Mac Donalds Stock Evaluation Example

posted by Nima

December 6, 2008 · Posted in Business 

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:

Annual Growth Rate

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:

Thus the formula is as follows:

Price(MCD)

= ($3.23 x 0.5 x 1.07 / 1.0265) + ($3.23 x 0.5 x 1.072 / 1.02652) + ($3.23 x 0.5 x 1.073 / 1.02653) + ($3.23 x 0.5 x 1.074 / 1.02654) + ($3.23 x 0.5 x 1.075 / 1.02655) + ($3.23 x 0.5 x 1.076 / (0.0265-0.01) / 1.02656)

= $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.

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Comments

One Response to “Mac Donalds Stock Evaluation Example”

  1. Jim Thompson on December 6th, 2008 6:01 pm

    Great! Many thanks. That makes it much clearer.

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