McDonald’s Corporation is one of the most recognized global pioneers in the sphere of fast-food service and is widely known for its concepts of quick-service Dining and unmatched operational performance. Operating since 1940, it has become an expanded chain restaurant from a sole restaurant with 40,000 and plus outlets all across the globe, catering to millions of people every day. McDonald’s is one of the most recognizable fast food chains globally, associated with its strategies for serving burgers and fries and its emphasis on maintaining the high quality of its products and services.

Section A- Events Affected the McDonald

 

Event 1- Global Economic Pressures

McDonald performs well on the international stage; operational problems, such as increased inflation rates and distortion of supply chains, did not significantly affect the performance. The comparable sales for this Company increased to nearly 11% at the international level, showing the Company’s strength in terms of market and excellent management. The constant increase in global guest counts by 5%, added to this, proved the brand’s sure-fire way to get and keep customers during the worst of economic times (HODSON & MABBETT, 2009).  Other digital initiatives included changes to the firm’s mobile app and steps to expand its loyalty programs, which had substantial active user traction; the top six markets boasted nearly 50 million loyalty users. These broad strategies explained below have seen system-wide sales expand by nearly $20 billion since 2020 (Brown & Knudsen, 2013).

 

Event 2- FIFA World Cup Campaign

The most memorable ad campaign undertaken to market Mcdonald’s was the FIFA World Cup ad campaign, created in the title style of “Wanna go to Mcdonald’s?”. As the world’s largest football event, another goal of this campaign was to reach millions of football fans. Even though it was not possible to look at figures that point directly towards the campaign and see how it boosted the financial health of Company, there are no doubts that it played an astounding role in increasing brand awareness among its primary clientele (Millward, 2016). The occasion of the World Cup let the Company introduce the products and reach a wide range of consumers of different nationalities, thus solidifying McDonald’s status as a favorite fast food joint in the world.

Financial impact of Events.

Global Economic Pressures

McDonald’s has a lot of financial effects because of the different economic challenges of the global economy in the year 2022. Such pressures were in the form of inflation, scarce supplies, and variations in foreign exchange rates. Inflation was another factor that affected the cost of goods sold because prices for raw materials and labor charges rose due to changes in the general price level (Schandl et al., 2016). According to the financial statement of the Company, the operating cost of the Company has risen by 9 percent than it was the previous year, being ($14. 5 billion in 2022. Increasing consumption costs are attributed to several factors, including supply chain disruptions, which have been worsened by the effects of the COVID-19 virus and geopolitical instabilities. Also, the variability in foreign exchange rates eroded McDonald’s sales from operations in foreign countries, especially Europe and Asia, by $500 million through foreign currency translation (Shumar, 2004).

FIFA World Cup Campaign

Based on the situation, the FIFA World Cup in Qatar was an event opportunity for McDonald’s, but it was also an event threat at the same time. McDonald’s corporate revenue benefited from the World Cup campaign, particularly in the Middle East & Latin America. For the current and previous tournaments, McDonald’s registered a 12% rise in same-store sales from these areas to the analogous period in the preceding year. This growth could be attributed to the promotional activities and the general improved traffic in the firm with the Word Cup.

Nevertheless, the campaign also observed high marketing costs. McDonald’s declared it was raising its marketing budget by $200 million by 15% for the fourth quarter of 2022. Even though CSG’s overall sales were boosted during the campaign, the marketing expenses slightly reduced the profit per head for the quarter.

Section B- Dividend Policy & Sources of Finance

Dividend payment History for 2022

The Company has maintained regular dividend distributions for its common stock for the past 47 years, and the distribution amount has been raised in the same year. The FY2022 full-year dividend is $5.66 per share, which means the quarterly dividend declared is $1.38 for each of the first three quarters (Stereńczak & Kubiak, 2022).

$1.52 per share paid in the fourth quarter. This increase in dividends every quarter by 10% means that this quarter will be $6.08 per share annually and speaks volumes about the Company’s confidence in the steadiness and sustainability of its cash generation.

2021	2022
$ 5.66 Dividend Per Share	$ 6.08 Dividend Per Share

Decisions that affect dividends for 2022

 

Similar to the past, future cash dividends shall be planned after assessing the anticipated profit and any required funds that may be required for financing, and the actual declaration of cash dividends is the prerogative of the Company’s Board of Directors. From the Company’s returns on capital investments, and considering the large amounts of cash which is generated by the Company operation, it became management’s policy to reinvest in the business for profitable growth while using excess cash flow to return value to shareholders in the form of dividends and share repurchases (Ali, 2022).

