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Five years ago, McDonald’s made a big mistake [#permalink]

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27 Sep 2017, 23:41

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Five years ago, McDonald’s made a big mistake by selling off its Chipotle stake to refocus on its core products. Today Chipotle has a market cap of $9 billion (10 percent that of McDonald’s) and the revenue growth it generated during these five years would have more than doubled McDonald’s total revenue growth. If the information given above is true, which of the following must be true?

a. If the ratio of revenue to market cap for McDonald’s has remained equal to that of Chipotle in the last five years, then Chipotle has grown at a significantly faster rate than McDonald’s. b. Chipotle’s current revenues must be less than the current revenues of McDonald’s. c. If market cap is directly proportional to the revenue of a company, then Chipotle must have more than doubled its market cap in the last five years. d. The ratio of revenue to market cap for McDonald’s is significantly lower than that for Chipotle. e. If both Chipotle and McDonald’s continue to grow at the same pace, then Chipotle will have greater revenues than McDonald’s within the next 10 years.

Five years ago, McDonald’s made a big mistake by selling off its Chipotle stake to refocus on its core products. Today Chipotle has a market cap of $9 billion (10 percent that of McDonald’s) and the revenue growth it generated during these five years would have more than doubled McDonald’s total revenue growth. If the information given above is true, which of the following must be true?

a. If the ratio of revenue to market cap for McDonald’s has remained equal to that of Chipotle in the last five years, then Chipotle has grown at a significantly faster rate than McDonald’s. b. Chipotle’s current revenues must be less than the current revenues of McDonald’s. c. If market cap is directly proportional to the revenue of a company, then Chipotle must have more than doubled its market cap in the last five years. d. The ratio of revenue to market cap for McDonald’s is significantly lower than that for Chipotle. e. If both Chipotle and McDonald’s continue to grow at the same pace, then Chipotle will have greater revenues than McDonald’s within the next 10 years.

The most important point revenue Vs market cap. Revenue is what a company earns through sales and other means WHILE market cap is the total worth of the company. So both mean different

Let's see what each statement tells us:-

a. If the ratio of revenue to market cap for McDonald’s has remained equal to that of Chipotle in the last five years, then Chipotle has grown at a significantly faster rate than McDonald’s. Now let the \(\frac{r_m}{m_m}=\frac{r_c}{m_c}=\frac{1}{10}\). So if the revenue has increased two times for MacDonald, the market cap would become 2*19=20. But we know that the revenue growth of Chipotle is much higher and would have even made the revenue growth of MacDonald more than double. So for chipotle too the revenue growth must have been twice *2 or 4 times , thus making the market cap also 4 times. Hence the statement is CORRECT

b. Chipotle’s current revenues must be less than the current revenues of McDonald’s. we know the revenue growth is more but nothing about REVENUE.

c. If market cap is directly proportional to the revenue of a company, then Chipotle must have more than doubled its market cap in the last five years. we have no info on the growth value, we just know the relationship between the revenue growth of two companies.

d. The ratio of revenue to market cap for McDonald’s is significantly lower than that for Chipotle. Again, nothing is given in para to suggest that.

e. If both Chipotle and McDonald’s continue to grow at the same pace, then Chipotle will have greater revenues than McDonald’s within the next 10 years. We don't know the exact values of revenue or growth or market cap to suggest this.

Five years ago, McDonald’s made a big mistake [#permalink]

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29 Sep 2017, 20:19

chetan2u wrote:

fmik7894 wrote:

Five years ago, McDonald’s made a big mistake by selling off its Chipotle stake to refocus on its core products. Today Chipotle has a market cap of $9 billion (10 percent that of McDonald’s) and the revenue growth it generated during these five years would have more than doubled McDonald’s total revenue growth. If the information given above is true, which of the following must be true?

a. If the ratio of revenue to market cap for McDonald’s has remained equal to that of Chipotle in the last five years, then Chipotle has grown at a significantly faster rate than McDonald’s. b. Chipotle’s current revenues must be less than the current revenues of McDonald’s. c. If market cap is directly proportional to the revenue of a company, then Chipotle must have more than doubled its market cap in the last five years. d. The ratio of revenue to market cap for McDonald’s is significantly lower than that for Chipotle. e. If both Chipotle and McDonald’s continue to grow at the same pace, then Chipotle will have greater revenues than McDonald’s within the next 10 years.

