Buy Report March 2007

Lauren Castro & Ricardo Vielledent

Recommendation: Buy, Full Position Approximately 1,200 shares

Continual profitability shows strong potential for future earnings Firm position in its industry Increasing Margins Strong fundamentals and healthy financials Undervalued in our multiple valuations and in our DCF analysis At a Glance: Ticket: MCD Exchange: NYSE Sector: Services Industry: Restaurants Market Cap: $54.03 Billion Avg. Volume: 6,251,870 52-Week High: $46.21 (2/23/07) 52-Week Low: $31.73 (07/13/06) Current Price $44.83 (3/28/07): Beta:1.35 EPS (ttm):2.83 P/E (ttm): 19.72 P/B (mrq): 3.51 P/S (ttm): 2.51 PEG: 2.02

Reuters.com

TABLE OF CONTENTS Company Profile and Business Strategy 3 Company Management .... 4 Company History .. 5 Recent News .. 6 Outlook 2007 .. 6-7 Industry Overview 7 Key Issues affecting the Industry 8 Competitive Landscape 9 Competitors .. 10 SWOT Analysis 11 Financial Ratios .. 12-13 Extended DuPont Model . 13 Sales Trends . 14 Multiple Valuations 15-16 Conservative ProForma Income Statement .. 17 Conservative DCF Analysis ... 18-19 Optimistic ProForma Income Statement .. 20 Optimistic DCF Analysis and ... 21 Analyst Recommendation Trends and Conclusion 22 Income Statement 23 Balance Sheet .. 24 Value Line 25

COMPANY PROFILE2 McDonalds Corporation was founded in 1948 and is based in Oak Brook, Illinois. The Company primarily franchises and operates McDonalds restaurants in the Restaurant-Food Service industry worldwide and as of December 31, 2006, operated approximately 31,045 restaurants in more than 118 countries. The business operates via six geographic segments: United States; Europe; Asia/Pacific, Middle East and Africa (APMEA); Latin America; and Canada. The U.S. and Europe segments each account for approximately 35% of total revenuesFrance, Germany and the United Kingdom (U.K.) collectively account for approximately 60% of Europes revenues. McDonalds restaurants offer a uniform menu, although there may be some variations based on geography. Menu items include hamburgers and cheeseburgers, Quarter Pounder with Cheese, Filet-OFish, several chicken sandwiches, Chicken McNuggets, Chicken Selects, French fries, premium salads, and a variety of signature desserts and beverages. Additionally, McDonalds restaurants in the United States and many international markets offer a full- or limited-breakfast menu, which may include Egg McMuffin, Sausage McMuffin with Egg, McGriddles, biscuit and bagel sandwiches, hotcakes, and muffins. The restaurants also sell a variety of other products during limited-time promotions. McDonalds Corp. also operates Boston Marketa home-meal replacement concept serving chicken, meatloaf, sirloin, sandwiches, soups and saladsand has minority ownership interest in U.K.-based Pret A Mangera quick-service food concept that serves prepared and packaged cold sandwiches, soups, salads, coffees and teas, primarily during breakfast and lunch. Prior to October 2006, the Company also had an ownership interest in Chipotle Mexican Grill but during the year ended December 31, 2006, the Company disposed of this investment. Since McDonalds restaurant business comprises virtually all of the Companys consolidated operating results, this report relates to that business, unless otherwise noted. BUSINESS STRATEGY2 All McDonalds restaurants are operated either by the Company, by independent entrepreneurs under the terms of franchise arrangements (franchisees), or by affiliates and developmental licensees operating under license agreements. Of the 31,046 McDonalds restaurants around the world at the end of 2006, 18,685 are operated by franchisees, 4,195 are operated by affiliates and 8,166 are operated by the Company. Under the Companys franchise arrangements, franchisees provide a portion of the required capital by initially investing in the equipment, signs, seating and decorations of their restaurants, and by reinvesting in the business over time. The Company owns the land and building or secures longterm leases for both Company-operated and franchised restaurant sites; ensuring long-term occupancy rights, controlling related costs, and improving alignment with franchisees. Under developmental licensee arrangements, licensees provide ongoing capital for the entire business, including the real estate interest, while the Company generally has no capital invested.

McDonalds 2006 Annual Report Form 10 -K

The Company operates primarily as a franchisor and believes that franchising is the best way to deliver great customer experience and drive profitabilityfranchising permits restaurant companies to expand their brand-name recognition rapidly, without bearing the full cost of acquiring land, buildings, and equipment. Nonetheless, Company-operated restaurants are also essential to the success of the business in both mature and developing markets because they allow the Company to further develop and refine operating standards, marketing concepts and product and pricing strategies, so that they can introduce Systemwide only those that they believe are beneficial. McDonalds business model enables them to play an integral role in the communities they serve and consistently deliver relevant restaurant experiences to customers. McDonalds revenues consist of sales by Company-operated restaurants. They also include fees from restaurants operated by franchisees and affiliates such as rent, service fees and/or royalties that are based on a percent of sales, with specifies minimum rent payments. Fees vary by type of site, amount of Company investment and local business conditions and are predetermined in franchise/license agreements that generally have 20-year terms. MANAGEMENT Ralph Alvarez, 51, is President and Chief Operating Officer Prior to entering his current position, Alvarez served as President, McDonalds North America; President, McDonalds U.S.A; Chief Operations Officer of McDonalds U.S.A.; President, Central Division; and Regional Director for Chipotle Mexican Grill. Except for a brief period in 1999, Mr. Alvarez has been with the Company for 12 years. Jose Armario, 47, is President, McDonalds Latin America Armario previously served as Senior Vice President and International Relationship Partner for the region. He has more than 20 years of broad international experience within the restaurant and retail industries. Mr. Armario has been with the Company for 10 years. Timothy J. Fenton, 49, is President, McDonalds Asia/Pacific/Middle East/ Africa Prior to entering his current position his current position, he served as President, East Division for McDonalds USA; Senior Vice President; International Relationship Partner. Mr. Fenton has been with the Company for 33 years. Denis Hennequin, 48, is President of McDonalds Europe Hennequin previously served as Senior Vice President and International Relationship Partner of McDonalds Europe, Vice President of McDonalds Europe, and President and Managing Director of McDonalds France. Mr. Hennequin has been with the company for 22 years. Donald Thompson, 43, is President, McDonalds USA Prior to entering his current position, Thompson served as Executive Vice President and Chief Operations Officer for McDonalds USA; Executive Vice President, Restaurant Solutions Group; and President, West Division. Mr. Thompson has been with the Company for 16 years. 4

