Corporate finance focuses on financial decisions of an organisation by raising money for various projects or ventures and focuses on the analysis of corporate acquisitions and other decisions in the investment banks and other similar corporations. The objectives of corporate financing include maintaining short-term cash flow by implementing effective accounts payable procedures and securing short-term financing and leveraging relationships with vendors without risking the future financial health of the company. Capital expenditure is necessary for any company to grow effectively. (1)
The given report emphasizes on the capital spending, financial leverage, capital structure and the credit ratings of PepsiCo. It also deals with the debt rating of the company qualitatively and quantitatively against its competitors. The report also provides information on how PepsiCo has pursued initiatives to expand into the international market and gives an opportunity to analyse the credit rating of the firm where the target of the firm is to maintain a single-A senior debt rating.
Background:
PepsiCo is the world leader in the food and beverages industry where the mission is to be the world's premier consumer products' company focused on convenient foods and beverages. The vision of the firm is to continually improve all aspects of the world in which we operate - environment, social, economic - creating a better tomorrow than today. (2)
PepsiCo has an average yearly growth of 15% compound rate in the net sales for about 30 years, from 1965
It is an established leader in the industry with more than two dozen consumer brands, including Doritos, Fritos, Ruffles, and Lay's (snack foods); and Pepsi-Cola, Diet Pepsi, and Mountain Dew (soft drinks)
The sales were doubling about every five years
The current market value of its shareholders is $44 billion, roughly six times its book value
It has been doing very well in the international markets as well, where in 75% of PepsiCo's total acquisition and investment activity represents international transactions
PepsiCo expects its investments to generate cash returns in excess of its long-term cost of capital, which it estimates to be approximately 10%
Net Debt Ratio:
A ratio that indicates the proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load. A debt ratio of greater than 1 indicates that a company has more debt than assets; meanwhile, a debt ratio of less than 1 indicates that a company has more assets than debt. (3)
PepsiCo always measure debts on net basis, which remits the net short term investments, thereby reducing the total debt value. The significance of off-balance sheet accounting is evident here. The total debt includes the Present value of the operating leases as well.
Thus net debt ratio, L*, is defined as
L* = (D + PVOL - CMS)/(NP + D + PVOL - CMS) *100
Where
D - Market Value of Total Debt
= $9453 Million
PVOL - Present value of Operating Leases
= 5*Annual Rental Expense
= 5*479
= $2395 Million
CMS - Cash and Marketable Securities (remits tax and transactions equal 25%)
= $1123.5 Million
N - Number of Outstanding Shares
= 788 Million
P - Current Share Price
= $55.875
Therefore,
Net Debt Ratio (L) = (9453+2395-1123.5)/(44029.5+9453+2395-1123.5)* 100
= (10724.5/54754)*100
= 0.1958 * 100
= 19.58%
Ratios:
The Exhibit 5 provides with the financial data of PepsiCo and its major competitors in the industry for which the following financial ratios have to be calculated:
Interest Coverage Ratio
Interest Coverage Ratio is the ratio that is used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same period. (4)
Interest Coverage ratio = EBIT / Interest
Pepsi
4.565982405
Cadbury
4.896296296
Coke
16.91176471
Coke Enterprises
1.444785276
McDonalds
7.379411765
Fixed Charge Coverage Ratio
Fixed Charge Coverage Ratio is the ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and leases (5)
Fixed charge Coverage ratio = (Ebit+Rental)/(Rental+Interest)
Pepsi
3.094745909
Cadbury
4.2875
Coke
16.91176471
Coke Enterprises
1.406162465
McDonalds
3.588305489
Long-Term Debt Ratio
In risk analysis, Long Term Debt Ratio is a way to determine a company's leverage. The ratio is calculated by taking the company's long-term debt and dividing it by the sum of its long-term debt and its preferred and common stock. (6)
Long Term Debt ratio = L.T. Debt/ L.T Debt + Market Capitalization
Pepsi
0.165736644
Cadbury
0.090317818
Coke
0.011651637
Coke Enterprises
0.517605854
McDonalds
0.112515723
Total Debt to adjusted Total Capitalization:
Total debt to capitalization is the company's financial leverage, calculated as the company's debt divided by its total capital. Debt includes all short-term and long-term obligations. Total capital includes the company's debt and shareholders' equity, which includes common stock, preferred stock, minority interest and net debt. (7)
Total Debt to Tot. Cap ratio
Pepsi
0.176749404
Cadbury
0.146189955
Coke
0.017191631
Coke Enterprises
0.521377599
McDonalds
0.1258667
Ratio Of Cash Flow To Long-Term Debt
A cash flow coverage ratio that measures how much cash is available to pay for long-term debt. This ratio is a good indicator of potential bankruptcy. To arrive at the ratio, compute cash flow by adding net income, depreciation expense, and changes in deferred tax, then dividing that amount by the book value of long-term debt. (8)
Cash flow to long term ratio
Pepsi
0.427803818
Cadbury
0.569444444
Coke
2.73006135
Coke Enterprises
0.155630739
McDonalds
0.539220291
Ratio Of Cash Flow To Total Debt
The ratio of cash flow to long term debt is the company's operating cash flow to its total debt, which, for purposes of this ratio, is defined as the sum of short-term borrowings, the current portion of long-term debt and long-term debt. This ratio provides an indication of a company's ability to cover total debt with its yearly cash flow from operations. The higher the percentage ratio, the better will be the company's ability to carry its total debt. (9)
Cash flow to total debt ratio
Pepsi
0.395853168
Cadbury
0.330201342
Coke
1.83992912
Coke Enterprises
0.153296834
McDonalds
0.474772539
Objective Analysis:
The current net debt ratio is calculated to be 19.58%, which is approximately equal to the target net debt ratio of 20%. This explains that the company is capable of paying off its debt very easily.
Moreover the current financial risk indicative ratios, which favour credit rating like,
Financial Risk Indicative
%
Profile
Cash flow/Debt
39.5
Intermediate
Debt Leverage
17.7
Minimal
Debt/EBIT
3.03
Intermediate
Quantitative Analysis:
The credit ratings of the firm are mostly dependant on the financial ratios. The following are the types of financial ratios that are analysed before the firm is rated.
Liquidity Ratios
Asset Management Ratios
Debt Management Ratios
Profitability ratios
Market Value Ratios
Leverage Ratios
Ratios
Operating income to sales
10.23634989
Solvency ratio
0.088636238
Liquidity:
Current
1.06042065
Asset management:
Fixed assets turnover
3.082168186
Total assets turnover
1.196170179
Debt management ratio:
Debt ratio:
71.24488833
Times int earned
4.565982405
Ebit coverage
3.094745909
Profitability:
Profit margin on sales
5.279247888
Basic earning power
12.24441648
Return on assets
6.314878893
Return on equity
22
Market value:
Price earning
27.9375
Price cashflow = share price/ c.f per share
11.76630136
Market to book
6.031438356
Leverage:
Debt to equity
21.46969645
Net debt/ebitda
3.443962749
