment
that has helped it reduce its reliance on human labor and increase the standardization of the food
manufacturing process. This technology is at its maturity stage and the industry is not expecting
any radical technological innovation that may provide any firm with a competitive advantage
over its rivals. However, the efficient implementation of supply chain management systems is
still assisting the fast food chains to monitor and control their operating costs. Environmentally,
the fast food restaurants, especially the ones that operate on a large global scale such as
McDonald’s, are frequently being held liable for polluting and damaging the environment
because of the extensive use of non- bio degradable material such as plastic and Styrofoam in its
food packaging. These allegations have led the fast food chains to utilize more bio-degradable
materials, such as paper for packaging and serving purposes, driving up the cost of raw materials
for these companiesxi. Legally, global fast food chains employee millions of people across the
globe, they face high legal costs in implementing and executing appropriate local laws and
regulations and often face lawsuits from employees, consumers and food activists in the wake of
diverging from any legal or ethical guidelines of the country.
Although the macro-environmental factors affect all industry participants equally, some
companies are better equipped with overcoming these hurdles and are better prepared to hedge
against these potential risks. A summary of these risks and McDonald’s position against them,
based on its market share and size, is highlighted in the Figure 1.

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Macro-
environmental
Factor
Overall
Outlook
MCD’s Position over its Competitors
Political Unfavorable Disadvantage, because of its high presence and junk
food image
Economic Unfavorable Advantage, because of high bargaining power over
suppliers to offset commodity price increases. Also,
due to high presence in the market and best value for
money, customers will still buy MCD products
despite reduction in purchasing power.
Social Neutral Advantage, because MCD is well placed to capture
changing consumer preferences towards healthy
food choices.
Technological Neutral Neutral, because same technology is available to
every fast food chain and it does not provide a
source of advantage to any single firm.
Environmental Unfavorable Neutral, because today every fast food operator
tends to act in an environmentally responsible
manner, which on one hand increases the cost of
operations, but can also result in cost savings if
carefully implemented.
Legal Unfavorable The legal and regulatory environment worldwide
exposes MCD to complex compliance, litigation and
similar risks that affects its operations and results in
material ways and has increased its cost of doing
business. In developing markets, MCD faces the
risks associated with new and untested laws and
judicial systems.
Figure 1: Summary of PESTEL analysis of fast food industry
So, based on this analysis, the following recommendations are put forth by the analysts.
Buy
PESTEL analysis 1 2

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2.3 Porter 5 Forces Model
Another important framework to assess the overall industry attractiveness was proposed by
Porterxii in the form of five market forces (see Figure 2) that shape up the industry dynamics in
any market.
Based on this framework and analysis of the fast food industry, this reveals that the threat of
competition is high, as the demand for fast food is increasing and fast food operators are
increasingly engaging in fierce competition with respect to price, food quality, consistency,
presentation, range and retail locations. Unlike the past couple of decades when fast food chains
used to limit their product offering to a limited number of items, these chains are now
consistently introducing a variety of foods with local tastes in order to capture the consumer
demand. Additionally, with easy access to technology and financing, new local competitors of
global fast food chains are emerging in every country, which offer similar product quality at a
lower price and their share of industry revenue is increasing every yearxiii. This essentially
translates into the fact that low start-up costs are resulting in threat of new entrants at a local
level. However, on a global scale, such a threat is minimal as the existing fast food chains are
almost maximizing the economies of scale and have captured a large segment of distribution
channels. A summary of barriers to entry is given in Figure 3.
Figure 2: Porter 5 Forces Model
Furthermore, the threat of substitutes is high. Other types of meals can easily replace fast food
meals; especially local ones such as home prepared meals, dine in restaurants, and meals
available at convenient stores. Also, with an increasing awareness about the health effects of fast
food, healthy alternatives are becoming more attractive among consumers. Furthermore, the
power of suppliers in front of global fast food chains is moderate as the buying power of global

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corporations like McDonald's is humongous, leaving moderate bargaining power with suppliers
over the prices of commodities. Still, the selection of suppliers to minimize the transportation
costs gives moderate bargaining power to local suppliers, which manage to receive the market
price of commodities. Lastly, although the individual consumers do not have the power to
influence the decisions of fast food chains directly, they influence it greatly by raising their
concerns through social media and other opinion outlets. The power of buyers is moderate and is
reflected in the increasing adherence of fast food industry to local social regulations and quality
standards to maintain their brand reputation.
Barriers to Entry Level/Impact
Industry Competition High
Industry Concentration Low
Life Cycle Stage Growing
Capital Intensity Medium
Technology Change Medium
Regulation and Policy Heavy
Industry Assistance None
Figure 3: Barriers to entry in international fast food market
2.4 Competitor Analysis
In the fast food industry, the two major market shareholders are McDonald’s with a 20.9%
market share in 2011, followed by Yum! Brands with an 11.9% market share, and then by
Subway, which commands only a 3.5% market sharexiv. These figures indicate that McDonald’s
strategy has served it well to become the largest fast-food chain in the world.
According to Porter’s theory of competitive advantage xii an organization can gain competitive
edge over its customers either by cost leadership or differentiation. As the Porter five forces
analysis reveal the presence of intense industry competition, it translates into the business
strategy of high cost saving along with localization of products to local tastes for increased
market share. So, in this highly competitive market, MCD holds a competitive advantage over its
competitors due to its dominant market share that earns it a higher bargaining power over its
competitors in terms of a lower cost of operations and strong franchising opportunities. So, based
on competitor and Porter 5 forces analyses, the analysts put forth the following recommendation:
Buy
Porter Five Forces and
Competitor analysis
1 2