HISTORY3 1955 The original McDonalds hamburger stand in California, owned by the brothers Dick and Mac McDonald, expans to open a restaurant in Des Plaines, Illinois. First days revenues were $366.12. The Des Plaines building is now a museum containing McDonalds memorabilia and artifacts. 1963 The smile known around the world, Ronald McDonald, made his first TV appearance, portrayed by Willard Scott. 1965 McDonalds goes public with the companys first offering on the stock exchange. 100 shares of stock costing $2,250 that day would have multiplied into 74,360 shares today, worth over $1.8 million on December 31, 2003. In 1985 McDonalds was added to the 30-company DJIA. 1968 The Big Mac is introduced. It was the brainchild of Jim Delligatti, who by the late 1960s operated a dozen stores in Pittsburgh.

1974 Fred Hill of the Philadelphia Eagles teamed up with McDonalds to create Ronald McDonald House. It is a place that the families of critically ill children can call home while theyre away from home as the young patients undergo treatment 1979 The Happy Meal is introduced and has since then been making kids visits much more special. Today, kids all over the world collect Happy Meal toys and boxes. McDonalds also starts making its way into more non-traditional locations like Amoco and Chevron stations, with full menu offerings and dining room seating, just as one would find in a traditional McDonalds. 1994 15,000 customers in Kuwait City, Kuwait lined up on McDonalds opening day in 1994. The line at the drive thru was seven miles long. Proving once again that Good Times, Great Taste is understandable in any language. 2005 McDonalds Corporation celebrated its 50th Anniversary with the opening of a flagship restaurant in Chicago

www.mcdonalds.com

RECENT COMPANY NEWS March 21, 2007: MCD says it expects to take market share from U.S. specialty coffee retailers as it prepares to expand its offerings of lattes, cappuccinos and iced coffees. March 19, 2007: MCD may sell Latin American restaurants, a Brazilian newspaper reported. The company said that the "evaluation process for Latin America is ongoing and no final decisions have been made at this time." March 15, 2007: MCD rolls out new packaging putting pictures of ordinary consumers who eat at the hamburger chain on its packaging, tapping into a media and Internet trend focused on real people March 12, 2007: MCD sells $400 million in 10-year notes March 8, 2007: MCD Reports February Comparable Sales Up 5.7% February 8, 2007: MCD Global Comparable Sales Rise 4.9% in January January 24, 2007: MCD Reports Record Results for 2006 January 17, 2007: MCD Marks 4th Consecutive Year of Strong Global Comparable Sales OUTLOOK FOR 20074 The Company will continue to execute their Plan to Win (plan to be better, not just bigger), with a strategic focus on their customers and restaurants, while continuing to exercise disciplined financial management. The company will extend its efforts to continue supporting consumers desire to make balanced lifestyle choices by adding nutrition labeling to the packaging of many core menu items throughout more restaurants.

The Company will expand the use of their new point of sale software (POS), which was in approximately 8,499 restaurants as of year-end 2006. Tests indicate that this new software helps improve order accuracy and drive-thru service speed. McDonalds will continue developing a new flexible operating system that takes a modular plug and play approach to kitchen configuration and restaurant operations. In the future, this system will enable greater menu flexibility based on local market needs while making it easier for crew to satisfy customers. During 2006, the Company returned nearly $5.0 billion to shareholders through a share repurchase program initially authorized in 2001. In 2007 and 2008 combined, the Company expects to return another $5.0 billion to its shareholders through a combination of additional share repurchases and dividends. The Company has paid dividends on its common stock for 31 consecutive years and has increased the dividend amount every year. This reflects the Companys confidence in the ongoing strength and reliability of its cash flow. The Company expects to open about 800 McDonalds restaurants in 2007. They expect net additions of about 400 (450 net traditional additions and 50 net satellite closings). In an effort to improve local relevance, profitability and returns the Company will continue to reduce the percentage of Company-operated restaurants in the U.K. and Canada, and they will continue to pursue the developmental license strategy.
McDonalds 2006 Annual Report Form 10-K

In the U.S., McDonalds will focus on chicken, breakfast, beverages and convenience. The Company is introducing Snack Wrap variations and the new Southwest Salad, as well as additional breakfast offerings. In Europe, the Company will add new food offerings, such as Premium Chicken Sandwiches and Snack Wraps, while leveraging the strength of their everyday affordability platforms. Building greater brand trust with regard to food quality, nutrition and employment image will remain a priority. In APMEA, where a large percentage of the population already eats breakfast away from home, the Company is introducing or expanding breakfast and they are also extending restaurant operating hours. The Company plans significant growth in Chinain 2006 the Company entered into a strategic alliance with Sinopec, Chinas largest petroleum retailer, to codevelop drive-thru restaurants at existing and new Sinopec locations, positioning them to capitalize on changing consumer lifestyles in China.

