1:Introduction
PepsiCo's inc. Is a global snack and beverage company. This company deals with different type of drinks and snacks of different flavour. It is different company from coca cola. It has an expensive stock price but smaller net profit .it is a sa2080 company.
The organisation people or company busy in making goods and things for sales in a particular kind of business commercial enterprise is called industry.
http://www.google.co.uk/search?hl=fn&chent=firefox=a&hs( electronicallt assesed on9th.dec, 2010.)
uk economy at risk of recession the uk economy is set to experience its weakest period of growth in 15 year and there is a risk of recession in the next two years a report warn
http://news.bbc.co.uk/1/hi/business/7212545.stm(electronically assessed on 10th.dec,2010)
2:MAIN BODY:
In this assignment we have to make choices for PepsiCo's capital structure. For this there are a lot of ratios calculations by doing these ratios calculating we will be able tom made batter choices for PepsiCo's capital structure. But first of all we have to know what the capital structure is?
2.1: CAPITAL STRUCTURE:
Capital structure includes long term and short term debt, common and preferred equity. By using these sources how the company finance its operation and growth, it is to understand the risk for a company by calculating debt-to-equity ratio.
http://www.investopedia.com/terms/c/capitalstructure.asp( electronically assesed on10th.dec,2010)
The shareholders wealth decreased if debt and equity increased and shareholder's wealth increased if debt to equity ratio decreased. So lower the debt to equity ratio higher the shares wealth.
GLENARNOLD Corporate finance management (4th.ed)
2.2: NET DEBT:
If we sum up short term and long term debt and from addition we subtract cash and cash equivalent s it will give us net debt .if we want to invest in a company we must keep this thing in our mind what is the net debt value of the company? This will reveal us the financial situation of the company and help us to choose the right decision.
http://www.investopedia .com/terms/n/netdebt.asp(10th, dec, 2010.)
2.3: Debt ratio:
Measurement of total assets of company is called debt ratio. By doing this measurement we will be able to get an idea about company leverage and due to this debt we will also be able to know that how much potential Risk Company will have to face due to this debt. This debt ratio can be calculated by dividing total debt with total assets of the company. By doing this we will get debt ratio of a company. Comparison between debt and equity is used in a balance sheet in order to calculate capital structure.
http://www.investopedia.com/term/d/debtratio.asp (electronically assessed on10thdec, 2010.)
2.4: Financial ratios:
In order to measure the company's financial performance by using company's financial statement which includes income statement and balance sheet of company for the calculation of financial ratios? There are four types of ratios which we used in corporate finance most commonly. These are profitability ratios gearing ratios efficiency ratios and investor's ratios.
Financial gearing is calculated by dividing net debt with equity where as the net debt is sum of long term and short term debt subtracted by marketable securities and available cash. Then the next step is to compare the financial gearing we have calculated with the benchmark of the company or industry. This is not the only way to measure the capital structure of a company .there are also other method to measure the capital structure of a company .one of them is summing up debt and equity and divide this addition with equity only. There is not ant specific ways to measure capital structure .but ratios are necessary to calculate in order to measure and understand the level of our business.
Http://premiumbusinesstraining.com/debt-ratios.php?9electronically assessed on 10th.dec,2010.)
The relationship between company's equity share holders and company's debt is called financial gearing. Or we can say that debt divided by equity called gearing. If the amount of debt is more than amount of equity then company is highly geared and invest in such company is risky because the company have to pay its debt.
Now if the financial gearing ratio is the high it is risky to invest in that industry or company. Because weather the company is getting profit or not or company is in profit or not the company have to pay debt along with interest. If the company growing or not in progress or in loss but the company have to pay its debt. So it is risky to invest in such company. Financial gearing is also known as financial leverage.
Htpp://www.ise.co.uk/financeglossary.asp?(electronically assessed on 12th.dec,2010.)
2.5:Discussion for question 1:
In reference to our solution of assignment,s question number 1 we find that PepsiCo's net debt ratio as per assignment requirement the normal/traditional formula of net debt ratio calculation will not used by us, instead of this we have to use the formula for the calculation of net debt ratio for the calculation of PepsiCo's net debt ratio. The formula for this calculation as given in the assignment which is as under.