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3 Analytical Adjustments
3.1 Revenue Recognition Policy
According to the McDonald’s annual report “The Company’s revenues consist of sales by
Company-operated restaurants and fees from franchised restaurants operated by conventional
franchisees, developmental licensees and foreign affiliates. Sales by Company-operated
restaurants are recognized on a cash basis. The Company presents sales net of sales tax and other
sales related taxes. Revenues from conventional franchised restaurants include rent and royalties
based on a percent of sales with minimum rent payments, and initial fees. Revenues from
restaurants licensed to foreign affiliates and developmental licensees include a royalty based on a
percentage of sales and may include initial fees. Continuing rent and royalties are recognized in
the period earned. Initial fees are recognized upon opening of a restaurant or granting of a new
franchise term, which is when the Company has performed substantially all initial services
required by the franchise arrangement.”
The revenue recognition policy of MCD is in compliance with GAAP, as it recognizes the
revenue when it is earned and the responsibilities are substantially performed. There are two
revenue streams for the company a) restaurant sales from MCD operated restaurants and b) rent
payments and franchising fees from restaurants licensed to foreign affiliates. MCD appropriately
follows the ‘revenue recognition’ principal and hence no analytical adjustment is needed in this
regard.
3.2 Asset Recognition Policies
Revenue generated from MCD owned restaurants is earned in the form of cash payments
received from customers and since no sales are made on credit, the chances of asset write-offs
related to accounts receivable are nil. For this reason, one cannot find an allowance for doubtful
accounts on the MCD balance sheet. Since there is no aging analysis for accounts receivable and
managerial estimation to determine the allowance for doubtful accounts is absent, no appropriate
analytical adjustment is needed with respect to accounts receivable.
Furthermore, McDonald’s states “Property and equipment at cost, with depreciation and
amortization provided using the straight-line method over the following estimated useful lives:
buildings - up to 40 years; leasehold improvement - the lesser of useful lives of assets or lease
terms, which generally include option periods; and equipment - three to 12 years.” The point to
note is that the useful lives of the assets are based on management’s estimates of the period over
which the assets will generate revenue; however, the effective lives are not to exceed lease term
plus options for leased property. Although, one may suspect managerial discretion in estimating
useful life of the long term assets, the useful lives are determined using historical experience
with similar assets, taking into account anticipated technological or other changes.

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The experience of past assets seems to be reasonable basis for determining the lives of future
assets and not much variation is expected as the technology in fast food industry is at a mature
stage. Furthermore, MCD periodically reviews the lives relative to physical factors, economic
factors and industry trends. If there are changes in the planned use of property and equipment, or
if technological changes occur more rapidly than anticipated, the useful lives assigned to these
assets are shortened, resulting in the accelerated recognition of depreciation and amortization
expense or write-offs in future periods. An overview of the accumulated depreciation account on
the balance sheet is presented in the Figure 4; it can be logically interpreted that no write-offs or
accelerated depreciation has been recognized in past three years and accumulated depreciation
has remained stable around 39% of total assets. So, for the purpose of calculating operating
income, no analytical adjustment is needed with regards to property, plant and equipment.
Figure 4: Accumulated depreciation from MCD’s balance sheet
4 Ratio Analysis, Historical Trends and Comparison to
Competitors
For analytical purposes this project will use the financial statements of the company, which are
reproduced in Appendices A, B and C. The common size income statement and the balance sheet
have also been developed to assist in the analysis. Furthermore, for benchmarking the analysts
will utilize the industry averages provided by Bloombergxv and Morningstarxvi.
4.1 Profitability Analysis
McDonald’s has two revenue streams – one from company owned restaurants and another from
franchising operations. For the calculation of gross profit margin, the relevant cost and revenue
values were chosen (i.e. COGS is only valid for company owned operations and franchising
related expenses are only attributable to revenues from franchising). However, this
disaggregation was not possible for the calculation of operating profit margin and the net profit
margin as the footnotes do not disclose the SG&A expenses attributable to each line of business.
Since both franchising and company owned restaurants are parts of MCD’s mainstream
operations, such disaggregation may provide little useful knowledge. However, the profitability
analysis of MCD’s wholly owned and franchising operations is carried out separately and is
presented in Figure 5.
Inmillions,exceptpersharedata December31,2013 2012 2011 2013 2012 2011
Accumulateddepreciationandamortization (14,608.30) (13,813.90) (12,903.10) -39.88% -39.04% -39.11%
ConsolidatedBalanceSheet CommonSizeBalanceSheet

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Figure 5: MCD Profitability Analysis
The operating profit margin and net profit margin of MCD hover around 31% and 19%
respectively. The operating profit margin or gross profit margin of MCD is lower than industry
average of 37.46%. However, this cannot be considered a weakness of MCD as there are two
outliers in the dataset - Burger King and Dunkin Brands with 74.61% and 81% gross profit
margins respectively. If these outliers are removed this ratio for the rest of the industry falls to
27.3%. Moreover, the net profit margin of the entire fast food industry is 8.7% on average, but
removing the very low performing players in the industry (with 1%-3% net profit margins) result
in this average to increase up to 14.7%. In terms of net profit margin, the analysis supports the
overall position of MCD in the industry as cost leader, because, despite the modest operating
margins as compared to some of its competitors, MCD boasts on average 5% more net profit
margin than its competitors.
4.2 Liquidity Analysis
The liquidity analysis of MCD is presented in Figure 6. The trends in the current, quick and cash
ratios are encouraging as all the ratios are improving over past 3 years. The current ratio of fast
food industry in 2013 was 1.6 and MCD is roughly similar to the industry average. Furthermore,
the quick ratio of MCD (1.3x) is also better than the industry average (1.2x) and it also maintains
an adequate amount of cash to cover its short-term obligations as evidenced by a 0.88x cash ratio
in 2013. It can be observed that over last 3 years, MCD has increased the amount of cash on
hand in order to be responsive during the economic recession and lack of high yield investment
opportunities over last few years. A downside of holding excessive cash is on the return on
2011 2012 2013
Gross profit margin of
company-operated restaurants
18.89% 18.16% 17.46%
Gross profit margin from
franchising operations
83.00% 82.97% 82.40%
Operating Profit Margin 31.58% 31.21% 31.18%
Net Profit Margin 20.38% 19.82% 19.87%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
Profitability Analysis