From 1975 to 2022, the Company declared dividends on common stock and consistently increased at least one dividend rate. As in previous periods, future dividend amounts will be determined based on forecasting the specific profit and other financing requirements, respectively, and will remain within the Company’s Board of Directors’ jurisdiction (Hasan, 2024).

Sources of funds

More often than not, the Company has long-term Debt and is affected by changes in interest rates and foreign exchange rates. Borrowing liabilities on 31-Dec-22, stood at $35.90 billion, compared to $35.60 billion at the end of the fiscal year ending 31-Dec-21. This net increase was mainly due to net issuance, which was $1.20 billion, partly outweighed by the effect of exchange on foreign currency financing costs decreased by $ 814 million (Ferine et al., 2023).

The significant sources of financing for the Company include Capital markets, which include the Debt and equity markets, bank financings, and Derivatives. The Company adjusts its debt portfolio related to movement in interest and foreign currency rates by repaying, repurchasing, and redeeming Debt, terminating swap agreements, and utilizing derivatives (Zhang et al., 2022).

As for interest rate changes, the Company hedges them and finances in foreign currency with the help of interest rate swaps in the currencies in which it has assets (Qiu, 2022). It also has the effect of mitigating the volatilities of foreign currencies on the cash flows and stakeholders’ equity. Overall foreign currency as borrowing was $13.00 billion and $12.80 billion on 31-Dec, 2022, and 31-Dec 2021, respectively. Further, where possible, the organization restaurants use local operating currencies when acquiring goods and services, thus achieving economic hedges (Chen & Li, 2022).

Trade-off Theory

By analyzing McDonald’s information for the financial year 2022, it becomes apparent that the firm effectively applied the trade-off theory when dealing with the issue of capital structure. At the same time, the Company’s capital structure for the year had relatively large Debt and equity parts. The total amount of Debt recorded at McDonald’s is almost $39.60 billion for both long-term and short-term borrowings (Hackbarth et al., 2007).

The total equity of McDonald’s Corporation for the calendar year ended 2022 was approximately $11.30 billion. This equity component comprises of issued, outstanding common stock,s additional paid-in capital, &  retained earnings. This equity and debt formation should be appropriate to determine the cost of capital and the firm’s health. Regarding finance costs, McDonald’s Company had an interest cost of approximately $1.20 billion, which accounts for the organization’s cost of servicing its debts, offset by its tax shields.

Still, McDonald’s maintained a high dividend policy and declared a value of about $5.66 divided by $6 billion for the year. This dividend policy shows that McDonald’s rewards its shareholders as it faces large debts. Also, this policy is akin to the trade-off theory, where an optimal level of Debt is considered for maintaining a balance between the tax shield of Debt and the cost associated with the market’s demand for covenant.

After offsetting it, McDonald’s adopted a cash and cash equivalents balance of approximately $2.30 billion. They stated that liquidity generated by the firm reduces the risks of bankruptcy and offers cover for additional shocks that the Company might experience. Also, effective capital management was evidenced by McDonald’s exercise of repurchasing about $2.50 billion in shares, signifying a concentration on the appropriate proportion of equity and the promotion of shareholder value. In general, McDonald’s capital structure in 2022 corresponds to the assumptions of the trade-off theory.

Pecking Order Theory

In the financial year 2022, McDonald’s Company presented sound knowledge implementing the pecking order theory of capital structure. This theory states that internal funds are the first preferred financing method, and Debt forms are the second preferred financing method before going for new equity. The Company’s internal funding sources were powerful, enabling McDonald’s to focus on funding operations and critical investments using its internal funds.

McDonald’s eventually lacked internal funds and resorted to debt financing, which supplements the pecking order theory’s second choice. The Company’s total liability at any one time was estimated to be $39.60 billion, and interest expenses of approximately $1.20 billion were recorded. This extensive use of Debt after leveraging internal funds also supports the theory that a firm uses Debt before turning to equity (Vasiliou et al., 2009).

Concerning equity financing and based on the pecking order theory, McDonald’s followed the theory because little new equity was raised or primary equity-related activity during the year. Thus, the focus on the Company’s internal cash and Debt remained consistent while the new equity was issued sparingly. Also, McDonald’s sustained its dividend policies and buybacks, which issued almost $5 last year. It generated 6 billion in dividends and repurchased about $2 in stocks. 5 billion in shares.

Traditional View Theory

Traditional view theory of capital structure that explains the Company choice of capital structure is not suitable for McDonald’s financial year 2022 if the operations have been managed effectively enough to ensure that the Company takes complete control of its operating obligations and expenses without straining for more funds via debts. The firm had an impressive total debt of about $ 39.6 billion, thus illustrating its employment of Debt to capitalize on tax shields since interest on borrowed funds is tax-deductible. This is in synergy with the theory of traditional view that posits that Debt can raise the value of the firm through the reduction of taxable income. But high debts also cost the firm; McDonald’s spent about $1 on interest on its debts. 2 billion novation creates the threat of financial danger, which is seen in a value of Less than 2 billion (Allen et al., 2000).

