Question

Individual project details: 1. This project is to be a 2-3 page written document (plus citation page) answer the two questions outlined below. Understand your audience and their knowledge level so do not take the time to explain those concepts already known. There is wide latitude on how to approach the subject area and it will be necessary to know the subject matter well for a concise analysis along with the ability to discern important data from just information in order to obtain an exemplary grade that shows strong evidence of reflective thought and critical thinking of subject matter. In other words, do not just restate what we already discussed in lecture. 2. Individual project- There is no right or wrong answer…...Question 1: your best friend has just won the stated $100 million lottery. Using time value of money and creating a persona of your friend do you recommend the lump sum payment or annuity and why? Question 2: Your newly wealthy best friend wants to invest in either Starbucks or McDonalds. Which do you recommend as a stock investment and why? 3. Charts, visuals, etc. are included in the 2-3 page maximum. Font should be 12 point and easily read. 4. Reference the project rubric for more details on grading.

Answer 1

1

I would recommend an annuity distributed over 3-4 years. There are 2 conflicting views here- first view is based on the traditional finance views which assumes a rational investor. It proposes that the investor is rational and risk averse and will not be swayed by the emotional biases or cognitive errors. Hence, it will propose a lump sum payout where all $100 Mn is received as a single payment immediately. Another reason for this type of payout is the time value of money. The later the money is received, the lesser is the present value of the amount. This is because the investor could have invested this amount and earned an investment return on the capital. Consider equal payouts of $25 Mn received over 4 years. If the investment rate is assumed a mere 2%, the present discounted value of this 4-year annuity becomes $95.193 Mn, which is almost 5% lower than the full value of $100 Mn received today. Considering the investor would invest the capital in a much higher yield investment, the discount value will be much lower and a larger portion will be lost due to time value of money.

The other view here is the behavioral finance view- it proposes that an investor is not always rational, emotional biases and cognitive errors. Hence, they may not always make the best economical decisions in a given scenario. In this case, knowing my friend who is an ordinary college graduate with no financial acumen, he is very likely to engage in flashy extravagant expenditures. Hence, it is more advisable to receive money is small amounts rather than a lump sum payout.

Based on the 2 views, there are certain pros and cons for each of the payouts as follows-

Lump sum payout

Pros-

Higher PV of the amount received

Better opportunity for the asset manager manage the overall investment portfolio

Cons-

Likely to engage in extravagant irrational purchases which would erode the wealth

Larger tax liability in the first year

4-year annuity

Pros-

Investor more likely to demonstrate self-control in spending and avoid irrational purchases

More time for financial education and selecting the asset managers over the longer period

Tax liability in the first year and overall tax liability may be managed better over the longer period

Cons-

Lower PV of money

Hence, after weighing the pros and cons, I would advise a 4-year annuity rather than an immediate lump sum payout.

2

There are multiple factors to be considered while making an investment decision. Both McDonald's (M) and Starbucks (S) are very good businesses in retail fast food business. They both have a geographical diversification and high brand value. However, M operates at a much higher level than S. let us look at the financial information for both of these companies.

	McDonalds	Starbucks	Who is Better?	Comments
Market cap	$ 142.969Bn	$ 89.489Bn	M	M has larger market cap but that should not affect the investment decision
Beta	0.39	0.41	-	both have almost similar beta
Trailing PE ratio	24.78	32.04	M	Higher PE ratio implies a probable overvalued stock
Forward PE ratio	21.25	23.75	M	Higher PE ratio implies a probable overvalued stock
EPS	7.54	2.25	M	Higher and more stable EPS is better
Dividend yield	2.49%	1.99%	M	Higher and more stable Dividend yield is better
Expected EPS	8.79	3.03	M	Higher and more stable EPS is better
5-year EPS growth	11.03%	15.66%	S	Higher and more stable EPS growth is better
Price/Sales	6.8	3.54	S	Higher PS ratio implies a probable overvaluation
EV/ Sales	8.24	1.7	S	Higher EV implies a probable overvaluation
EV/ EBIDTA	17.21	18.25	M	Higher EV implies a probable overvaluation
Profit Margin	28.18%	11.98%	M	Higher profit margin is better for the business. M is much better than S
Operating Margin	40.80%	14.82%	M	Higher operating margin is better for the business. M is much better than S
ROA (1 year)	16.10%	12.17%	M	Higher ROA implies better utilization of assets. M is much better than S
ROE (1 year)	28.54%	210.29%	S	Higher ROE implies better return for capital providers. M is much better than S
Book Value Per Share	-8.16%	-2.32	-	Both companies have a -ve book values. Hence, it is not a relevant comparable measure
ESG score	57	68	S	Higher Environmental, Social and Governance score implies a more sustainable business.

Hence, after looking at the financial data and the charts, it appears that McDonald's has had a more stable and sustainable growth over the past. I would recommend McDonalds as a better investment option. Please note that both the companies are good in their own ways. There are a lot of parameters to judge the investment value of the company. An investment analysis considers huge amount of data and the comparison performed here provides very limited view.