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average assets as the inclusion of cash balances in average assets reduced return on average
assets by about two percentage points for all years presented. However, for calculating the
operating performance of the company, ‘cash and cash equivalents’ have been removed from the
calculations.
Figure 6: Liquidity analysis of MCD
So, from an overall liquidity analysis it can be interpreted that MCD maintains an adequate level
of liquidity to support its current liabilities.
4.3 Debt Utilization
The solvency and debt coverage analyses of MCD are presented in Figure 7 and Figure 8
respectively. It can be seen that nearly 56% of MCD’s assets are being financed by liabilities
(both long and short term) and this ratio is slightly higher than the overall fast food industry
(55%). Additionally, the debt to equity ratio of the company is 88% as compared to 117% of the
rest of the industry and it indicates that MCD is well balanced in terms of financing its
operations and assets relative to its competitors, which mainly rely on debt financing to fund
their operations. No industry average has been provided for free operating cash flow to debt
ratio, but MCD has been keeping this ratio stable around 30%. Under more typical
circumstances, a high double-digit percentage ratio would be a sign of financial strength, while a
low percentage ratio could be a negative sign that indicates too much debt or weak cash flow
generation. It is important to investigate the larger factor behind a low ratio. A high or increasing
free cash flow to total debt ratio is usually a positive sign, showing that the company is in a less
risky financial position and better able to pay its debt load and, in the case of MCD, the company
can repay its entire debt within 3 years, provided it uses its entire free cash flow to repay its
interest bearing debt. A company with a decreasing ratio results in a riskier financial position, as
2011 2012 2013
Current Ratio 1.25 1.45 1.59
Quick Ratio 1.05 1.09 1.30
Cash Ratio 0.67 0.69 0.88
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
Liquidity of MCD

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declining cash flow and/or a rising debt load reveals a company that is less able to manage its
debt.
Figure 7: Solvency of McDonald's
Moreover, the average times interest earned and EBITDA coverage ratios for the entire fast food
industry are not available for benchmarking, but it can be observed that these two ratios are
stable in the case of MCD over last three years. MCD can cover its interest almost 17 times using
its EBIT and this coverage increases to almost 20 times after accounting for depreciation and
amortization, which are noncash accounts. Still, a comparison can be made with respect to the
nearest competitor of MCD, Yum brands, which has a TIE ratio of 13x and EBITDA coverage of
21x.
Figure 8: Debt Coverage of McDonald's
2011 2012 2013
Total Liabilities / Total Assets 0.56 0.57 0.56
Total Debt/Equity 0.867 0.89 0.88
Free Operating Cash Flow to
Debt
0.35 0.29 0.30
-
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Solvency of MCD
2011 2012 2013
Times Interest Earned 17.31 16.66 16.79
EBITDA Coverage 20.18 19.54 19.83
0.00
5.00
10.00
15.00
20.00
25.00
Debt Coverage of MCD

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From an overall analysis of debt utilization it can be concluded that MCD is not only well
equipped to fulfil its short-term obligations but it is also generating adequate amounts of cash
and income from operations to cover its interest bearing debt obligations. One cannot conclude
that MCD is doing an outstanding job with debt utilization as compared to its competitors, but so
far the company has portrayed a stable outlook and strong operations that steer away any worries
of bankruptcy arising from failure to cover debt obligations.
4.4 Asset Utilization
The asset utilization of MCD is depicted in the form of its cash conversion cycle in Figure 9. In
2013, the accounts receivable turnover and inventory turnover of MCD were 14.01 and 126.96
respectively. Additionally, the company has cut down its cash conversion time by 33% since last
year due to better accounts receivable collection and increased short-term financing through
accounts payable. Improvements in these two areas have reduced the cash conversion time to
merely 2.84 days and the company was able to achieve this due to rapid inventory turnover, the
ability to adjust menu prices and effective cost controls.
Figure 9: Cash Conversion Cycle of MCD
Based on an improved cash conversion cycle and better asset utilization, the analysts consider
MCD as a strong buy.
4.5 Valuation Ratios
Diluted earnings per common share are calculated using net income divided by diluted weighted-
average shares. Diluted weighted average shares include weighted-average shares outstanding
plus the dilutive effect of share-based compensation calculated using the treasury stock method
(in millions of shares): 2013–7.6; 2012–10.1; 2011–12.8. Stock options that were not included in
2012 2013
Days sales outstanding 26.59 26.06
Days payable outstanding 25.21 26.10
Days inventory outstanding 2.86 2.87
Cash Conversion Cycle 4.23 2.84
0.00
5.00
10.00
15.00
20.00
25.00
30.00
Cash Conversion Cycle of MCD

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diluted weighted average shares because they would have been anti-dilutive were (in millions of
shares): 2013–4.7; 2012–4.7; 2011–0.0. The diluted EPS for MCD are shown in Figure 10.
Figure 10: Diluted EPS of MCD
EPS presents an encouraging figure of MCD because of 4% growth in per share earnings, which
can result from either stock repurchases or from increased earnings. The company’s footnote
further discloses information about the calculation of EPS as in 2013 the net income increased
2% (3% in constant currencies) to $5.6 billion. However, foreign currency translation and lower
company-operated gross margin had a negative impact of $0.05 on diluted earnings per share, it
was more than offset by growth in net income that was positively impacted by higher franchised
margin dollars, and to a lesser extent, lower selling, general and administrative expenses.
Additionally, a decrease in diluted weighted average shares outstanding also contributed to the
diluted earnings per share growth in 2013.
As a comparison, in 2012, net income decreased 1% (increased 3% in constant currencies) to
$5.5 billion and diluted earnings per common share increased 2% (5% in constant currencies) to
$5.36. Foreign currency translation had a negative impact of $0.17 on diluted earnings per share.
Net income and diluted earnings per share growth in constant currencies were positively
impacted by growth in franchised margin dollars, partly offset by a higher effective income tax
rate and higher selling, general and administrative expenses in 2012. The Company repurchased
18.7 million shares of its stock for $1.8 billion in 2013 and 28.1 million shares of its stock for
$2.6 billion in 2012, driving reductions in weighted-average shares outstanding on a diluted basis
in both periods.
From this information it can be concluded that a number of important factors that affect the EPS
of MCD include SG&A expenses, net income, earnings from franchise operations, foreign
currency translation, income taxes and stock repurchases. However, MCD has been consistently
2011 2012 2013
Earnings per common
share–diluted
$5.27 $5.36 $5.55
$5.10
$5.15
$5.20
$5.25
$5.30
$5.35
$5.40
$5.45
$5.50
$5.55
$5.60
AxisTitle
Earnings per common share–diluted