Mcdonald’s sustained a comfortable equity base of approximately $11.30 billion to mitigate these risks. This equity also ensures that high debt levels will not endanger the organization by acting as a financial cushion. The Company also insisted on good liquidity, whereby the Company had approximately $2 in cash and cash equivalents. 3 billion helps the Company to cope with short-term liabilities while the long-term liabilities such as debts remain high.

The strategic financial decisions that affect McDonald’s include declaring about $5 dividends, $6 billion in resale, and roughly $2 billion in resale. In the same regard, the Company has targeted specific returns for shareholders as well as optimized its capital structure, as seen in its offered 5 billion shares. In conclusion, the projection of McDonald’s financial strategy for 2022 shows a straightforward utilization of the traditional view theory.

 

Section C Financial Ratios

Profitability Ratio

Net profit Margin

It is a profitability ratio that reveals the proportion of the net income in the total turnover (Nariswari & Nugraha, 2020).

Formula = (Net Income / Total Revenue) X100

Description	Formula	2022 Million $	2021 Million $
Net Profit Margin	(Net Income / Total Revenue) X100	(6177.4 /23,182.6 ) X100	(7545.2 /23,222.9 ) X100
		26.65%	32.49%

For McDonald’s, the Net Profit Margin for 2022 was roughly 26.65 %. The margin, however, improved in 2021 and was recorded to be 32.49%. This 49% reveals that McDonald’s retained 32.49 of its stores in 2021. This implies that in the year 2022, there was a variation in either the expenses incurred or the revenue growth, affecting the general profitability

Return on Assets (ROA)

It is another profitability ratio that calculates how efficiently the organization’s assets can generate net income (Heikal et al., 2014).

Formula = (Net Income / Total Assets) X100

Description	Formula	2022 Million $	2021 Million $
Return on Assets=	(Net Income / Total Assets) X100	(6177.4 /50,435.6 ) X100	(7545.2 /53,854.3 ) X100
		12.25%	14.01%

Analysing the key financial ratios, McDonald’s ROA for the year 2022 was nearly 12.25%. The ROA in 2021 is higher at 14.01% than in 2020, i.e., 34% higher. We are more efficient with the assets; our fixed assets turnover ratio is 14.01 %. It shows a reduction in the ROA from 2021 to 2022, which means there are issues with sustaining asset efficiency or improved investments that have not impacted the business’s profitability.

Liquidity Ratios

Current Ratio

The Current Ratio is a liquidity ratio that assesses a firm’s capacity to clear its short-term obligations using the short-term resources available (Husna & Satria, 2019).

Formula= Current Assets / Current Liabilities

Description	Formula	2022 Million $	2021 Million $
Current Ratio	Current Assets / Current Liabilities	5,424.2 /3,802.1	7148.5 /4020.0
		1.43	1.78

For McDonald’s, as of 2022, the Current Ratio was about 1.43, which implied that the Company possessed $1. 43 times the current assets to each current liability. In 2021, this slightly improved to 1.178, which says McDonald’s currently has $1. Current assets should be 1.78 times the amount of the current liabilities. The decline from 1. 78 to 1. 43 may be due to a reduction in liquidity through a decrease in current assets or current liabilities that may affect the organization’s short-term operational capacity.

Quick Ratio

It is an even more conservative estimate of the business’s ability to cover its obligations than the Current Ratio (Iskandar, 2020).

Formula = Current Assets-Inventories) / Current Liabilities

Description	Formula	2022 Million $	2021 Million $
Quick Ratio	Current Assets-Inventories) / Current Liabilities	(5,424.2-52) /3,802.1	(7148.5-55.6) /4020.0
		1.41	1.76

In the case of McDonald’s in 2022, this remarkably similar formula gives a Quick Ratio of about 1. 41, supporting that the Company had 1.41 in liquid assets for every $1 of current liabilities other than inventories. The Quick Ratio was slightly higher in 2021, standing at 1.76. The profitability index of McDonald’s has been put at 1.76, which betrays an improvement in liquid assets with 1.76 times every $1 of current liabilities. The decrease from 1. 76 to 1. 41 also shows the Company’s short-term solvency decrease, where it failed to meet its current obligations using its most liquid assets.

Efficiency Ratio

Asset Turnover Ratio:

It is a financial ratio that may be used to evaluate the efforts; by employing the total assets of a given company, the firm can realize sales (Patin et al., 2020).

