Stock Analysis on Net
Stock Analysis on Net

McDonald’s Corp. (NYSE:MCD)

Present Value of Free Cash Flow to Equity (FCFE) 

Microsoft Excel

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.

Intrinsic Stock Value (Valuation Summary)

McDonald’s Corp., free cash flow to equity (FCFE) forecast

US$ in thousands, except per share data

Microsoft Excel
Year Value FCFEt or Terminal value (TVt) Calculation Present value at 11.31%
01 FCFE0 10,247,300
1 FCFE1 10,247,300 = 10,247,300 × (1 + 0.00%) 9,205,939
2 FCFE2 10,247,300 = 10,247,300 × (1 + 0.00%) 8,270,404
3 FCFE3 10,247,300 = 10,247,300 × (1 + 0.00%) 7,429,940
4 FCFE4 10,247,300 = 10,247,300 × (1 + 0.00%) 6,674,888
5 FCFE5 10,247,300 = 10,247,300 × (1 + 0.00%) 5,996,565
5 Terminal value (TV5) 90,589,126 = 10,247,300 × (1 + 0.00%) ÷ (11.31% – 0.00%) 53,011,390
Intrinsic value of McDonald’s Corp. common stock 90,589,126
 
Intrinsic value of McDonald’s Corp. common stock (per share) $126.41
Current share price $292.68

Based on: 10-K (reporting date: 2023-12-31).

1 See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Required Rate of Return (r)

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Assumptions
Rate of return on LT Treasury Composite1 RF 4.79%
Expected rate of return on market portfolio2 E(RM) 13.79%
Systematic risk of McDonald’s Corp. common stock βMCD 0.72
 
Required rate of return on McDonald’s Corp. common stock3 rMCD 11.31%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

2 See details »

3 rMCD = RF + βMCD [E(RM) – RF]
= 4.79% + 0.72 [13.79% – 4.79%]
= 11.31%

FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

McDonald’s Corp., PRAT model

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Average Dec 31, 2023 Dec 31, 2022 Dec 31, 2021 Dec 31, 2020 Dec 31, 2019
Selected Financial Data (US$ in thousands)
Common stock cash dividends 4,532,800 4,168,200 3,918,600 3,752,900 3,581,900
Net income 8,468,800 6,177,400 7,545,200 4,730,500 6,025,400
Revenues 25,493,700 23,182,600 23,222,900 19,207,800 21,076,500
Total assets 56,146,800 50,435,600 53,854,300 52,626,800 47,510,800
Shareholders’ equity (deficit) (4,706,700) (6,003,400) (4,601,000) (7,824,900) (8,210,300)
Financial Ratios
Retention rate1 0.46 0.33 0.48 0.21 0.41
Profit margin2 33.22% 26.65% 32.49% 24.63% 28.59%
Asset turnover3 0.45 0.46 0.43 0.36 0.44
Financial leverage4 — — — — —
Averages
Retention rate 0.38
Profit margin 29.11%
Asset turnover 0.43
Financial leverage —
 
FCFE growth rate (g)5 0.00%

Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).

2023 Calculations

1 Retention rate = (Net income – Common stock cash dividends) ÷ Net income
= (8,468,800 – 4,532,800) ÷ 8,468,800
= 0.46

2 Profit margin = 100 × Net income ÷ Revenues
= 100 × 8,468,800 ÷ 25,493,700
= 33.22%

3 Asset turnover = Revenues ÷ Total assets
= 25,493,700 ÷ 56,146,800
= 0.45

4 Financial leverage = Total assets ÷ Shareholders’ equity (deficit)
= 56,146,800 ÷ -4,706,700
= —

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.38 × 29.11% × 0.43 × —
= 0.00%

FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (209,740,250 × 11.31% – 10,247,300) ÷ (209,740,250 + 10,247,300)
= 0.00%

where:
Equity market value0 = current market value of McDonald’s Corp. common stock (US$ in thousands)
FCFE0 = the last year McDonald’s Corp. free cash flow to equity (US$ in thousands)
r = required rate of return on McDonald’s Corp. common stock

FCFE growth rate (g) forecast

McDonald’s Corp., H-model

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Year Value gt
1 g1 0.00%
2 g2 0.00%
3 g3 0.00%
4 g4 0.00%
5 and thereafter g5 0.00%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= 0.00% + (0.00% – 0.00%) × (2 – 1) ÷ (5 – 1)
= 0.00%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 0.00% + (0.00% – 0.00%) × (3 – 1) ÷ (5 – 1)
= 0.00%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 0.00% + (0.00% – 0.00%) × (4 – 1) ÷ (5 – 1)
= 0.00%