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inducing growth in its EPS through regular stock repurchases. Indeed, for the last three years, the
Company returned a total of $16.4 billion to shareholders through a combination of share
repurchases and dividends. The repurchase and dividend details of MCD are shown in the Figure
11.
Figure 11: Stick repurchase and dividend
So, in the opinion of analysts, the stock repurchase is not an operational decision of a company
and the EPS from the operations of the company can be identified by negating the impact of
stock repurchases as shown in Figure 12. It can be seen that the EPS was inflated by 10bps in
2013, while this impact has been higher in past years reaching up to 20bps in 2011. On average
EPS in fast food industry was 1.304 in 2013 and MCD has performed much better than rest of its
competitors.
Figure 12: EPS without stock repurchases
2011 2012 2013
EPS without
repurchases
$5.06 $5.21 $5.45
$4.80
$4.90
$5.00
$5.10
$5.20
$5.30
$5.40
$5.50
AxisTitle
EPS without stock repurchases

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The change in EPS also affects the P/E ratio of MCD. The price to earnings ratio (PE Ratio) is
the measure of the share price relative to the annual net income earned by the firm per share. PE
ratio shows current investor demand for a company share. A high PE ratio generally indicates
increased demand because investors anticipate earnings growth in the future. The PE ratio has
units of years, which can be interpreted as the number of years of earnings to pay back purchase
price. However, the PE ratio cannot be seen and interpreted in isolation and usually a comparison
is made with the composite index to understand the confidence of investors in the company as
compared to the overall market. So, the P/E ratio of MCD and S&P 500 is presented in Figure 13
and it can be interpreted that the overall stock market considers MCD a reasonable buy with PE
ratio similar to that of the overall industry.
Figure 13: PE Ratio of MCD and S&P500
4.6 DuPont Analysis
To perform DuPont analysis, the analysts have used two variants of the DuPont ratio. The first
variant utilizes profit margin, total asset turnover and equity multiplier and is shown in Figure 14
for basic DuPont analysis.
2011 2012 2013
PE Ratio with stock repurchases 19.82 17.23 17.79
S&P PE Ratio for the year end 14.87 17.03 18.19
0.00
5.00
10.00
15.00
20.00
25.00

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Figure 14: 3-factor variant of DuPont Ratio
It can be seen from Figure 14 that despite better profitability and the same equity multiplier, the
lower total asset turnover in 2013 has resulted in lower ROE and this originates from a higher
percentage increase in average equity as compared to that of average assets. Lower asset
turnover means that the volume of sales that MCD generated from each dollar invested in assets
in 2013 is lower than that of 2012 and it can increase its asset turnover by increasing sales
volume without increasing its assets and/or by reducing asset investment without reducing sales.
Figure 15: Extended DuPont Ratio
2012 2013
NI/Revenue 19.82% 19.87%
Revenue/Average Assets 0.81 0.78
Average Assets/Average OE 2.30 2.30
DuPont ROE 36.82% 35.69%
0.00%
50.00%
100.00%
150.00%
200.00%
250.00%
2012 2013
NI/EBT 0.68 0.68
EBT/EBIT 0.94 0.94
EBIT/Revenue 0.31 0.31
Revenue/Average Assets 0.81 0.78
Average Assets/Average OE 2.30 2.30
DuPont ROE 36.82% 35.69%
0.00
0.50
1.00
1.50
2.00
2.50

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Our analysis of the DuPont ratio can be further strengthened by using an extended DuPont ratio
as presented in Figure 15, which clearly shows that a lower asset turnover is the primary reason
for the lower ROE of MCD in 2013. Both the three- and five-step equations provide a deeper
understanding of a company's ROE by examining what is really changing in a company rather
than looking at one simple ratio. As always with financial statement ratios, the results should be
examined against the company's history and its competitors, so, the average asset turnover of the
fast food industry has been 0.68 in 2013. This means that MCD has performed better than the
overall industry, but in 3% change in asset turnover has resulted in 3% reduction in the ROE of
the company and asset turnover should be monitored closely for MCD as it is dependent on the
operating activities of the company.
5 ROE Disaggregation and Off-Balance Sheet Financing
ROE disaggregation is used as a foundation to analyze the operating and non-operating
components of MCD’s return on equity. As it can be seen in the disaggregation of ROE (Figure
16), operating return (RNOA) is nearly twice as high as the non-operating return for both 2013
and 2012. For 2013, RNOA was 23.05% and non-operating return was 12.64%. For 2012,
RNOA was 23.87% and non-operating return was 12.94%. The fact that MCD has excellent
returns on its operations means that the company can rely heavily on its operations to support the
business. A further analysis of the MCD income statement (Appendix A) reveals that non-
operating expenses totaled $559.8M versus operating expenses of $19,341.40M for 2013.
Similarly, 2012 totals for the same measures were $525.60M and $18,962.40M, respectively.
The bulk of the non-operating expenses appear to be interest on MCD’s long-term debt. With the
company’s debt to equity ratio (Section 4.3) being nearly 1 for 2011, 2012 and 2013, MCD is
well balanced from a financing standpoint. Because MCD is so reliant on its operating return, it
is crucial to analyze its profitability ratios especially the operating profit margin. This measure is
a good indication of how well the company performs by analyzing its income and expenses from
operations. As seen in profitability analysis, the MCD’s operating profit margin is high –
consistently around 31% for the three previous years. To conclude, MCD relies heavily on its
operations but with such profitable operations, it is not a concern. A greater concern would be if
the company was more reliant on non-operating sources because that is not as sustainable in the
long-term.

