Business- Financial Management McDonalds Case Studies 2023 Update Solution

Strategic Role of Financial Management - ANS-financial management at McDonald's is concerned with how assets are deployed, how these assets are financed (either via debt or equity) and the overall profitability of the company. Objectives of Financial Management: Profitability - ANS-McDonald's aimed for consistent operating margins in the mid-40% range. (Overall net profit for the company before interest and tax.) Halfway through 2020, this was below 20%. Objectives of Financial Management: Growth - ANS-McDonald's had the goal of increasing systemwide sales growth by 3% to 5%. Systemwide sales were down 13% worldwide for the first 6 months of 2020. Objectives of Financial Management: Efficiency - ANS-return on incremental invested capital in the mid-20% range. (That is, McDonald's expected a rise of 25%.) COVID saw a significant reduction in income and the amount of capital being invested. Objectives of Financial Management: Liquidity - ANS-Ensure enough cash is available to meet operating expenses and return equity to shareholders via dividends and share buybacks. COVID forced the suspension of the program that was returning equity to shareholders. Acquisition of US$6.5 billion in cash which was funded by a new US$1 billion overdraft and US$5.5 billion in issued notes. Objectives of Financial Management: Solvency - ANS-Mcdonald's aimed to stabilise the debt of the company through the company has increased level of debt due to COVID19. Its current debt is higher than management would like, they're aiming on reducing that debt as soon as practical. The Difference Between Short and Long term - ANS-no case study. However, McDonald's in the short time is to recover from COVID as seen achieved through their liquidity and gearing objectives. Interdependence with Other Key Business Functions - ANS-no case study. Internal Sources of Finance: Retained Profits - ANS-Management has indicated that they have four main priorities with profits. Investing in the business through capital expenditure, paying a dividend, buying back shares and paying off the debt that matures, Mcdonald's continues to pay its shareholders dividends at a level higher than ever before. External Sources of Finance: Short Term Debt (Factoring) - ANS-no case study External Sources of Finance: Short Term Debt (Overdrafts) - ANS-Due to the COVID-19 pandemic, McDonald's drew US$1 billion on an overdraft, which is needed to help meet cash flow needs. It reports that it still has a further overdraft facility of US$3.5 billion that it has not accessed. External Sources of Finance: Short Term Debt (Commerical Bills) - ANS-McDonald's issues "commercial paper" to raise funds. External Sources of Finance: Long Term Debt (Mortgage) - ANS-As McDonald's franchisees rarely own the land upon which their restaurants sit, they would be unable to take out a traditional mortgage for their store. They may, however, take out a chattel mortgage for specific assets, including equipment and machinery. External Sources of Finance: Long Term Debt (Unsecured Notes and Debentures) - ANS-McDonald's has borrowed cash at fixed interest rates using unsecured notes and debentures. External Sources of Finance: Long Term Debt (Leasing) - ANS-In 2019, McDonald's paid about US$1.6 billion in lease payments worldwide. This includes leases for land and buildings, usually for 20 years. McDonald's leasing strategy can reduce the initial capital outlay required for new stores, enabling more stores to be opened in a shorter time frame. It also retains cash in the business that can be used for other purposes. External Sources of Finance: Equity (Ordinary Shares) - ANS-McDonald's Corporation initially raised capital when it floated on the New York Stock Exchange (NYSE) on April 21, 1965. McDonald's has issued 1,660 million shares. As of 31st December 2019, 746 million shares were still in the market. McDonald's has consistently paid its shareholders a high dividend and at this stage does not appear to be interested in raising additional equity via share sales. Financial Institutions - ANS-McDonald's uses a range of bank and finance companies (provides debt) worldwide to fund its operations. The company must also abide by the rules of the NYSE (equity), which include regularly disclosing financial and other important information publicly. Influence of Government: ASIC - ANS-As an Australian registered company, McDonald's Australia Holdings Limited, which is owned 100% by McDonald's, must report certain information to ASIC. Due to McDonald's size and the fact that it is foreignowned, the Corporations Act 2001 also compels McDonald's Australia to submit audited financial statements that can be accessed by the general public. Influence of Government: Company Taxation - ANS-Multinationals such as McDonald's operate under many different tax systems around the globe. The 2019 Annual Report stated that the company's effective rate of income tax on profit was 24.9% (globally). Continues...