INDUSTRY OVERVIEW5 The US economy is expected to continue growing through 2007, as consumer confidence remains relatively strong and consumer spending continues to remain at positive levels, despite higher gas prices. Furthermore, the outlook for the Restaurant Industry remains positive in the long term. Even during times of economic weakness, demand has remained strong in the sector, leading us to conclude that casual dining is less sensitive to the general economic cycle than previously assumed (S&P). Customer traffic patterns and profit margins are projected to improve, due to both improved sales trends and continued decline in food costsbeef, pork, and poultry prices are expected to recede due to increased supply. The graph bellow depicts the increase in industry sales within past decades according to the National Restaurant Association, restaurant-industry sales are forecast to advance 5% in 2007 and equal 4% of the U.S. GDP.

Restaurant Industry Sales (billions of current dollars)

Standard and Poors Industry Survey

KEY ISSUES AFFECTING THE INDUSTRY:6 A Shift in Focus Since 2003, the fast-food industry, in general, has shifted its competitive focus from price discounting to product innovation. This shift has significantly benefited overall industry profitabilityaccording to the National Restaurant Association, sales at quick-service restaurants grew 4.7% in 2003, 7.4% in 2004, and 4.8% in 2005. Perhaps the greatest beneficiary of the shift toward product development and away from price discounting is industry titan McDonaldsin 2003 the Company changed its management team and embarked on a plan to return it to positive sales growth and income trends by emphasizing product development, marketing, and customer service. Health Issues Over the past several years, American culture has become significantly more health- conscious and the fast-food industry, in particular, has been blamed for obesity-related health problems faced by consumers. As a result, the fast-food industry has made dramatic changes to avoid losses from consumer perceptions about the healthfulness of its food offerings. As a result, industry leader McDonalds has developed a wide range of Healthy Lifestyle programs, including the addition of menu offerings that the company believes will attract health-conscious consumers. The Company has focused its marketing efforts on promoting its salad offerings and developing new Happy Meals that include yogurt, milk, vegetables, or fruit. They also decided to discontinue the supersize French fries and soda offerings that they promoted in the past. Furthermore, in 2003 the Company formed its Global Advisory Council on Healthy Lifestyles to help guide the company on activities to promote balanced, healthy lifestyles. The group includes experts in fitness, nutrition, and active lifestylessome of whom are prominent doctors, educators, and athletes. Finally, McDonalds has collaborated with the World Health Organization and the Department of Health and Human Services to educate consumers on the importance of nutrition and fitness. Wage Issues Although wage increases have been tame over the past several years, current low unemployment rates have tightened the labor market and increased labor costs for the industry. Furthermore, one should be aware of possible emerging laws regulating employment compensation and increases in the federal minimum wage level that may affect profitability. On the other hand, S&P predicts that wage increases will likely be offset by improved efficiency as customer traffic picks up. Food Prices The cost of food and beverages is one of a restaurants largest expenses. While annual food prices jumped more than 13% from 2002 to 2005, recent lower prices of beef, chicken, and pork have helped restaurantsfast-food chains have been able to capitalize in gains from recent lower prices more than other restaurants that contract for commodities further in advance. Furthermore, because restaurant companies negotiate directly with national and regional suppliers, larger customers, like McDonalds, hold a greater bargaining power. Companies Slow Expansion Plans Many restaurants throughout the industry have announced that their expansion rates would slow in 2006 and 2007, due to high real estate and construction costs that have risen 10% in each of the last two years, as well as overall lower profit margins that have lowered expected ROI. Other chains, particularly in the fast-food industry, are expected to deemphasize US expansion over the next few
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Standard and Poors Industry Survey

years, due to maturing of their concepts. S&P expects slowing expansion rates to free up capital for increased reimaging and remodeling activityMcDonalds has announced that they will focus less investment on expansion and contribute more to remodeling efforts in the near future. International Expansion Focused on China During recent years, US chains have become increasingly aware of underserved markets in countries around the world that would allow expansion into fertile ground. S&P claims McDonalds to be the largest US restaurant chain in international markets. While McDonalds has a strong general international presence, it is currently working to improve its presence in Chinathe Chinese market has become increasingly attractive to restaurants seeking expansion because of its strong economic performance over the past few years relative to the more mature markets in Europe and Japan and because the countrys government has taken steps over the past decade to encourage foreign investment. Over the next several years McDonalds will focus on expansion into this market, hopefully establishing themselves in time for the 2008 Summer Olympics in Beijing. COMPETITIVE LANDSCAPE78 McDonalds restaurants compete with international, national, regional, and local retailers of food products. Competition is based on price, convenience and service, and by offering quality food products. The Companys competitors include quick-service eating establishments, pizza parlors, coffee shops, street vendors, convenience food stores, and supermarketsthe companys strongest competitors are quick-service restaurants offering similar products. In the U.S. there are approximately 550,000 restaurants that generated about $365 billion in annual sales in 2006. McDonalds restaurant business accounts for about 2.5% of those restaurants and 7.4% of the sales. Competitors outside of the U.S. vary by region and, thus, no reasonable estimate can be made about these. 10 Largest U.S. Restaurant Chains

The above graph shows the percent changes in sales and US units for the top 10 largest restaurant chains. Although this information is from 2005, it is still impressive to note the magnitude of McDonalds restaurants sales and the number of restaurant units the Company holds, compared to its competitors.