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Figure 16: ROE Disaggregation of MCD
Although the ROE of 35.69% for MCD seems to be an achievable figure because it is an industry
leader, a deeper analysis of the footnotes indicate that MCD carries a huge number of its assets
as operating leases, and if these leases are capitalized then it adversely affects the ROE of the
company. The present value of operating leases comes out to be $10,590M as shown in figure
17.
Figure 17: PV of Operational Leases
Furthermore, the adjustments in the financial statements are shown in figure 18.
ROE Disaggregation 2013 2012 2011
Total interest expense 559.80 525.60 517.50
Effective Tax Rate 31.92% 32.36% 31.32%
Tax Shield 178.67 170.07 162.06
Tax from Operations 2,797.27 2,784.27 2,671.16
NOPAT 5,967.03 5,820.33 5,858.54
Average NOA 25,889.90 24,386.30
RNOA 23.05% 23.87%
Average Stockholder's Equity 15,651.650 14,841.900
NNO 10,343.600 10,132.900 8,935.900
Average NNO 10,238.250 9,534.400
FLEV 0.654 0.642
NNE 381.131 355.527 355.440
NNEP 3.72% 3.73%
Spread 19.33% 20.14%
Non-operating return 12.64% 12.94%
ROE = RNOA + Non-operating Return 35.69% 36.80%
ROE (Direct Method) = NI/Average Stockholder's
Equity
ROE 35.69% 36.82%
In millions Operating leases PV of operating leases
2014 1,440 $1,338.12
2015 1,334 $1,151.91
2016 1,218 $977.33
2017 1,099 $819.45
2018 990 $685.95
Thereafter 7,632
Total 13713 $10,590.26

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Figure 18: Financial statement adjustments due to lease capitalization
As a result of these adjustments, the ROE for 2013 drops almost 10% with a 5% drop in both
operating and non-operating returns. The operating return has dropped due to a 41% increase in
operating assets, which have more than offset the increase in NOPAT due to the removal of rent
expense. The non-operating return has dropped due to more than 100% increase in non-operating
expenses and non-operating liabilities. The ROE calculation after adjustments is shown in Figure
19.
Figure 19: ROE disaggregation after adjustments
Adjustments in Balance Sheet 2013
Mcdonald's Reported Figures Adjustments
Adjusted
Figures % Increase
Net operating assets 25,889.90 $10,590.26 36,480 40.90%
Net non-operating liabilities 10,238.250 $10,590.26 20,829 103.44%
Equity
Adjustments in Income Statement
Remove rent expense $1,892.6
Add depreciation expense $833
Add interest expense $806
Tax rate 31.92%
Mcdonald's Reported Figures Adjustments
Adjusted
Figures % Increase
NOPAT 5,967.03 $721 6,688.25 12.09%
Net non-operating expense 381.131 548.98 930.11 144.04%
ROE Disaggregation 2013
Total interest expense 559.80
Effective Tax Rate 31.92%
Tax Shield 178.67
Tax from Operations 2,797.27
NOPAT 6,688.25
Average NOA $36,480.16
RNOA 18.33%
Average Stockholder's Equity 15,651.650
NNO 10,343.600
Average NNO 20,828.513
FLEV 0.654
NNE 1,651.331
NNEP 7.93%
Spread 10.41%
Non-operating return 6.81%
ROE = RNOA + Non-operating Return 25.14%

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So, based on a complete analysis of MCD ratios, the analysts have the following
recommendations for MCD’s stock.
Buy
Profitabilityanalysis 1 1 1
Liquidityanalysis 1 2
Debt utilization 1 1 1
Assetutilization 1 1 1
Valuationratios 1 1 1
DuPont/ROE Analysis 3
6 Credit Risk Analysis
McDonald’s is a globally diversified company with worldwide sales in excess of $90 billion.
Even with a slight decrease in same store sales from year prior, their credit ratings remain stable.
In addition to the financial data that is explicitly stated on the company’s financial documents,
the analyst also has to consider the non-financial statement information about the brand equity
that McDonald’s carries. Everything else being equal and with no outlandish findings about the
way McDonald’s processes their food or treats their employees, they will remain a quick service
restaurant wildly trusted by consumers. The trust from consumers is the backing to strong
financial data that is reflected through ratio analysis and financial statement analysis. This strong
brand equity gives McDonald’s the ability to have over 35,000 locations worldwide, and over
$90 billion in sales. Over the past three years of financial data, McDonald’s has maintained a
consistent balance of total liabilities to total assets, averaging $0.5633 over the past three years.
Figure 20: Liabilities to Asset Ratio
$0.55
$0.56
$0.56
$0.57
$0.57
$0.58
$0.58
2011 2012 2013
Total Liabilities / Total Assets

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The situation for McDonald’s to utilize debt-financing needs to be considered. If McDonald’s
needed to take out a loan in order to cover their existing interest payments, this would draw a red
flag for an unstable credit rating. However, McDonald’s has times interest earned ratios of 16.79,
16.66, and 17.31 for the past three years. This means the company has enough earnings to cover
their interest expense almost 17 times over. A high number for times interest earned signals a
low risk of default to the market. Given the strong brand equity of McDonald’s, their consistent
and strong earnings, and their stable and consistent debt levels, they can be qualified with a
strong credit rating.
In terms of credit related losses, McDonald’s is exposed by counterparties to its hedging
instruments in the event of non-performance. The counterparties to these agreements consist of a
diverse group of financial institutions and market participants. MCD continually monitors its
positions and the credit ratings of its counterparties and adjusts positions as appropriate.
Fortunately, MCD does not have significant exposure to any individual counterparty.
Furthermore, at December 31, 2013, neither the Company nor its counterparties were required to
post collateral on any derivative position, other than on hedges of certain of the Company’s
supplemental benefit plan liabilities where its counterparties were required to post collateral on
their liability positions. This shows that the company has a prudent policy of hedging its risk
positions and so far it has not been required by the lenders to post any collateral for short and
long-term borrowing.
7 Non-Owner Financing at MCD
At December 31, 2013, MCD had a $1.5 billion line of credit agreement expiring in November
2016 with fees of 0.065% per annum on the total commitment, which remained unused. Fees and
interest rates on this line are based on the Company’s long-term credit rating assigned by
Moody’s and Standard & Poor’s. The current credit rating of McDonald’s senior unsecured debt
in both foreign and domestic markets is A2 from Moody’sxvii, A for foreign and local long terms
debt, and A-1 for foreign and local short-term debt from S&Pxviii. MCD’s subsidiaries had
unused lines of credit that were primarily uncommitted, short-term and denominated in various
currencies at local market rates of interest. The weighted-average interest rate of short-term
borrowings was 5.1% at December 31, 2013 (based on $609.7 million of foreign currency bank
line borrowings) and 4.1% at December 31, 2012 (based on $581.3 million of foreign currency
bank line borrowings and $200.0 million of commercial paper).
The Company has incurred debt obligations principally through public and private offerings and
bank loans. There are no provisions in MCD’s debt obligations that would accelerate repayment
of debt as a result of a change in credit ratings or a material adverse change in the Company’s
business. Certain of the Company’s debt obligations contain cross-acceleration provisions, and
restrictions on Company and subsidiary mortgages and the long-term debt of certain subsidiaries.
Under certain agreements, the Company has the option to retire debt prior to maturity, either at

