PERFORMING AN EPS/EBIT ANALYSIS FOR MCDONALD’S PURPOSE: An EPS/EBIT analysis is one of the most widely used techniques for determining the extent that debt and/or stock should be used to finance strategies to be implemented. This exercise can give you practice performing EPS/EBIT analysis. INSTRUCTIONS: Let’s say McDonald’s needs to raise $1.1 billion to expand into Africa. Determine whether McDonald’s should have used all debt, all-stock, or a 50-50 combination of debt and stock to finance 4this market-development strategy. Assume a 35% tax rate, 4% interest rate, McDonald’s stock price of $55 per share, and an annual dividend of $0.30 per share of common stock. The EBIT range for 2010 is between $6.332 billion and $9 billion. A total of 1 billion shares of common stock are outstanding. Develop an EPS/EBIT chart to reflect your analysis. TEACHING NOTES: Amount needed to raise: $1.1 billion Interest rate: 4% Tax rate: 35% Stock price: $55 Annual dividend: $0.30 per share Number of shares outstanding: 1 billion 2010 EBIT range: $6.332 billion to $9 billion Common Stock Financing Recession EBIT Interest EBT Taxes EAT # of Shares
Debt Financing Recession $6.33 Normal $7.67 Boom $9
Combination Recession $6.33 Normal $7.67 Boom $9
PREPARING PROJECTED FINANCIAL STATEMENTS FOR MCDONALD’S PURPOSE: This exercise is designed to give you experience preparing projected financial statements. Pro forma analysis is a central strategy-implementation technique because it allows managers to anticipate and evaluate the expected results of various strategy-implementation approaches. Strategy 1) Build 300 new company-owned and operated McDonald’s in Africa at a cost of $1 million dollars each. 2) Forecast a 10% rise in company-owned restaurant sales in year 2010 3) Borrow $150 million payable in five yearly installments @ 4% simple interest 4) On January 10, 2010 issue...