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McDonalds 2006 Annual Report Form 10 -K Standard and Poors Industry Survey

COMPETITORS910

Burger King (BKC) Market Cap: 2.89B P/E: 48.47 Burger King Holdings, Inc., through its subsidiary, Burger King Corporation, engages in the franchising and operation of fast food hamburger restaurants. The company was founded in 1954 and is headquartered in Miami, Florida. As of August 23, 2006, it operated approximately 11,000 restaurants in 65 countries worldwide. The company operates in three business segments: United States and Canada; Europe, Middle East and Africa and Asia Pacific, and Latin America. The basic menu of all of its restaurants features hamburgers, cheeseburgers, chicken and fish sandwiches, breakfast items, French fries, onion rings, salads, desserts, soft drinks, shakes, milk, and coffee. The restaurant also sells a variety of promotional products on a limited basis. Wendys (WEN) Market Cap: 3.08B P/E: 39.30 Wendy's International, Inc. and its subsidiaries engage in the operation, development, and franchising of a system of quick service restaurants. The Company was founded by Dave Thomas in 1969 and it is based in Dublin, Ohio. As of December 31, 2006, the Company and its franchisees operated approximately 6,000 restaurants in the United States and in 20 other countries and territories. Subsidiaries include Wendys Old Fashioned Hamburgers, Pasta Pomodoro brands, and Caf Express, which the company approved for future sale on October 2006. The Companys Wendys restaurants menu offer hamburgers and filet of chicken breast sandwiches, chicken nuggets, chicken strips, chili, baked and French fried potatoes, salads, desserts, soft drinks and other non-alcoholic beverages, and childrens meals. Promotional items are also introduced to the menu periodically for limited periods.

YUM! Brands Inc. (YUM) Market Cap: 15.67B P/E: 20.34 YUM! Brands, Inc. engages in the development, operation, franchising, and licensing of quick service restaurants. Headquartered in Louisville, Kentucky, the company was incorporated in 1997 under the name TRICON Global Restaurants, Inc. and later changed its name to YUM! Brands, Inc. in 2002. As of November 16, 2006, it operated approximately 34,000 restaurants in 100 countries and territories. Its restaurant brands comprise KFC, Pizza Hut, Taco Bell, Long John Silver (LJS), and A&W AllAmerican Food Restaurants (A&W) that offer Mexican-style food categoriesthese restaurants prepare, package and sell menu food items. YUM Restaurants International and YUM Restaurants China comprise another joint YUM segment. The International Division, based in Dallas, Texas, comprises more than 11,000 restaurants, primarily KFCs and Pizza Huts, operating in over 100 countries outside the United States. The China Division has more than 2,600 system restaurants, predominately KFCs.
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Finance.yahoo.com www.reuters.com

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S.W.O.T. ANALYSIS Strengths: Global brand recognition. The company owns valuable intellectual property including trademarks, service marks, patents, copyrights, trade secrets, among other proprietary information. The companys operations are not seasonal to any material degree. MCD is not dependent upon either a single customer or small group of customers. The Companys product development process is driven mainly by customer feedback approximately every six weeks the company gathers 80-100 customers at a selected McDonalds unit to get input on new ideas as well as existing menu items. MCDs Plan to Win improved the taste of many of the menu items and has introduced a variety of choices such as premium salads, premium burgers and additional chicken offerings in many markets worldwide. Well positioned to capture growth opportunities in China. Acceleration in comparable sales as well as revenue from 2005 to 2006. Economies of scale have made competition difficult for small operators. Purchasing power is high because the Company has substantial negotiating power with regard to food and packaging supply contracts. Periodic employee training programs and extensive training programs for new managers at their school, dubbed Hamburger University. Weaknesses: The risks of operating in markets, such as Brazil and China, in which there are significant uncertainties, including the application of legal requirements and the enforceability of laws and contractual obligations. Currency exposure and translation losses. Issues with regard to the publics perceptions of quality service and restaurant cleanliness. Because of the vast needs of such a large company, the supply of ingredients, when introducing new items, may take several months. Opportunities: Significant growth opportunities in Chinastrategic alliance with Sinopec, Chinas largest petroleum retailer provides MCD the opportunity to co-develop drive-thru restaurants at existing and new Sinopec locations, positioning MCD to capitalize on changing consumer lifestyles in China. Although the Companys international sales have been somewhat low in the past, MCDs efforts improved international sales in 2006. Continuous increase in sales from a focus towards product innovation. Threats: Although this is a mature industry, it still remains highly competitive and fragmented. Risk of markets in developing countries. Global and local market conditions. Fluctuations in commodity prices, interest and foreign exchange rates and the effects of local governmental initiatives to manage these, given national economic conditions such as consumer spending and inflation rates. The impact of nutritional, health and other scientific inquiries and conclusions, which constantly evolve and often have contradictory implications but nonetheless drive consumer perceptions. Food safetyoutbreak of diseases, such as Mad Cow disease, could significantly affect a company in the restaurant industry by reducing customer traffic and increasing food costs. 11

FINANCIAL RATIO ANALYSIS

LIQUIDITY Current Ratio Quick Ratio Net Working Capital 2006 1.21 1.16 $617.2 2005 2004 2003 2002 WEN 1.51 0.81 0.69 0.71 1.66 1.48 0.77 0.64 0.66 1.59 $2,111.3 -$663.0 -$864.0 -$707.0 $262.0 BKC 0.89 0.89 -$39.0 YUM 0.52 0.47 -$823.0