L= (D+PVOL-CMS)/NP+D+PVOL-CMS)
Where d is total market value of the debt.CMS is cash and marketable securities and PVOL is present of value of operating lease commitment is common stock price and N is the number of common shares. Now we are asked to calculate net debt ratio of PepsiCo's by using this formula in the assignment .in order to calculate this net debt ratio the figures are given in the assignment exhibit 5. From there we will took values for the calculation of net debt ratio of pepsico,s.As it is the total market value of debt and the information given in exhibit 2 for PepsiCo's for the latest year is $8747 as in balance sheet the book value of the debt .and also at the end of the balance sheet it is noted that the market value is equal to the book value of debt.
After the debt value we need the present value of operating lease PVOL .and according to the information provided in the assignment it the present value of operating lease is the five time of annual rental expense. Annual rental expense is given in exhibit 5 for the PepsiCo's for the latest year.
After that what we needed is the value of cash and marketable securities and we have to reduce them due to the tax and transaction cost. As these have to b remitted for the United States. Now the number of common shares of PepsiCo's for latest year is $778 millions and year end share price is $55.875.so the total equity or the equity for the PepsiCo's latest year is $44029.5 million. Now we get all the values which we needed for the calculation of net debt ratios of PepsiCo's .by putting these values in the formula and by doing all the calculations i have found that the PepsiCo's net debt ratio is 18.53% for the current year.
The graphs which are provided in exhibit 3 we come to know that the PepsiCo's net debt ratios for the previous two years is 26% and 22% consentively.Also given in exhibit 3 the historical data for the net debt ratio of PepsiCo's and from the given graph it is clear that there is a very slight change in the company's net debt ratio in every year. This change is in a continuous manner.
The target set by the PepsiCo's for its net debt of PepsiCo's for the current year is between 20% to 25% . and the calculation i have done i got net debt ratios for PepsiCo's is 18,53% .according to our calculation and the information provided this target is not realistic and PepsiCo's has to reset its net debt ratio target between 15% to 20%.
PepsiCo's net debt ratio graph:
High net debt ratio is risky for the company and in this case the net debt ratio of PepsiCo's is lower than the previous two years.
2.6: Discussion of question 2:
In question number two we have to calculate six different ratios which we are asked to calculate in the question. So we have to explain the method by which we have calculated these ratios we will discuss this step wise us under:
2.6.1: Interest coverage ratio:
This is the first ratio we have to calculate in this question the formula for calculating this ratio is
Interest coverage ratio=PBT/interest
Whereas the value of PBT and interest is given in exhibit 5 from there we have to take values and calculate ratios for all five companies .PBT is profit before tax.
1.1: PepsiCo's vs pepsico,s
Company
latest year
one year ago
Two years ago
PepsiCo's(PBT)
3114
3309
2996
interest
682
645
573
INTERSET COVERGE RATIO
4.57
5.13
5.23
Graph of pepsico,s vs pepsico,s:
From this graph it is concluded that the in interest coverage ratio is less as compare to the previous two years.
PepsiCo's vs. other companies:
Now we have to calculate the interest converge ratio of PepsiCo's and for other four companies given in exhibit five and then comparison between them.
companies
Interest coverage ratios
PepsiCo's
4.57
Cadbury Schweppes
4.90
Coca cola
16.91
Coca cola enter prizes
1.44
Mc Donald
7.38
If the interest charge coverage ratio of a company is lower its mean that it is not good for companies' financial position. More is this ratio lower will b the debt rate and low is this ratio more will be the debt rate. Means company will have to pay more debt if this ratio is low. So the higher percentage of this ratio is good for company financial position and future .if the interest coverage ratio is high it is good to invest in that company. As in this graph of coca cola is much high as compare to PepsiCo's.
http://www.investopedia.com/articles/basic(electronically assessed on 13th.dec,2010.)
2.6.2: Fixed charge coverage ratio:
The next ratio we have to calculate is fixed charge coverage ratio first for PepsiCo's vs. PepsiCo's and then PepsiCo's vs. other companies. Formula for calculation of this ratio is as below:
Fixed charge coverage ratio=EBIT+annual rent/interest +annual rent
But there is no annual rent is given for PepsiCo's previous year so we are unable to calculate PepsiCo's vs. PepsiCo's fixed charge coverage ratio but PepsiCo's vs. other companies can be calculated by looking the information given in exhibit 5.
