# McDonald’s Corp. (NYSE:MCD)

## Present Value of Free Cash Flow to the Firm (FCFF)

Intermediate level

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 the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

### Intrinsic Stock Value (Valuation Summary)

McDonald’s Corp., free cash flow to the firm (FCFF) forecast

US\$ in thousands, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 5.52%
01 FCFF0 6,534,899
1 FCFF1 7,035,919  = 6,534,899  × (1 + 7.67%) 6,668,013
2 FCFF2 7,478,710  = 7,035,919  × (1 + 6.29%) 6,717,038
3 FCFF3 7,846,644  = 7,478,710  × (1 + 4.92%) 6,678,987
4 FCFF4 8,124,901  = 7,846,644  × (1 + 3.55%) 6,554,209
5 FCFF5 8,301,426  = 8,124,901  × (1 + 2.17%) 6,346,444
5 Terminal value (TV5) 253,577,778  = 8,301,426  × (1 + 2.17%) ÷ (5.52%2.17%) 193,860,347
Intrinsic value of McDonald’s Corp.’s capital 226,825,039
Less: Debt obligations (fair value) 37,600,000
Intrinsic value of McDonald’s Corp.’s common stock 189,225,039

Intrinsic value of McDonald’s Corp.’s common stock (per share) \$253.96
Current share price \$217.44

Based on: 10-K (filing date: 2020-02-26).

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.

### Weighted Average Cost of Capital (WACC)

McDonald’s Corp., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 162,016,933  0.81 6.26%
Debt obligations (fair value) 37,600,000  0.19 2.30% = 3.16% × (1 – 27.28%)

Based on: 10-K (filing date: 2020-02-26).

1 US\$ in thousands

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 745,110,988 × \$217.44 = \$162,016,933,230.72

Debt obligations (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

Required rate of return on debt. See details »

Required rate of return on debt is after tax.

Estimated (average) effective income tax rate
= (24.90% + 23.20% + 25.70% + 31.70% + 30.90%) ÷ 5 = 27.28%

WACC = 5.52%

### FCFF Growth Rate (g)

#### FCFF growth rate (g) implied by PRAT model

McDonald’s Corp., PRAT model

Average Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Selected Financial Data (US\$ in thousands)
Interest expense, net of capitalized interest 1,121,900  981,200  921,300  884,800  638,300
Net income 6,025,400  5,924,300  5,192,300  4,686,500  4,529,300

Effective income tax rate (EITR)1 24.90% 23.20% 25.70% 31.70% 30.90%

Interest expense, net of capitalized interest, after tax2 842,547  753,562  684,526  604,318  441,065
Add: Common stock cash dividends 3,581,900  3,255,900  3,089,200  3,058,200  3,230,300
Interest expense (after tax) and dividends 4,424,447  4,009,462  3,773,726  3,662,518  3,671,365

EBIT(1 – EITR)3 6,867,947  6,677,862  5,876,826  5,290,818  4,970,365

Current maturities of long-term debt 59,100  —  —  77,200  —
Long-term debt, excluding current maturities 34,118,100  31,075,300  29,536,400  25,878,500  24,122,100
Shareholders’ equity (deficit) (8,210,300) (6,258,400) (3,268,000) (2,204,300) 7,087,900
Total capital 25,966,900  24,816,900  26,268,400  23,751,400  31,210,000
Financial Ratios
Retention rate (RR)4 0.36 0.40 0.36 0.31 0.26
Return on invested capital (ROIC)5 26.45% 26.91% 22.37% 22.28% 15.93%
Averages
RR 0.34
ROIC 22.79%

FCFF growth rate (g)6 7.67%

Based on: 10-K (filing date: 2020-02-26), 10-K (filing date: 2019-02-22), 10-K (filing date: 2018-02-23), 10-K (filing date: 2017-03-01), 10-K (filing date: 2016-02-25).

2019 Calculations

2 Interest expense, net of capitalized interest, after tax = Interest expense, net of capitalized interest × (1 – EITR)
= 1,121,900 × (1 – 24.90%) = 842,547

3 EBIT(1 – EITR) = Net income + Interest expense, net of capitalized interest, after tax
= 6,025,400 + 842,547 = 6,867,947

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [6,867,9474,424,447] ÷ 6,867,947 = 0.36

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 6,867,947 ÷ 25,966,900 = 26.45%

6 g = RR × ROIC
= 0.34 × 22.79% = 7.67%

#### FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (199,616,933 × 5.52%6,534,899) ÷ (199,616,933 + 6,534,899) = 2.17%

where:
Total capital, fair value0 = current fair value of McDonald’s Corp.’s debt and equity (US\$ in thousands)
FCFF0 = the last year McDonald’s Corp.’s free cash flow to the firm (US\$ in thousands)
WACC = weighted average cost of McDonald’s Corp.’s capital

#### FCFF growth rate (g) forecast

McDonald’s Corp., H-model

Year Value gt
1 g1 7.67%
2 g2 6.29%
3 g3 4.92%
4 g4 3.55%
5 and thereafter g5 2.17%

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 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 7.67% + (2.17%7.67%) × (2 – 1) ÷ (5 – 1) = 6.29%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 7.67% + (2.17%7.67%) × (3 – 1) ÷ (5 – 1) = 4.92%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 7.67% + (2.17%7.67%) × (4 – 1) ÷ (5 – 1) = 3.55%