Because virtually all sales in the restaurant industry are transacted in cash or equivalents, restaurant companies often operate with negative working capital. Nonetheless, McDonalds NWC remains above that of its competitors and has increased dramatically within the past few years. McDonalds liquidity ratios are higher than those of BKC and YUM but are lower than WEN. Overall, McDonalds liquidity ratios have been increasing over time, with the exception of 2006 , when relative to the previous year. Furthermore, both ratios have been moving at a similar trend relative to each other because any fluctuations in the rate of change are absent of changes in inventory. The decrease in the ratios trend in 2006 is primarily due to a decrease in cash, which resulted from higher shares purchased, higher net debt repayments and an increase in common stock dividend. Furthermore, in 2005, cash provided by financing activities increased $2.0 billion primarily due to local borrowings related to HIA and higher proceeds from employee stock option exercises. This was partly offset by higher shares repurchased, higher debt repayments and an increase in the common stock dividend compared to 2004. As a result, cash and equivalents decreased $2.1 billion in 2006 compared to an increase of $2.9 billion in 2005.
ASSET MANAGEMENT Inventory Turnover Fixed Asset Turnover Total Asset Turnover TATO (Goodwill Removed) 2006 99.67 0.88 0.73 0.79 2005 93.12 0.74 0.69 0.73 2004 91.63 0.76 0.69 0.74 2003 99.12 0.7 0.69 0.74 2002 98.96 0.72 0.66 0.71 WEN 66.7 1.02 0.89 0.92 BKC NM 0.98 0.78 0.78 YUM 79.71 1.84 1.57 1.75

While McDonalds inventory turnover has fluctuated throughout the past five years, it is worth noting that its levels have remained above its competitors, showing that McDonalds does a superior job of selling its inventory. Although McDonalds Total Asset Turnover (TATO) is less than that of its competitors, it is important to note its increase over the past year. Furthermore, when calculating TATO excluding Goodwill, McDonalds appears to do a better job at generating revenue from its assets than BKC. In the future McDonalds should continue making efforts to improve the management of their assets.
DEBT MANAGEMENT Debt-to-Asset Ratio Debt-to-Equity Ratio Equity Multiplier 2006 0.47 0.88 1.88 2005 0.5 0.98 1.98 2004 0.49 0.96 1.96 2003 0.54 1.16 2.16 2002 0.57 1.33 2.33 WEN 0.51 1.04 2.04 BKC 0.78 3.5 4.5 YUM 0.78 3.42 4.42

McDonalds Debt-to-Equity ratio has followed an overall decreasing trend throughout the observed five-year time period and remains significantly lower than its competitors. Furthermore, although the Companys Debt-to-Asset ratio has been slightly inconsistent, it remains much lower than its competitors, further showing that the company is not very reliant on debt. These trends, along with a decreasing Equity Multiplier, show that the company is relying less on debt to finance its assets proving the Companys increasing financial stability. 12

PROFITABILITY Gross Margin (%) EBIT Profit Margin (%) Net Profit Margin (%) Operating Margin (%) Return on Assets (%) ROA Goodwill Removed (%) Return on Equity (%) 2006 32.35 21.16 16.42 20.59 15.48 16.65 22.53 2005 31.45 20.32 13.12 20.13 13.94 14.91 17.02 2004 31.75 19.14 12.25 19.03 13.26 14.18 16.57 2003 30.32 15.95 8.58 16.46 10.98 11.74 12.79 2002 30.24 13.22 5.80 13.72 8.76 9.33 8.92 WEN 17.96 1.64 3.85 1.64 1.35 1.50 6.99 BKC 36.71 7.42 1.32 8.30 2.28 5.80 4.63 YUM 25.80 13.2 8.62 13.20 20.78 23.05 59.82

Operating Margin is one of the most important profitability measures in assessing a restaurant company because it indicates how adept a company is at making a profit on its sales dollar. McDonalds Operating Margins have been increasing steadily over the five-year time period and are substantially higher than its competitors showing that the Company has stronger profitability. Likewise, the rest of the Companys margins are very strong and above its competitors, with the exception of McDonalds most recent Gross Margins, as compared to Burger King. McDonalds Net and EBIT profit margins are significantly higher than this competitor further showing that the Company has been more profitable. Similarly, the Companys Return on Assets and Return on Equity figures fall between its competitors but it is worth noting that these have been increasing consistently throughout the past five years. We expect McDonalds profitability to continue its overall upward trend into the future. EXTENDED DUPONT MODEL
Extended DuPont Model ROE 22.53 17.92 16.57 12.79 8.92 6.99 4.63 59.82 = = = = = = = = = Net Profit Margin 16.42 13.12 12.25 8.58 5.80 3.85 1.32 8.62 x Total Asset Turnover 0.73 0.69 0.69 0.69 0.66 0.89 0.78 1.57 x Equity Multiplier 1.88 1.98 1.96 2.16 2.33 2.04 4.5 4.42

2006 2005 2004 2003 2002 WEN BKC YUM

The Extended DuPont Model shows us how the Return on Equity is derived and what factors influence it. As mentioned above, McDonalds ROE has consistently improved during the fiveyear timeline. This improvement has resulted from the aforementioned increases in Net Profit Margin and a slight increase in Total Asset Turnover (Goodwill included). Furthermore, ROE has continued to increase despite little change in TATO and a decreasing Equity Multiplier. We are confident that McDonalds will continue to strengthen its financial standing into the future.