PepsiCo's vs. other companies:
companies
PepsiCo's
Cadbury Schweppes
Coca cola
Coca cola enterprises
Mc Donald
Fixed charge coverage ratio
3.09
4.29
16.91
1.41
3.59
Graph for these ratios:
This is for the measurement of time by which a company have to pay its debt. If the ratio is high its mean that the company position is better to pay its debt per year. Decision of investing in a company by looking at this ratio can only be made if there are other companies with whom you can compare your companies position. As in our case coca cola fixed charge coverage ratio as much greater as compare to PepsiCo's and of Cadbury and mc Donald is slightly higher then pepsico,s.this shows us that coca cola is in better position to pay its debt as compare to PepsiCo's.
http://www.financial-dictionary.the freedictionary.com/fixed-charge+coverage(electronically assessed on 13th.ded,2010.)
2.6.3: Long term debt ratio:
Third ratio which we have to calculate according to the assignment question number 2 is long term debt ratio. First long term debt ratio PepsiCo's vs. PepsiCo's and the PepsiCo's vs. other companies. Formula for this ratio calculation is given as under:
Long term debt ratio=long term debt/debt +equity*100
But the information about PepsiCo's previous year is not given so we have to calculate the long term debt ratio of PepsiCo's vs. other companies.
PepsiCo's vs. other companies:
companies
PepsiCo's
Cadbury Schweppes
Coca cola
Coca cola enterprises
Mc Donald
Long term debt ratio
16.3%
8.47%
11.13%
51.39%
11.08%
Graph of PepsiCo's vs. other companies net debt ratio:
This ratio is also good when your earning is also increasing along with investment. By taking debt without earning is also not good for company because company will not be able to pay its debt along with interest per year. And if there is no earning only debt is to be taken then this ratio is not good for companies financial health.
http://www.allbusiness.com/long-term-debt-ratio(electronically assessed on 14th.dec,2010)
2.6.4: Total debt to adjusted total capitalisation:
Fourth ratio we have to calculate is total debt to total adjusted capitalisation this can b calculated by using this formula:
Total debt to total adjusted total capitalisation=total debt/total capitalisation*100
Amount needed to do this calculation is given in exhibit 5.by putting values and doing all the calculation we will get PepsiCo's vs. other companies' total debt to adjusted total capitalisation ratio which is as under:
PepsiCo's vs. other companies:
companies
PepsiCo's
Cadbury Schweppes
Coca cola
Coca cola enterprise
Mc Donald
Total debt to total adjusted capitalization ratio
18%
15%
2%
52%
13%
By showing these values in graph
In this also total debt to adjusted total capitalisation ratio of coca cola higher then PepsiCo's and of all other companies is lower than PepsiCo's. As this is also shown in the graph.
2.6.5: Cash flow to long term debt ratio:
For calculation of this ratio it is clear from the ratios name that what we need for calculating of this ratio is cash flow and long term debt of each company because we have to calculate this ratio for each of the company mention in exhibit 5. Now the formula for this ratio calculation is given below.
Ratio of cash flow to lone term debt=cash flow/long term debt*100
PepsiCo's vs. other companies:
companies
PepsiCo's
Cadbury Schweppes
Coca cola
Coca cola enterprise
Mc Donald
Cash flow to long term debt ratio
43%
57%
273%
16%
54%
Now if we want to show these values in a graph the graph would be like this
This ratio is used to measure company's ability to pay its long term debt .higher the ratio means company have enough money to pay its long term debt or company's financial position is good. As is this graph shown that coca cola have much ability to pay its debt as compare too PepsiCo's. But Cadbury and mc Donald are also in better position as compare to PepsiCo's.
http://www.bizwiz.ca/cash-flow-ratio-calculation-formulas/cash-flow-to-long-term-debt.html(electronically assessed on 14th.ded, 2010.)
2.6.6: Ratio of cash flow to total debt:
This is the last ratio of our course work and it is slightly change from previous there we have to take long term debt and here we have to take total debt in order to calculate ratio of cash flow to total debt. Formula will be like this
Ratio of cash flow to total debt=cash flows/total debt*100
PepsiCo's vs. other companies:
companies
PepsiCo's
Cadbury
Coca Cola
Coca cola Ent.