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par or at a premium over par. The Company has no current plans to retire a significant amount of
its debt prior to maturity.
Borrowings related to the leveraged Employee Stock Ownership Plan ("ESOP") at December 31,
2013, which include $23.2 million of loans from the Company to the ESOP, are reflected as debt
with a corresponding reduction of shareholders’ equity (additional paid-in capital included a
balance of $19.9 million and $27.2 million at December 31, 2013 and 2012, respectively). The
ESOP is repaying the loans and interest through 2018 using Company contributions and
dividends from its McDonald’s common stock holdings. As the principal amount of the
borrowings is repaid, the debt and the unearned ESOP compensation (additional paid-in capital)
are reduced.
8 Owner Financing and Recent Equity Activity
The Company’s common stock trades under the symbol MCD and is listed on the New York
Stock Exchange in the U.S. The following table sets forth the common stock price ranges on the
New York Stock Exchange and dividends declared per common share:
Figure 21: Owner Financing
The number of shareholders of record and beneficial owners of the company’s common stock as
of January 31, 2014 were estimated to be 1,824,000. MCD’s management believes it is prudent
to reinvest in the business in markets with acceptable returns and/or opportunity for long-term
growth and use excess cash flow to return cash to shareholders through dividends and share
repurchases. The company has dividend policy based on consistent payouts and has paid
dividends on common stock for 38 consecutive years through 2013 and has increased the
dividend amount at least once every year. As in the past, future dividend amounts will be
considered after reviewing profitability expectations and financing needs, and will be declared at
the discretion of its Board of Directors. Furthermore, MCD believes in paying out to its
shareholders in the form of equity repurchases as shown from the following table:

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Figure 22: Share repurchases
The following table summarizes information about the MCD’s equity compensation plans as of
December 31, 2013. All outstanding awards relate to the MCD’s common stock. Shares issued
under all of the following plans may be from the MCD’s treasury, newly issued or both.
Figure 23: Equity compensation plan for share dilution
The impact of share dilution has already been incorporated in earning per share calculation of the
company and it has not been further utilized for analytical purposes in this report.
9 Forecasting Financial Statements and OI-Based Valuation
To forecast the financial performance of MCD for next five years the analysts have utilized the
parsimonious method of forecasting. All the important ratios, such as NOPM and NOAT, have
been calculated using the adjusted ROE calculation table (Figure 19). Furthermore, these
projected numbers have also been utilized to perform the operating income based (OI-based)
valuation of the company. However, to calculate the ROPI based stock price of MCD a number
of other variables were calculated first (see Figure 24) and the details of their calculations are as
follows:

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i. Weighted Average Cost of Capital (WACC) was calculated by first identifying the
weights of debt and equity financing utilized by MCD. Since, MCD has never issued any
preferred stock, so, the calculation was limited to common stock and debt.
ii. The cost of equity was calculated through the dividend discount model and the historical
data available in MCD’s financial statements (income statement) was utilized.
iii. The effective cost of debt was provided in the footnotes of 10K filing of MCD.
iv. Effective tax rate was already calculated in ROE disaggregation.
v. Sales growth has been computed based on the year-over-year sales trend.
vi. Terminal growth rate was calculated from World Bank’sxix report on global economic
growth rates. Since, MCD operates in more than 100 countries; an average of all GDP
growth rates was taken as a terminal growth rate.
Figure 24: Variables for forecasting and ROPI calculation
Finally, the OI-based stock calculation is presented in Figure 25 and according to our analysis
the true price of MCD stock should be $99.50 as compared to the current slightly inflated price
of $101.25xx.
2013
Dividends declared per common share 3.12$
Stock Price on Dec 31 96.91
Dividend yield 3.22%
Dividend growth 8.71%
Cost of equity capital 11.93%
Cost of debt 4%
Effective Tax Rate 31.9%
After tax cost of debt 2.7%
Weight of debt 47%
Weight of equity 53%
WACC 7.6%
Avg. NOA 36,480.2
Avg. NNO 20,828.5
NOPM 23.80%
NOAT 0.8
Sales growth 1.95%
Terminal growth rate 3.0%

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Figure 25: OI-Based stock value of MCD
Total number of shares outstanding (million) 1,006.00
MCD Reported
($ millions) 2013 2014 2015 2016 2017
Sales 28,105.70 $28,655 $29,215 $29,786 $30,368 $30,961
NOPAT 6,688.2 6,818.9 6,952.2 7,088.1 7,226.6 7,367.8
NOA 36,480.2 37,193.0 37,919.8 38,660.9 39,416.3 40,186.6
Year 1 2 3 4 5
WACC x NOA 2777.6 2831.9 2887.2 2943.6 3001.1
ROPI 4,041 4,120 4,201 4,283 4,367
PV of ROPI $3,755.43 $3,557.92 $3,370.80 $3,193.52 $94,640.3
PV of Horizon $13,877.67
PV of terminal $70,567.01
Total value of the firm (NNO+OE) $120,924.84
Total value of the firm's equity $100,096.33
Price per share $99.50 vs. $101.25
Forecast Horizon Terminal
Period
Author:
Value of termin

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10 Analyst Recommendation and Consequences
When aggregating the analyst recommendations from each section of the report, the final
consensus is a Hold position on the MCD stock (see below). As presented in Figure 13, the MCD
P/E ratio is consistent with the P/E ratio of the S&P 500 indicating that MCD is a stock worth
having in an investment portfolio. Before concluding to hold MCD stock, it is best to analyze the
alternatives to determine if they are better. The OI-based valuation in Figure 25 indicates that the
MCD price is currently inflated at $101.25 (versus the calculated price of $99.50). Conversely,
selling MCD stock would not be an ideal choice either as the stock price has been steadily
climbing over the past several weeks. In conclusion, based on the analyses from the report
(summarized below) and after weighing the alternatives, the evidence clearly indicates that a
Hold position is best for the MCD stock.
Sell Underperform Hold Buy
Strong
Buy
External businessenvironment 1 2
PESTEL analysis 1 2
Porterfive forcesandcompetitoranalysis 1 2
Profitabilityanalysis 1 1 1
Liquidityanalysis 1 2
Debtutilization 1 1 1
Assetutilization 1 1 1
Valuationratios 1 1 1
DuPont/ROEAnalysis 3
Stock Valuation 3
Total 0 3 15 10 2

