Spring $2024-$ Finance $420$ In$-$class Exercise $(40$ Points$)-$ Due: Wednesday, Apr. $10$ at before class. Email your spreadsheet. No document needed for this assignment.

McDonalds in Poland

This exercise assumes that McDonalds is planning to open a new corporate restaurant in Poland. Their currency is the Polish Zloty $($PLN$).$ Based on research from the web, I've created a project analysis scenario for you to analyze.

Cost of Capital

Calculate the cost of capital for MCD using the format we used in the class example. Calculate the average rd and max rd from their Securities Summary.

Calculate the rs using CAPM. Use $5\%$ as your $rf($T$-$bill$)$ and $5\mathrm{.}5\%$ as your market risk premium.

Calculate rs using max bond yield $+$ premium

Calculate your $\frac{D}{V}$ and $\frac{E}{V}$ and WACC, using your average $rd$ and your CAPM. Use the U$.$S$.$ tax rate of $19\mathrm{.}5\%.$

Capital Budget Assumptions $-$ Base Case

$2.$ Approximate cost of opening a McDonalds restaurant is $8\mathrm{.}5M$ PLN$.$

$3.$ Assume your restaurant will serve $90,000$ orders in year $1$ at an average price of $45$

$4.$ PLN per order. You expect orders to grow by $1\%$ per year.

$5.$ The project life is $5$ years.

$6.$ Variable costs are expected to be $75\%$ of revenues.

$7.$ Fixed costs are assumed to be $300,000$ PLN per year.

$8.$ Depreciation is $2\mathrm{.}5\%$ of capital expenditures cost.

$9.$ The corporate tax rate in Poland is $19\%.$ There is currently no tax on remittances or no limits on remittances. Assume McDonalds will remit $100\%$ of cash flows.

$10.$ Assume they will not pay additional tax to U$.$S for remitted funds either.

$11.$ Assume the salvage value of the business is $10M$ PLN after$-$tax $($net of book value$)$ in year $5.$

$12.$ The March $2023$ exchange rate is $1$USD$=3\mathrm{.}963638PLN$ or $1PLN=$$$0\mathrm{.}2522935$USD.

$13.$ Calculate the NPV and IRR of the project. Use your cost of capital as your rate of return.

Capital Budget $-$ Exchange Rate and Salvage Value Scenarios

$14.$ There is always uncertainty in exchange rates. For this part download USD$/$PLN data from Jan. $2019-$ current $($the last month should be Mar $2024).$ Calculate the mean and standard deviation and the $3$ standard deviation ranges. Use the $3^{rd}$ standard deviation range forecast as your upper and lower estimates of exchange rate. Create $2$ different scenarios using these exchange rate for years $1-5($upper and lower$).$ Calculate the NPV$/$IRR using the highest PLN rate and the NPV$/$IRR using the lowest PLN rate.

$15.$ The salvage value of the business is uncertain. What is the breakeven salvage value we would need in year $5$ to make the project worthwhile? What is the breakeven salvage value if the value of the PLN falls to the lowest value from the $3$ standard deviation range.