PepsiCo Inc. was started in year 1965 by the merger of Pepsi-Cola and Frito-lays. They acquired the Tropicana in year 1998 and it merged with the quaker oats company in year 2001 which also include gastorade. The pepsico consist of Pepsico Beverage North America,Frito Lay North America,Pepsico International and Quaker Foods North America. Its brands is in mostly 200 countries and territories .And they actually raise their sales at the retail level of about $92 billion.
After merging of Pepsi-Cola and Frito-Lay Inc. the net sales grew at an average rate of 15% per year with doubling of their sales about every five year,over the next thirty years of their merger.
The liability which the pepsico booked is $18.1 billion and the book value of the stock holder's equity of $7.3 billion . In fact the market value of PepsiCo's stock holders is much greater.
Pepsico is the leader of world in the business of snack food and it is almost number one in soft drinks. It has more than twenty four full-established consumer brands which includes Doritos, Fritos, Ruffles, and Lay's (snack foods); and Pepsi-Cola, Diet Pepsi, and Mountain Dew (soft drinks).
There outstanding common shares are around 788 million and it has $55.875 as it share price, which has stockholders' equity of $44.0 billion as its market value which is almost six times its book value.
The main aim of PepsiCo's is to become the world's premier consumer products company who focused on consumer convenient foods and beverages. They look to produce healthy financial rewards to investors as they provide chances for growth and enhancement to their employees, their business partners and the communities in which they operate. They focus to act with fairness,integrity and fairness and to follow the regulations and laws of the countries where they do business.
PepsiCo's History
In year1898, a young named Caleb Bradham pharmacist started experimenting with combinations of syrups ,spices and juices, trying to create a new refreshing drink. He succeedly inventing the beverage which is now called as Pepsi Cola all around in the world.It has been bringing refreshments and funs for its customers over many years with its large range of snacks and drinks.Untill year 1997, it also owned Pizza Hut, Taco Bell and KFC.For expanding their business globally Pepsico has recently taken endeavours with the motive of achieving higher sales. It has started taking modern techniques of its abroad beverage operations by keeping in mind abroad opportunities.They began by reforming the packaging of firm's soft drink bottles and cans by changing the red, white and blue colour to all new blue design cans and bottles packaging. In the end of 2005, Coca-Cola was put behind by Pepsico for the first time in 112 years in the market position since then both companies started to compete with each other.
In year 2010, two biggest bottlers is purchased by PepsiCo - Pepsi Bottling Group and PepsiAmericas - by this transaction the organization importantly strengthened its beverage business in Europe and North America.
Corporate Structure
PepsiCo is comprised of four business units:
PepsiCo Americas Beverages (PAB)
PepsiCo Americas Foods (PAF)
PepsiCo Europe
PepsiCo Asia, Middle East, Africa (AMEA)
Brands
PepsiCo offers the world's largest portfolio of billionâ€dollar food and beverage brands, including 19 different product lines that each generates more than $1 billion in annual retail sales. Their brands stand for quality and are respected household names. They include:
Guiding Principles And Trends Of Pepsico Inc.
They came up with their six principles.
They believe in:
Care for their customers, their consumers and the world where they live in.
They came up with solutions which benefits them and their surroundings.Their success realy depends on a thorough knowledge,understanding of their customers, consumers and communities. To show this spirit of eager and generosity, they go to that much extent which actually shows, they realy care.
They sell only those products on which they can say that's their product means they realy can be proud of.
They tested the true standards in their own ability to consume the product and personally endorse the products they sell off.Their confidence helps them to ensures the quality of their products, from that very moment they purchases the ingredients till the moment it reaches to the consumers.
Follows the path of candor and truth.
They tell the whole story rather just telling only individual goals. Add on to being more clear, accurate and honest, they take the responsibility to ensures their communications should understood.
Short term and long term balances.
For taking every decision they weigh both short-term and long-term benefits and risks. By maintaining the balance between this they get helps to sustain their growth and ensures that their solutions and ideas are relevant both in present and in the future.
Achieve wins with inclusion and diversity.
They hire people from diverse backrounds,ways of thinking and traits.Their backround and diversity brings new ideas,new perspective into the work environment and innovates as well as the ability to find out new market innovations and opportunities.
Give respect to others and togetherly succeed.