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Appendix A: MCD Income Statement 2013
In millions, except per share data Years ended December 31,2013 2012 2011 2013 2012 2011
REVENUES
Sales by Company-operated restaurants 18,874.20$ 18,602.50$ 18,292.80$
Revenues from franchised restaurants 9,231.50 8,964.50 8,713.20
Total revenues 28,105.70 27,567.00 27,006.00
OPERATING COSTS AND EXPENSES
Company-operated restaurant expenses
Food & paper 6,361.30 6,318.20 6,167.20 22.63% 22.92% 22.84%
Payroll & employee benefits 4,824.10 4,710.30 4,606.30 17.16% 17.09% 17.06%
Occupancy & other operating expenses 4,393.20 4,195.20 4,064.40 15.63% 15.22% 15.05%
Franchised restaurants-occupancy expenses 1,624.40 1,527.00 1,481.50 5.78% 5.54% 5.49%
Selling, general & administrative expenses 2,385.60 2,455.20 2,393.70 8.49% 8.91% 8.86%
Other operating (income) expense, net (247.20) (243.50) (236.80) -0.88% -0.88% -0.88%
Total operating costs and expenses 19,341.40 18,962.40 18,476.30 68.82% 68.79% 68.42%
Operating income 8,764.30 8,604.60 8,529.70 31.18% 31.21% 31.58%
Interest expense-net of capitalized interest of
$15.5, $15.9 and $14.0 521.90 516.60 492.80 1.86% 1.87% 1.82%
Nonoperating (income) expense, net 37.90 9.00 24.70 0.13% 0.03% 0.09%
Income before provision for income taxes 8,204.50 8,079.00 8,012.20 29.19% 29.31% 29.67%
Provision for income taxes 2,618.60 2,614.20 2,509.10 9.32% 9.48% 9.29%
Net income 5,585.90$ 5,464.80$ 5,503.10$ 19.87% 19.82% 20.38%
Earnings per common share–basic 5.59$ 5.41$ 5.33$
Earnings per common share–diluted 5.55$ 5.36$ 5.27$
Dividends declared per common share 3.12$ 2.87$ 2.53$
Weighted-average shares outstanding–basic 998.40 1,010.10 1,032.10
Weighted-average shares outstanding–diluted 1,006.00 1,020.20 1,044.90
Consolidated Statement of Income
Common Size income
Statement

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Appendix B: MCD Balance Sheet 2013
In millions, except per share data December 31,2013 2012 2011 2013 2012 2011
ASSETS
Current assets
Cash and equivalents 2,798.70$ 2,336.10$ 2,335.70$ 7.64% 6.60% 7.08%
Accounts and notes receivable 1,319.80 1,375.30 1,334.70 3.60% 3.89% 4.05%
Inventories, at cost, not in excess of market 123.70 121.70 116.80 0.34% 0.34% 0.35%
Prepaid expenses and other current assets 807.90 1,089.00 615.80 2.21% 3.08% 1.87%
Total current assets 5,050.10 4,922.10 4,403.00 13.79% 13.91% 13.35%
Other assets
Investments in and advances to affiliates 1,209.10 1,380.50 1,427.00 3.30% 3.90% 4.33%
Goodwill 2,872.70 2,804.00 2,653.20 7.84% 7.92% 8.04%
Miscellaneous 1,747.10 1,602.70 1,672.20 4.77% 4.53% 5.07%
Total other assets 5,828.90 5,787.20 5,752.40 15.91% 16.35% 17.44%
Property and equipment
Property and equipment, at cost 40,355.60 38,491.10 35,737.60 110.18% 108.77% 108.33%
Accumulated depreciation and amortization (14,608.30) (13,813.90) (12,903.10) -39.88% -39.04% -39.11%
Net property and equipment 25,747.30 24,677.20 22,834.50 70.30% 69.74% 69.22%
Total assets 36,626.30$ 35,386.50$ 32,989.90$
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable 1,086.00$ 1,141.90$ 961.30$ 5.27% 5.68% 5.17%
Income taxes 215.50 298.70 262.20 1.05% 1.49% 1.41%
Other taxes 383.10 370.70 338.10 1.86% 1.84% 1.82%
Accrued interest 221.60 217.00 218.20 1.07% 1.08% 1.17%
Accrued payroll and other liabilities 1,263.80 1,374.80 1,362.80 6.13% 6.84% 7.33%
Current maturities of long term debt 366.60 1.97%
Total current liabilities 3,170.00 3,403.10 3,509.20 15.38% 16.94% 18.89%
Long-term debt 14,129.80 13,632.50 12,113.80 68.54% 67.85% 65.20%
Other long-term liabilities 1,669.10 1,526.20 1,612.60 8.10% 7.60% 8.68%
Deferred income taxes 1,647.70 1,531.10 1,344.10 7.99% 7.62% 7.23%
Shareholders’ equity
Preferred stock, no par value; authorized – 165.0 million
shares; issued – none
Common stock, $.01 par value; authorized – 3.5 billion shares;
issued – 1,660.6 million shares 16.60 16.60 16.60 0.10% 0.11% 0.12%
Additional paid-in capital 5,994.10 5,778.90 5,487.30 37.44% 37.79% 38.13%
Retained earnings 41,751.20 39,278.00 36,707.50 260.79% 256.83% 255.09%
Accumulated other comprehensive income 427.60 796.40 449.70 2.67% 5.21% 3.13%
Common stock in treasury, at cost; 670.2 and 657.9 million shares(32,179.80) (30,576.30) (28,270.90) -201.00% -199.93% -196.46%
Total shareholders’ equity 16,009.70 15,293.60 14,390.20
Total liabilities and shareholders’ equity 36,626.30$ 35,386.50$ 32,969.90$
Consolidated Balance Sheet Common Size Balance Sheet

