This is how the concepts of stock evaluation can be applied to the example of the company Mc Donalds (MCD):

Free Cash Flow per share:

- MCD’s Free Cash Flow generated over the past 4 quarters totaled $3,585,100,000 ( = 1,706,400,000 +1,262,000,000 + 1,478,500,000 + 1,284,700,000 – 534,900,000 – 482,000,000 – 405,100,000 – 724,500,000)
- MCD has shares outstanding of 1,110,000,000
- Thus the Free Cash Flow Per Share is = $3,585,100,000 / 1,110,000,000 = $3.23

Annual Growth Rate

- Mac Donalds annual FCF over the past 4 full years (04/05/06/07) has been $2,520,500,000/$2,519,000,000/$3,067,400,000/$3,726,300,000 respectively which corresponds with an average annual growth rate of about 14%
- Now, even though MCD is a company that produces basic goods that will always be demanded, even or maybe especially in tough times, we have to take into account the fact that the outlook for consumer demand in general looks bleak over the next 5 years. We shall thus discount the estimated growth rate over the next years down to 7%.

Confidence Margin

We shall apply a confidence margin of 50% in order to account for the fact that we did not make very elaborate research on the overall strengths/weaknesses and opportunities/risks that the company faces and hence are not very sure if the expected returns will be achieved. The more research one does, and the more certain one is regarding the returns, the higher this number can be.

Risk Free Rate:

- At the time this post was written the rate for 10 Year Treasury notes was 2.65%

Thus the formula is as follows:

**Price(MCD)**

**= ($3.23 x 0.5 x 1.07 / 1.0265) + ($3.23 x 0.5 x 1.07 ^{2} / 1.0265^{2}) + ($3.23 x 0.5 x 1.07^{3} / 1.0265^{3}) + ($3.23 x 0.5 x 1.07^{4} / 1.0265^{4}) + ($3.23 x 0.5 x 1.07^{5} / 1.0265^{5}) + **

**($3.23 x 0.5 x 1.07**

^{6}/ (0.0265-0.01) / 1.0265^{6}**)**

**= $1.68343887 + $1.754777975 + $1.829140217 + $1.906653709 + $1.987451991 + $125.5560159**

**= $134.72**

This analysis suggests that Mac Donalds shares are currently available at a price below the fair price. If my estimations turn out to be true, or the company performs even better than estimated, I would most likely be realizing a gain from this investment.

Great! Many thanks. That makes it much clearer.