Mc Donald
Ratio of cash flow to total debt
40%
33%
184%
15%
47%
If we want to show this data in graph graph would like this:
Again higher percentage of this ratio is good for company. In this case coca cola having higher value as compare to pepsico,s.And mc Donald also having slightly greater value as compare to PepsiCo's.
3: Q.no3 discussion
Before jumping into the question we have to know what is rating. Meaning of rating and which are the most commonly used rating creterias.How these criteria are used for the company rating. And which rating criteria are good for company and which is bad for company. Most comely used rating criteria are Moody's and standard and poor. These rating areas are associated with the creditor risk/credit risk are different at different rating criteria. We will discuss these risks one by one along with the rating method and their signs of representing these rating criteria's.
CREDIT RISK REPRENSATION BY MOODY,S.
Moody,s first method to reperesent investment grade is
Aaa:its mean that if you have this investment grade your company having higest investment quality.
Second investment grade given by moody, is
Aa:which mean very strong or high quality grade of investment for a company.
Third grade is
A; this is upper medium grade or we can say only strong grade of investment.
Fourth grade is
Baa;which means it is a medium grade of investment.
Fifth one is
Ba;this is the speculative or lower medium investment grade.
Sixth one is
B:which means this is speculative or lower grade of investment.
Seventh one is
Caa;this means default investment grade or poor investment grade.
Eight one is
Ca:this is the most speculative grade of investment.
Ninth one is
C:which means this grade is bank corrupt position of investment or no interest being paid on default
STANDARD AND POOR grading representation:
First one in this credit risk grading areas is
AAA represent highest quality of investment grade for a company.
Second one is in s&p
AA:shows very high or very strong quality of investment grade.
Third one is
A:shows us strong or upper medium investment grade.
Fourth one is
BBB:for medium grade identification in standard and poor.
Fifth one is
BB:is lwer medium grade
Sixth one
B;low grade of investment same as in Moody's.
Seventh one is
CCC:this is poor quality investment grade or may be default investment grade.
Eighth one is
CC:just hoping grade means most speculative rather than reality.
Ninth one is
C: sign of bank corrupt investment grade that the company is in danger of bank corruptly.
Tenth one is
D;in unable to pay interest in default investment grade.
By looking at this grading method we come to know that in Moody's basically three alphabet used for grading representations A B C but these are sub divided into categories for describing for effectively .basically A means high rating of investment grade and B means medium rating of investment grade and C means low investment grading D mean not reliable or this investment grade is not workable feasible.
These rating can also be represented by using positive or negative sigs like A++ or d-something like this now the PepsiCo's want to maintain its single A-senior debt rating and its net debt ratio we know after calculation in first question is 18.53%.this net debt ratio is lower if we compare this ratio of PepsiCo's with previous .net debt ratio of PepsiCo's was 22% two years ago and was 29% one year ago and 18%for the latest year. Higher net debt ratio means company have to pay debt along with interest as well. From this long term debt ratio we come to know that PepsiCo's is performing batter as compare to the previous years when net debt ratio was greater as compare to the latest year .and PepsiCo's want to maintain single A senior debt rating .it means PepsiCo's want to achieve strong or upper medium investment grade for this PepsiCo's have to reset its net debt ratios between 15% to 20% in order to maintain its realistic approach as compare to the previous year it is clear.
4: CONCLUSION.
After successful accomplishment of theory and calculation we can conclude that PepsiCo's seems not in better financial position as compare to the previous and as compare to the other companies as we have done net debt ratio and six different other ratios for question number two some seems good for PepsiCo's and some results are quite not in the favour of PepsiCo's financial position. As the use of these financial ratios is to check company financial position financial statement by calculating these financial ratios.
How the investors can face risk if they invest in PepsiCo's or if they invest in other companies as compare to PepsiCo's which type of risk they have to face or they have to keep ion their mind the investment grading as describe in question number three's discussion which grading areas as dangerous for companies.
For example in fixed charge coverage ratio PepsiCo's time to pay its debt is lower as compare to other companies. Which is not better for the health of a company .but if we compare it with other companies it is obvious that of coca cola it is greater mean this ratio is greater and of Cadbury and mc Donald is also slightly higher then PepsiCo's .but these are not real decision we are assuming this on the base of our calculation and may be the real fact is different from what we have calculated.