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SALES TRENDS11 Comparable Sales-McDonalds Restaurants

U.S. Europe APMEA* Latin America Canada Total 2006 5.2% 5.8% 5.5% 14.6% 4.7% 5.7% increase 2005 4.4% 2.6% 4.0% 11.6% 30.0% 3.9% 2004 9.6% 2.4% 5.6% 13.0% 5.4% 6.9%

* APMEA is made up of segments in Asia/Pacific, Middle East and Africa Comparable sales are a key performance indicator used within the retail industry. Increases or decreases in comparable sales represent the percent change in constant currency sales from the same period in the prior year for all McDonalds restaurants in operation for at least thirteen months. These figures show that McDonalds same-store sales have been increasing year-to-year and we expect these positive sales trends to continue into the future, adding to the profitability of investments for every 1% point increase in U.S. comparable sales in the future, annual net income per share would increase by about 2.5 cents. Similarly, an increase of 1% point in Europes comparable sales would increase annual net income per share by about 2 cents. Systemwide Sales-McDonalds Restaurants
2006 6% 8% 5% 21% 12% 7% increase 2005 5% 4% 6% 21% 8% 6% Increase excluding currency translation 2006 2005 6% 5% 7% 4% 8% 6% 16% 13% 5% 1% 7% 5%

U.S. Europe APMEA* Latin America Canada Total

* APMEA is made up of segments in Asia/Pacific, Middle East and Africa Systemwide sales include sales at all McDonalds and Boston Market restaurants and measure total revenues from restaurants operated by the company, its franchisees, and its affiliates. Sales by franchisees and affiliates are not recorded as revenues by the Company but management believes this information is important in understanding the Companys financial performance because it is the basis on which the Company calculates and records franchised and affiliated revenues and is indicative of the financial health of their franchisee base. Changes in Systemwide sales are driven by comparable sales and net restaurant unit expansion. Thus, Systemwide sales growth is an important factor in projecting the top-line growth potential of a company. As shown by the figures above, these have been increasing for the past two yearspartially due to the increase in same-store sales growthand are likely to continue growing in the future: the Company expects net restaurant additions to add slightly more than 1% to Systematic sales growth in 2007.

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McDonalds 2006 Annual Report Form 10-K

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MULTIPLES VALUATIONS

Price/Earnings Valuation

In our P/E Valuation we used a current P/E of 19.76 for our most likely scenario. For the pessimistic scenario we used the lowest P/E McDonalds Corp. has traded at during the past five yearsa P/E of 9.92. For the optimistic scenario we used the 26.40 Industry average. In calculating EPS we used the current EPS of $2.29 as the most likely scenario and for the pessimistic and optimistic values we simply added and subtracted 15% to get $1.95 and $2.63, respectively.

EPS P/E Pessemistic Most Likely Optimistic 9.92 19.76 26.40

Pessimistic Most Likely Optimistic $ 1.95 $ 2.29 $ 2.63 19.31 22.72 26.12 38.46 45.25 52.04 51.39 60.46 69.52

Price/Book Valuation

Book value per share has been increasing by 7% during the last two years and, thus, we increased the current book value per share by this same amount for our most likely scenario. Value Line predicts book value per share to be 17.05 for the upcoming year and we used this figure in our optimistic scenario. For our pessimistic scenario we used a current book value per share of $12.84. In calculating the P/B multiples we used the current P/B in our most likely scenario and, in order to come up with our pessimistic and optimistic scenario, we subtracted and added 15% to this figure, yielding values of 2.96 and 4.00, respectively.

BVPS P/B Pessemistic Most Likely Optimistic 2.96 3.48 4.00

Pessimistic Most Likely Optimistic $ 12.84 $ 13.73 $ 17.05 37.98 40.61 50.43 44.68 47.78 59.33 51.39 54.95 68.23

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Price/Sales Valuation

In calculating the Sales per Share for our valuation, we used the current $17.25 Sales per Share for the pessimistic scenario. For the most likely scenario we added 9.18%the 5-year average increase in Sales per Shareand for the optimistic scenario, we added 15% to the most likely. For the P/S multiples we used the current P/S of 2.52 as our most likely scenario. For the pessimistic and optimistic scenarios we subtracted and added 15% to the most likely, yielding 2.14 and 2.90, respectively.

SPS P/S Pessemistic Most Likely Optimistic 2.14 2.52 2.90

Pessimistic Most Likely Optimistic $ 17.25 $ 18.83 $ 21.65 36.95 40.33 46.38 43.47 47.45 54.57 49.99 54.57 62.75

Price/Cash Flow Valuation

In calculating Cash Flow per share, we used the current CFPS of $3.29 as the pessimistic scenario and added a historical 5-year growth average of 9.63% to get $3.61 for the most likely scenario. Subsequently we added 15% to the most likely scenario to arrive at a CFPS of $4.15 for our optimistic scenario. For our P/CF multiples we used the current P/CF of 13.04 as our most likely scenario. For our pessimistic and optimistic scenarios we subtracted and added 15% to get P/CFs of 11.08 and 15.00, respectively.

