Question

Part 1

1. Compute the weighted cost of capital (WACC) of McDonald’s (MCD)

2. show how to compute the WACC using SML

3. Once you know the WACC for McDonald’s (WEN), using the WACC as a cutoff, you should make a decision whether or not you accept the following project

McDonald’s has 765.32 million shares of stock outstanding. The book value per share is $-8.16, but the stock sells for $185.53. Total equity is $6.258M on a book value basis. The cost of equity using CAPM is 21.47%. Analyst estimate the growth in earnings per share for the company will be 6.55% for the next five years. The cost of equity using the dividend discount model is 26.25%.

Year	Dividend	Percentage Change
2018	$1.16	14.9%
2017	$1.01	7.4%
2016	$0.94	5.6%.
2015	$0.89	4.7%
2014	$0.85	4.9%

McDonald’s cost of debt is 3.2377%. The book value basis, of McDonald’s equity and debt are worth $6.258M and $3.030M respectively. The total value is $9.288M. So the equity and debt percentages are 0.67 and 0.32. Assuming a tax rate of 21%, McDonald’s WACC is?

Part 2

As the president of McDonald’s, you should determine whether to go ahead with a plan to renovate the company’s distribution system. The plan will cost the company $50 million, and it is expected to save $12 million per year after taxes over the next six years. Will you accept? Or Reject?

Answer 1

After tax cost of debt = cost of debt*(1-tax rate)

After tax cost of debt = 3.2377*(1-0.21)

'= 2.557783

Weight of equity = 1-D/A

Weight of equity = 1-0.32

W(E)=0.68

Weight of debt = D/A

Weight of debt = 0.32

W(D)=0.32

WACC=after tax cost of debt*W(D)+cost of equity*W(E)

WACC=2.56*0.32+21.47*0.68

WACC% = 15.42

Discount rate	15.420%
Year	0	1	2	3	4	5	6
Cash flow stream	-50	12	12	12	12	12	12
Discounting factor	1.000	1.154	1.332	1.538	1.775	2.048	2.364
Discounted cash flows project	-50.000	10.397	9.008	7.804	6.762	5.858	5.076
NPV = Sum of discounted cash flows
NPV Project III =	-5.10
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

reject project as NPV is negative