The most important point revenue Vs market cap. Revenue is what a company earns through sales and other means WHILE market cap is the total worth of the company. So both mean different

Let's see what each statement tells us:-

a. If the ratio of revenue to market cap for McDonald’s has remained equal to that of Chipotle in the last five years, then Chipotle has grown at a significantly faster rate than McDonald’s. Now let the \(\frac{r_m}{m_m}=\frac{r_c}{m_c}=\frac{1}{10}\). So if the revenue has increased two times for MacDonald, the market cap would become 2*19=20. But we know that the revenue growth of Chipotle is much higher and would have even made the revenue growth of MacDonald more than double. So for chipotle too the revenue growth must have been twice *2 or 4 times , thus making the market cap also 4 times. Hence the statement is CORRECT

b. Chipotle’s current revenues must be less than the current revenues of McDonald’s. we know the revenue growth is more but nothing about REVENUE.

c. If market cap is directly proportional to the revenue of a company, then Chipotle must have more than doubled its market cap in the last five years. we have no info on the growth value, we just know the relationship between the revenue growth of two companies.

d. The ratio of revenue to market cap for McDonald’s is significantly lower than that for Chipotle. Again, nothing is given in para to suggest that.

e. If both Chipotle and McDonald’s continue to grow at the same pace, then Chipotle will have greater revenues than McDonald’s within the next 10 years. We don't know the exact values of revenue or growth or market cap to suggest this.

A

Hello chetan2u,

Thank you for the explanation. I would like to present my understanding of Option C.

From the premise we know that "the revenue growth Chipotle generated during these five years would have more than doubled McDonald’s total revenue growth"

Now, this is a hypothetical situation, which says that had McDonalds not sold off Chipotle, Chipotle would have more than doubled the former's revenue. Now for this to be true, Chipotle itself must have doubled its revenue.

Option C says that market cap is directly proportional to revenue. While I know that the absolute value of revenue is not mentioned, we know Chipotle must have doubled its own revenue

Hence, market cap of Chipotle must also have been doubled during the 5 yrs period.

Five years ago, McDonald’s made a big mistake by selling off its Chipotle stake to refocus on its core products. Today Chipotle has a market cap of $9 billion (10 percent that of McDonald’s) and the revenue growth it generated during these five years would have more than doubled McDonald’s total revenue growth. If the information given above is true, which of the following must be true?

a. If the ratio of revenue to market cap for McDonald’s has remained equal to that of Chipotle in the last five years, then Chipotle has grown at a significantly faster rate than McDonald’s. b. Chipotle’s current revenues must be less than the current revenues of McDonald’s. c. If market cap is directly proportional to the revenue of a company, then Chipotle must have more than doubled its market cap in the last five years. d. The ratio of revenue to market cap for McDonald’s is significantly lower than that for Chipotle. e. If both Chipotle and McDonald’s continue to grow at the same pace, then Chipotle will have greater revenues than McDonald’s within the next 10 years.

The most important point revenue Vs market cap. Revenue is what a company earns through sales and other means WHILE market cap is the total worth of the company. So both mean different

Let's see what each statement tells us:-

a. If the ratio of revenue to market cap for McDonald’s has remained equal to that of Chipotle in the last five years, then Chipotle has grown at a significantly faster rate than McDonald’s. Now let the \(\frac{r_m}{m_m}=\frac{r_c}{m_c}=\frac{1}{10}\). So if the revenue has increased two times for MacDonald, the market cap would become 2*19=20. But we know that the revenue growth of Chipotle is much higher and would have even made the revenue growth of MacDonald more than double. So for chipotle too the revenue growth must have been twice *2 or 4 times , thus making the market cap also 4 times. Hence the statement is CORRECT

b. Chipotle’s current revenues must be less than the current revenues of McDonald’s. we know the revenue growth is more but nothing about REVENUE.

c. If market cap is directly proportional to the revenue of a company, then Chipotle must have more than doubled its market cap in the last five years. we have no info on the growth value, we just know the relationship between the revenue growth of two companies.

d. The ratio of revenue to market cap for McDonald’s is significantly lower than that for Chipotle. Again, nothing is given in para to suggest that.

e. If both Chipotle and McDonald’s continue to grow at the same pace, then Chipotle will have greater revenues than McDonald’s within the next 10 years. We don't know the exact values of revenue or growth or market cap to suggest this.

A

Hello chetan2u,

Thank you for the explanation. I would like to present my understanding of Option C.

From the premise we know that "the revenue growth Chipotle generated during these five years would have more than doubled McDonald’s total revenue growth"

Now, this is a hypothetical situation, which says that had McDonalds not sold off Chipotle, Chipotle would have more than doubled the former's revenue. Now for this to be true, Chipotle itself must have doubled its revenue.

Option C says that market cap is directly proportional to revenue. While I know that the absolute value of revenue is not mentioned, we know Chipotle must have doubled its own revenue

Hence, market cap of Chipotle must also have been doubled during the 5 yrs period.

Hi..

You are confusing the TWO terms - revenue and revenue growth. What is doubling is revenue growth say it was 1% it has become two percent. But what is market cap directly proportional to - revenue. If revenue growth has become 2% from 1%, the change in REVENUE will be 1.02 So increase in market cap is 1.02

Oh okay. So if I understand correctly, had the option choice said that the market cap is proportional to revenue GROWTH, then we could have concluded that Chipotle almost doubled its market cap during the 5 yr period.