BUSN 5000

Homework 7

Please open this document in Microsoft Word and respond directly in this document without
modification of the text in bold. This way the answer will be in the same place and in the
same format for every student.

You will submit this Word file in Canvas. If you have any trouble, reach out to your instructor
in a timely manner.

Question 1 – McDonalds is considering purchasing its (hypothetical) rival, Crusty Burger.

McDonalds analysts believe the following stream of earnings (profit) is a reasonable estimate.
Determine the maximum price McDonalds should pay for Crusty Burger based on the value of
earnings alone. You may use whatever discount rate you choose but prepare to justify this
choice in the following question. You must show all your work.

10-Year Projected Earnings for Crusty Burger

Year 1 $300 Million
Year 2 $310 Million
Year 3 $320 Million
Year 4 $330 Million
Year 5 $340 Million
Year 6 $350 Million
Year 7 $360 Million
Year 8 $370 Million
Year 9 $380 Million
Year 10 $390 Million

Provide the appropriate calculation and solution immediately below

To determine the maximum price McDonald's should pay for Crusty Burger based on the value
of earnings alone, we need to calculate the present value of the projected earnings using a chosen
discount rate. Let's assume a discount rate of 10% for this calculation.

Using the formula for present value of future cash flows:

PV = (CF1 / (1 + r)^1) + (CF2 / (1 + r)^2) + ... + (CFn / (1 + r)^n)

Where PV is the present value, CF is the cash flow for each year, r is the discount rate, and n is
the number of years.

Calculating the present value for each year's earnings:

PV = (300 / (1 + 0.1)^1) + (310 / (1 + 0.1)^2) + (320 / (1 + 0.1)^3) + (330 / (1 + 0.1)^4) + (340 /

(1 + 0.1)^5) + (350 / (1 + 0.1)^6) + (360 / (1 + 0.1)^7) + (370 / (1 + 0.1)^8) + (380 / (1 + 0.1)^9)
+ (390 / (1 + 0.1)^10)

PV = (300 / 1.1^1) + (310 / 1.1^2) + (320 / 1.1^3) + (330 / 1.1^4) + (340 / 1.1^5) + (350 / 1.1^6)
+ (360 / 1.1^7) + (370 / 1.1^8) + (380 / 1.1^9) + (390 / 1.1^10)
BUSN 5000
Homework 7

PV = 272.73 + 267.56 + 262.41 + 257.37 + 252.45 + 247.64 + 242.94 + 238.34 + 233.84 +

229.43

PV = 2504.51 million (approximately)

Therefore, the maximum price McDonald's should pay for Crusty Burger based on the value of
earnings alone, using a discount rate of 10%, is approximately $2,504.51 million.

Question 2 – Provide an executive summary justifying a maximum purchase price. Be sure to

justify your choice of discount rate in your summary. Do not quote directly from any source
including ChatGPT. Rely on your own reasoning. Limit 300 words

We wanted to figure out the highest price that would be reasonable for McDonald's to
pay for Crusty Burger based on how much money it's expected to make in the future. To do that,
we used a 10% discount rate. This rate is important because it represents the return that investors
would expect from other similar investments.

The 10% rate also takes into account the idea that money loses value over time due to
things like inflation and the risk of waiting for a return. By using the discount rate, we make sure
to consider these factors and make a fair evaluation.

Choosing a 10% discount rate strikes a good balance between being cautious and being
optimistic. If the rate was higher, it would mean we think the future earnings are riskier and
would be worth less. If the rate was lower, it would mean we think the earnings are worth more,
but it could be risky to overestimate.

Based on our calculations, we found that the maximum price McDonald's should pay for
Crusty Burger is around $2,504.51 million. This price takes into account the opportunity cost
(what could be earned from other investments), the time value of money, and the risks involved
in the fast-food industry and Crusty Burger's performance.

In conclusion, the 10% discount rate we used helps us determine a reasonable price for
the acquisition of Crusty Burger based on its projected earnings. It's important to consider all
these factors to make sure the purchase price is fair and makes sense for McDonald's.