Formula= Total Revenue  / Total Assets 

Description	Formula	2022 Million $	2021 Million $
Asset Turnover	Total Revenue  / Total Assets	23,182.6 / 50,435.6	23,222.9 / 53,854.3
		0.46	0.43

This ratio is obtained by dividing Total Revenue by Total Assets; it shows how effectively the Company’s assets are used to generate sales. As for the Asset Turnover Ratio, this index has been calculated at 0.46 for 2022 compared to 0. 43 in 2021. The increase signifies that the efficiency with which the various assets were used was slightly better in 2022 than in the previous year, implying that the amounts earned in revenue for the different assets were better in 2022. However, the fact that the volume has risen points to the ratio demonstrating relatively low efficiency, meaning that the Company’s capacity to turn assets into revenues remains somewhat limited.

Fixed Asset Turnover Ratio:

It indicates how efficiently the business’s fixed assets are utilized for generating sales. This is arrived at by dividing Total Revenue by Total Fixed Assets (Patin et al., 2020).

Formula = Total Revenue / Total Fixed Assets 

Description	Formula	2022 Million $	2021 Million $
Fixed Asset Turnover=	Total Revenue  / Total Fixed Assets	23,182.6 / 45,011.4	23,222.9 / 46,705.8
		0.52	0.50

Here, the Fixed Asset Turnover Ratio of the Company has been calculated to analyze its liquidity position for the fiscal year 2022 as 0.52, up from 0.50 in 2021. This increase suggests an improved capacity to deploy the fixed assets, properties, plants & equipment to generate sales. This has revealed a better ratio that shows the Company has been able to sell more per unit of fixed assets for the year in question. Nevertheless, this slight improvement suggests that the Company is gradually improving its efficiency to utilize its fixed assets to generate revenues.

Gearing Ratio

Debt to Equity Ratio

It ratio is the financial leverage ratio that compares the organizational total current liabilities to the shareholder’s equity (Lasman & Weil, 1978).

Formula= Liabilities- Non-Current / (Liabilities- Non-Current + Equity) X 100

Description	2022 $ Million	2021 $ Million
Total Liabilities & shareholder Equity	50,435.6	53,854.3
Shareholder’s Equity	(6,003.4)	(4,601.0)
Total liabilities	56,439.0	58,455.3
Total Current Liabilities	3,802.1	4,020.0
Total Non-Current Liabilities	52,636.9	54,435.3

Description	Formula	2022 Million $	2021 Million $
Debt to Equity Ratio	Non-Current / (Liabilities- Non-Current + Equity) X 100	52636.9 /(52636.9+(6003.4))X100	54435.3/(54435.3 +4601) X100
		1.129 i.e 112.9%	109.23 %

On this basis, the following calculations show that McDonald’s had a Debt to Equity Ratio of atleast 112. 9% in 2022 and 109.23 % in 2021 respectively. The change in the above ratio from 2021/2022 indicates that McDonalds Company has stretched some magnitude of leverage, in the current fiscal year relying more on debt as the source of its funds than equity. A high DE ratio means that the company is faced with higher risk as the firm is utilising more of debt in its funding structure rather than equity. It may also help improve shareholders’ gains but, at the same time, makes the organization more susceptible to issues related to financial vulnerability.

Interest Coverage Ratio:

It measures a organization’s capacity to service the interest on its Debt using Earnings before Interest & Taxes (EBIT) (Suranta et al., 2023).

Formula = Earnings Before Interest & Taxation / Interest Expense

The ratio is 7.76 for 2022, compared to 8.73 in 2021. This decline means that though the Company can comfortably absorb the interest costs, it has slightly reduced the capacity in the year under analysis. The decline from 8.73 to 7.76 Although 7.76 may convey higher pressure in terms of increased amount of liabilities, or conversely lower income, they have retained an acceptable position of the ratio, where it can be supposed and concluded that the firm has enough earnings to meet all interests and does not have critical problems with this.

Description	Formula	2022 Million $	2021 Million $
Interest Coverage Ratio=	Earnings Before Interest & Taxation / Interest Expense	9,371/1207	10,356/1,185.8
		7.76	8.73

Conclusion

According to the analysis of the McDonald’s 2022 Annual Report, it is evident that the company has been able to perform well financially and flexibly during the learning process in the year under analysis despite the prevailing unfavourable global economic environment. This trend wiki showcases features such as an increase in revenues due to changes in the menu offer, digital growth, and Global comparable store sales. One was able to observe the company’s commitment to sustainability and corporate responsibility by its sustainable initiatives through environmental Management and support to the communities. In general, McDonald’s managed to maintain its position as a market leader and provide value to shareholders, relying on operational efficiency and sound management of growth prospects.

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