CFPS P/CF Pessemistic Most Likely Optimistic 11.08 13.04 15.00

Pessimistic Most Likely Optimistic $ 3.29 $ 3.61 $ 4.15 36.47 40.01 46.02 42.90 47.07 54.14 49.34 54.14 62.26

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PROFORMA STATEMENT McDonalds Corp. (MCD) ProForma Income Statement Fiscal Years Ended December 31 ($ in millions, except per share data) CONSERVATIVE FORECAST
IN MILLIONS, EXCEPT PER SHARE DATA

FY 2006

Sales Growth Total Revenues $ 21,586.40 $

Forecast 2007 8% 23,313.31 $

Forecast 2008 8% 25,178.38 $

Forecast 2009 8% 27,192.65 $

Forecast 2010 8% 29,368.06 $

Forecast 2011 8% 31,717.50

% of Sales

100.00%

Operating Expenses Cost of Revenue SG&A Expenses Other Total Operating Expenses Operating Income Interest Expense Income Before Taxes Income Taxes Net Income After Taxes Common Shares Outstanding Earnings Per Common Share

$ $ $ $ $ $ $ $ $

14,602.10 2,337.90 201.30 17,141.30

$ $ $ $

15,619.92 2,494.52 233.13 18,347.58

$ $ $ $

16,869.51 2,694.09 251.78 19,815.38

$ $ $ $

18,219.07 2,909.61 271.93 21,400.61

$ $ $ $

19,676.60 3,142.38 293.68 23,112.66

$ $ $ $

21,250.73 3,393.77 317.18 24,961.68 6,755.83 570.92

67.00% 10.70% 1.00% 78.70% 21.30% 1.80%

4,445.10 $ 402.00 $ 4,043.10 $ 1,293.40 $ 2,749.70 $ 1,200 2.29 $

4,965.74 $ 419.64 $ 4,546.10 $ 1,409.29 $ 3,136.81 $ 1,200 2.61 $

5,362.99 $ 453.21 $ 4,909.78 $ 1,522.03 $ 3,387.75 $ 1,200 2.82 $

5,792.03 $ 489.47 $ 5,302.57 $ 1,643.80 $ 3,658.77 $ 1,200 3.05 $

6,255.40 $ 528.63 $ 5,726.77 $ 1,775.30 $ 3,951.47 $ 1,200 3.29 $

6,184.91 19.50% 1,917.32 tax rate 31% 4,267.59 1,200 3.56 13.40%

Sales McDonalds Corp.s historical sales growth average is 8% for the past three years. After analyzing McDonalds Corp., we believe sales will grow at a consistent, if not higher, rateMcDonalds sales have grown consistently year-after-year. In the interest of keeping our analysis conservative, we held the growth in sales constant at 8% through 2011. Given recent positive trends we believe an 8% growth in sales through 2011 to be very conservative. Thus, we have included a less-conservative analysis of this same data in page 20 of this report. Forecast In calculating Cost of revenue, SG&A, and other expense assumptions we used a historical 3-year average of each as a percentage of salesthe historical average for Cost of revenue was 67.00%, SG&A expense was 10.70%, and other was 1.00% of sales. Furthermore, operating income was 21.30% of sales and we used a tax rate of 31%, consistent with figures from preceding years. Likewise, I calculated a Net Profit Margin of 13.40% for the five-year forecast. Common Shares Outstanding For the purpose of this Pro Forma Income statement and DCF analysis, the number of shares outstanding remained at 1.2 billion shares. 17

FREE CASH FLOW TO THE FIRM McDonalds Corp. (MCD) DCF Analysis Fiscal Years Ended December 31 ($ in millions) CONSERVATIVE DCF
Forecast 2007 3,136.81 1,510.29 1,553.44 356.18 2,737.48 2,491.56 Forecast 2008 3,387.75 1,563.15 1,607.81 391.79 2,951.30 2,444.86 Forecast 2009 3,658.77 1,617.86 1,664.09 430.97 3,181.57 2,398.86 Forecast 2010 3,951.47 1,674.49 1,722.33 465.45 3,438.18 2,359.46 Forecast 2011 4,267.59 1,733.10 1,782.61 502.69 3,715.39 2,320.64

Net Income Plus: Depreciation/Amortization Less: Capital Expenditures Less: Changes in NWC FCFF PV of FCFF Terminal Value PV of Terminal Value PV of FCFF PV of Firm L-T Debt Value of Equity Shares Outstanding Price Per Share

$ $ $ $ $ $

$ $ $ $ $ $

$ $ $ $ $ $

$ $ $ $ $ $

$ $ $ $ $ $ $ $ $ $ $ $

80,105.88 49,649.11 12,015.38 61,664.49 8,416.50 53,247.99 1,200.00 $ 44.37

WACC Calculations
WACC L-T Debt % of L-T Debt Cost of Debt Stockholders Equity % of Equity Cost of Equity Terminal Growth Rate 9.87% 8,416.50 35% 4.70% $ 15,453.30 65% 12.63% 5% $

CAPM risk free rate (10-year T-Bond) Beta Cost of Equity

4.53% 1.35 12.63%

FCFF Value Drivers

Estimated Sales Growth Dep. as a % of PP&E CapEx as % of PP&E NWC as % of Sales 2007 8.00% 7.00% 7.20% 1.50% 2008 8.00% 7.00% 7.20% 1.50% 2009 8.00% 7.00% 7.20% 1.50% 2010 8.00% 7.00% 7.20% 1.50% 2011 2012-perp. 8.00% 5.00% 7.00% 7.00% 7.20% 7.20% 1.50% 1.50%

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Depreciation In forecasting Depreciation and Amortization we used a historical average as a percentage of Property, Plant, and Equipment Net, which yielded 7%. These were the only non-cash charges added back to Net Income in the forecasted cash flows from the DCF analysis. Incremental Fixed Capital Investment We calculated Fixed Capital Investment by first projecting PP&E, then determining the percent change per-year. We then used a 7.2% historical average of Capital Expenditures as a percentage of PP&E. Net Working Capital In calculating the change in Net Working Capital, we used the change in Working Capital per-year and the change in Sales-per-year. We then calculated the increase in Working Capital as a percentage of sales, yielding 1.5%. Discount Rate In calculating the Discount Rate, we used a weighted average cost of capital of 9.87%. Terminal Value We forecasted terminal value using a terminal growth rate of 5%. We then added the present values of the FCFF and the Terminal value, and, after subtracting L-T Debt, we arrived at a Total Value of Equity of approximately $53 million. We divided this number by the number of shares outstanding, yielding a present value of the Price-per-Share of $44.37.

