Short Description: Valuation of Stock through ROE.

1. Calculate an estimate of MCD's ability to grow its EPS based on your answer to parts a) and b) below.

Using the ROE and payout ratio data below, MCD's capability to grow its earnings per share is estimated at 16.1%.

a. Using MCD's income statement and balance sheet for year ended December 2008, calculate an estimate of its forward-looking return on equity (ROE). Examine some history of MCD's ROE. Is this ratio \"stable\" over the last few years?

ROE = NI/Equity = 32.2%

b. Using MCD's estimated annualized dividend (see Question 1 of Part 1) and its estimated EPS for 2009, calculate its estimated ordinary dividend payout ratio.

2. Do you believe that your answer from Question 1 of Part 2 provides a good approximation of MCD's ability to grow its EPS on a short-term basis (i.e., over the next 1 - 2 years)? Provide at least one fact in support of your answer (There are many \"single\" facts that might adequately support the correct answer).

3. Use Mcd's Statement of Cash Flows to answer the following questions:

a. What is MCD's dividend payout ratio during the past 3 fiscal years if you modify the ratios to account for net stock repurchases? NOTE: use the total amount of dividends, net stock repurchases, and net income to calculate this ratio. Compare this ratio to an ordinary dividend payout ratio computed over the same time frame.

b. How might the type of assumed dividend payout ratio (ordinary vs. modified) affect a dividend valuation? Your response should address both expected dividends and growth (i.e., two of the three variables in a standard valuation equation).