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Appendix C: MCD Cash Flow Statement
In millions Years ended December 31, 2013 2012 2011
Operating activities
Net income 5,585.90$ 5,464.80$ 5,503.10$
Adjustments to reconcile to cash provided by operations
Charges and credits:
Depreciation and amortization 1,585.10 1,488.50 1,415.00
Deferred income taxes 25.20 134.50 188.40
Share-based compensation 89.10 93.40 86.20
Other 26.80 (92.00) (82.60)
Changes in working capital items:
Accounts receivable 56.20 (29.40) (160.80)
Inventories, prepaid expenses and other current assets (44.40) (27.20) (52.20)
Accounts payable (60.70) 124.10 35.80
Income taxes (154.40) (74.00) 198.50
Other accrued liabilities 11.90 (116.60) 18.70
Cash provided by operations 7,120.70 6,966.10 7,150.10
Investing activities
Capital expenditures (2,824.70) (3,049.20) (2,729.80)
Purchases of restaurant businesses (181.00) (158.50) (186.40)
Sales of restaurant businesses and property 440.10 394.70 511.40
Other (108.20) (354.30) (166.10)
Cash used for investing activities (2,673.80) (3,167.30) (2,570.90)
Financing activities
Net short-term borrowings (186.50) (117.50) 260.60
Long-term financing issuances 1,417.20 2,284.90 1,367.30
Long-term financing repayments (695.40) (962.80) (624.00)
Treasury stock purchases (1,777.80) (2,615.10) (3,363.10)
Common stock dividends (3,114.60) (2,896.60) (2,609.70)
Proceeds from stock option exercises 233.30 328.60 334.00
Excess tax benefit on share-based compensation 92.60 142.30 112.50
Other (11.80) (13.60) (10.60)
Cash used for financing activities (4,043.00) (3,849.80) (4,533.00)
Effect of exchange rates on cash and equivalents 58.70 51.40 (97.50)
Cash and equivalents increase (decrease) 462.60 0.40 (51.30)
Cash and equivalents at beginning of year 2,336.10 2,335.70 2,387.00
Cash and equivalents at end of year 2,798.70 2,336.10 2,335.70
Supplemental cash flow disclosures
Interest paid 532.70 533.70 489.30
Income taxes paid 2,546.00 2,447.80 2,056.70
Consolidated Statement of Cash Flows

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References
i McDonald’s’s Corporate (2014). McDonald’s – The Leading Global Food Service Retailer ::
AboutMcDonald’s.com. [ONLINE] Available at: http://www.aboutMcDonald’s.com/mcd/our_company.html.
[Accessed 15 February 2014].
ii McDonald’s Franchising (2014). FAQs :: AboutMcDonald’s.com.[ONLINE] Available
at:http://www.aboutMcDonald’s.com/mcd/franchising/FAQs.html. [Accessed 15 February 2014].
iii McDonald’s Financials (2014). Financial Highlights :: AboutMcDonald’s.com. [ONLINE] Available
at:http://www.aboutMcDonald’s.com/mcd/investors/financial_highlights.html. [Accessed 15 February 2014].
iv McDonald’s Annual Report (2012). [ONLINE] Available at:
http://www.aboutMcDonald’s.com/content/dam/AboutMcDonald’s/Investors/Investor%202013/2012%20Annual%2
0Report%20Final.pdf. [Accessed 15 February 2014].
v Ibid
vi Salvatore, D. (2012). Introduction to International Economics.Wiley.
vii ibid
viii The Washington Post (2013). Low fast-food wages come at high public cost, reports say - The Washington Post.
[ONLINE] Available at:http://www.washingtonpost.com/business/economy/low-fast-food-wages-come-at-high-
public-cost-report-say/2013/10/15/3fc5a608-34e7-11e3-80c6-7e6dd8d22d8f_story.html. [Accessed 15 February
2014].
ix Ibid
x Davis, B., & Carpenter, C. (2009). Proximity of fast-food restaurants to schools and adolescent obesity. Journal
Information, 99(3), 505-510.
xi O'Kane, G. (2012). What is the real cost of our food? Implications for the environment, society and public health
nutrition. Public health nutrition,15(2), 268-276.
xii Porter, M. E. (2011). Competitive advantage of nations:creating and sustaining superior performance. Simon
and Schuster.
xiii McDonald’s Annual Report (2012). [ONLINE] Available at:
http://www.aboutMcDonald’s.com/content/dam/AboutMcDonald’s/Investors/Investor%202013/2012%20Annual%2
0Report%20Final.pdf. [Accessed 15 February 2014].
xiv MCD Competitors (2014). MCD Competitors | McDonald's Corporation Common S Stock - Yahoo! Finance.
[ONLINE] Available at: http://finance.yahoo.com/q/co?s=MCD+Competitors. [Accessed 15 February 2014].
xv Businessweek (2014). MCDONALD'S CORP (MCD:New York): Financial Statements - Businessweek.[ONLINE]
Available at:http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=MCD. [Accessed 18
April 2014].

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xvi Morningstar (2014). Price Ratios and Valuation for McDonald's Corporation (MCD) from Morningstar.com.
[ONLINE] Available at:http://financials.morningstar.com/valuation/price-ratio.html?t=MCD. [Accessed 18 April
2014].
xvii McDonald's Corporation Credit Rating - Moody's (2014). McDonald's Corporation Credit Rating - Moody's.
[ONLINE] Available at:https://www.moodys.com/credit-ratings/McDonald’s-Corporation-credit-rating-479500.
[Accessed 31 March 2014].
xviii Standard & Poor's | MCD. 2014. Standard & Poor's | MCD Credit Rating.[ONLINE] Available
at: http://www.standardandpoors.com/prot/ratings/entity-details/en/us/?entityID=101460§orCode=CORP. [Accessed
31 March 2014].
xix World Bank (2014). GDP growth (annual %) | Data | Table. [ONLINE] Available at
:http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG. [Accessed 03 May 2014].
xx NYSE:MCD (2014). McDonald'sCorporation:NYSE:MCD quotes & news - Google Finance.[ONLINE]
Available at: https://www.google.com/finance?cid=22568. [Accessed 07 May 2014].

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