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PROFORMA STATEMENT McDonalds Corp. (MCD) ProForma Income Statement Fiscal Years Ended December 31 ($ in millions, except per share data) OPTIMISTIC FORECAST
IN MILLIONS, EXCEPT PER SHARE DATA

Forecast 2006 2007 9%

Forecast 2008 10%

Forecast 2009 11%

Forecast 2010 12%

Forecast 2011 13%

% of Sales

Sales Growth Total Revenues

$ 21,586.40 $ 23,529.18 $ 25,882.09 $ 28,729.12 $ 32,176.62 $ 36,359.58

100.00%

Operating Expenses Cost of Revenue SG&A Expenses Other Total Operating Expenses Operating Income Interest Expense Income Before Taxes Income Taxes Net Income After Taxes Common Shares Outstanding Earnings Per Common Share

$ 14,602.10 $ 15,764.55 $ 2,337.90 $ 2,517.62 $ 201.30 $ 235.29 $ 17,141.30 $ 18,517.46 $ $ $ $ $ 4,445.10 $ 402.00 $ 4,043.10 $ 1,293.40 $ 2,749.70 $ 1,200 2.29 $

$ 17,341.00 $ 19,248.51 $ 2,769.38 $ 3,074.02 $ 258.82 $ 287.29 $ 20,369.21 $ 22,609.82 5,512.89 $ 465.88 $ 5,047.01 $ 1,564.57 $ 3,482.44 $ 1,200 2.90 $

$ 21,558.33 $ 24,360.92 $ 3,442.90 $ 3,890.47 $ 321.77 $ 363.60 $ 25,323.00 $ 28,614.99 6,853.62 $ 579.18 $ 6,274.44 $ 1,945.08 $ 4,329.36 $ 1,200 3.61 $ 7,744.59 654.47

67.00% 10.70% 1.00% 78.70% 21.30% 1.80%

5,011.71 $ 423.53 $ 4,588.19 $ 1,422.34 $ 3,165.85 $ 1,200 2.64 $

6,119.30 $ 517.12 $ 5,602.18 $ 1,736.68 $ 3,865.50 $ 1,200 3.22 $

7,090.12 19.50% 2,197.94 tax rate 31% 4,892.18 1,200 4.08

Sales In this forecast we used a percentage growth of 1% per year in sales, which, according to the Companys management, is the expected sales growth for the next 5 years. We did this to see MCDs added value, if indeed management is able to realize these gains. All other factors were held equivalent to the previous forecast and DCF analysis in relation to Cost of revenue, SG&A and other expenses, as well as Net Profit Margin. Common Shares Outstanding For the purpose of this Pro Forma Income statement and DCF analysis, the number of shares outstanding were also held constant at 1.2 billion shares.

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FREE CASH FLOW TO THE FIRM McDonalds Corp. (MCD) DCF Analysis Fiscal Years Ended December 31 ($ in millions) OPTIMISTIC DCF
Forecast Net Income Plus: Depreciation/Amortization Less: Capital Expenditures Less: Changes in NWC FCFF PV of FCFF Terminal Value PV of Terminal Value PV of FCFF PV of Firm L-T Debt Value of Equity Shares Outstanding Price Per Share $ $ $ $ $ $ 2007 3,165.85 1,510.29 1,553.44 356.18 2,766.52 2,518.00 Forecast $ $ $ $ $ $ 2008 3,482.44 1,563.15 1,607.81 391.79 3,045.98 2,523.30 Forecast $ $ $ $ $ $ 2009 3,865.50 1,617.86 1,664.09 430.97 3,388.31 2,554.73 Forecast $ $ $ $ $ $ 2010 4,329.36 1,674.49 1,722.33 465.45 3,816.07 2,618.79 Forecast $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2011 4,892.18 1,733.10 1,782.61 502.69 4,339.98 2,710.77 93,572.42 57,995.59 12,925.58 70,921.17 8,416.50 62,504.67 1,200.00 52.09

DCF Analysis Assumptions: The same assumptions were used for the optimistic DCF analysis as in our analysis conservative with respect to Depreciation and Amortization, Incremental Fixed Capital Investment, Net Working Capital, WACC, and Terminal Value. This DCF analysis shows a price per share of $52.09.

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ANALYST RECOMMENDATION TRENDS

CONCLUSION In retrospect, we believe MCD to be a solid and stable company with very strong fundamentals. We have seen consistent growth in the past, and acceleration in sales in the last year. The company is on track to provide impressive results in 2007 as the year has a very positive outlook for McDonald s. MCD also appears to be undervalued in all four valuations: P/E, P/B, P/S, and P/CF. While our conservative DCF Analysis shows the company is slightly undervalued, our optimistic DCF Analysis, based on managements expectation with regard to growth in sales, shows MCD is even more undervalued. The aforementioned reasons and McDonalds excellent margins have prompted us to recommend a buy of a full position of approximately 1,200 MCD shares.

Recommendation: Buy Full Position: 1,200 shares

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McDonalds Corp. (MCD) Income Statement Fiscal Years Ended December 31 ($ in millions, except per share data)

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McDonalds Corp. (MCD) Consolidated Balance Sheet Years ended December 31 ($ in millions, except per share data)

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