Their success depends on mutual understanding between inside and outside the company. It requires employees who has the capability to work as a part of team or in any informal collabration. While their company actually built on individual success or exellence, They also knows the value and importance of teamwork in accomplishing their goals.
Corporate Governance of Pepsico
It has adopted very strict corporate standards which govern their operations and ensures accountability for their actions.
The policies guiding and processes for their business..
Policies
Policy
It is essential in a democratic society that citizens participate in their government. The health of our society depends on all of us being well informed and responsibly engaged in the political process.
The PepsiCo Concerned Citizens Fund (CCF) receives voluntary employee contributions to make political campaign contributions to U.S. federal and state political parties, committees and candidates. The CCF and the company's corporate contributions provide an important opportunity for PepsiCo, and its employees, to participate in the democratic process.
We believe that providing financial support to responsible pro-business candidates is an important means by which we help improve the business climate, our quality of life and the society in which we live, enabling us to succeed as a company committed to integrity, innovation and value.
The following criteria will be used in connection with all contributions:
The candidate's or entity's commitment to improving the business climate;
The candidate's or entity's position or voting record on issues of direct concern to PepsiCo;
The location of PepsiCo facilities or employees within the candidate's district or state;
The candidate's position on key committees where legislation of importance to PepsiCo is considered or the candidate's demonstrated leadership - or potential for leadership - within the U.S. Congress or a State Legislature;
The candidate's need for campaign financial assistance.
The public policy issues we face as a company and our engagement in the public policy process, including contributions as part of the political process, are discussed with and reviewed by the Nominating and Corporate Governance Committee of the company's Board of Directors.
Details on PepsiCo's political contributions will be posted on its website on an annual basis. This will occur in conjunction with the release of PepsiCo's Corporate Citizenship Report each year.
All contributions and support of U.S. or state political parties, committees or candidates from the CCF or corporate funds must be made in accordance with applicable campaign finance and disclosure laws.
Coercion of any employee to contribute to the CCF or to make any political contribution of any kind is unacceptable.
Our employees have the right to be engaged in the political process in their individual capacity as they see fit, and make political contributions of their own time and money to the candidates or parties of their choice. Of course, those efforts must not in any way suggest PepsiCo's support.
Management and supervisory employees who are citizens of the United States may voluntarily contribute to the CCF.
PepsiCo employees must obtain approval of the Corporate Vice President Public Policy & Government Affairs before making political contributions of corporate funds.
All contributions must be reviewed by the corporate law department to ensure legal compliance.
All payments from the CCF to support U.S. or state political parties, committees or candidates must be approved by the CCF Executive Committee.
http://www.pepsico.com/Company/Corporate-Governance/Policies.html
Importance Of Finance
Cash or Capital is the necessity of starting or running the business.There is no chance of business survival without cash/capital.There are lots of uses of finance-advertising,salaries,expansion,paying interests on loan,purchase of raw materials and assets,etc.
There are many sources of finance available to business but it is the duty of finance decisioner to decide/choose from different sources of finance.
Internal Sources
Trade Credit,Profits or Retained Earnings,Sale of Assets,Stock reducing,etc.
External sources
Building Societies,Factoring Services,Issue of Shares and Issue of Debentures,Personal Savings,Commercial Banks,etc.
Strategies for Growth
PepsiCo has several key strategies for longâ€term, sustainable growth, including:
Building the company's global macrosnack portfolio
Responsibly and profitably growing the company's beverage business
Building the company's nutrition business, in dairy, grains, fruits and vegetables
Leveraging the company's unique "Power of One" selling model across foods and beverages
Delivering on environmental sustainability commitments
Strengthening and refreshing the organization to prosper in a changing environment
Ensuring prudent, responsible financial management
Capital Spending
Capital spending is an outlay that provides benefits for long terms. Net cash used for investing in activities was $2.4 billion in year 2009, It done for getting returns by the investment made. For generating future surplus revenue of its long term cost of capital PepsiCo's do capital spending, which is 10%.About 75% of PepsiCo's investment activitiy represents international transactions that is why PepsiCo focuses more on its international investments. Pepsico focuses more in opportunities to regain its spot in industry segments,snack foods and beverages all the way through its planned acquisitions.
Their Commitment
They are committed to delivering sustained growth(long time growth) through empowered people acting responsibly(maturily) and building trust.
Broad Objectives
Broad Objectives
Remove
Eliminate environmentally sensitive materials
Reduce
Achieve Best-in-Class material optimization or performance criteria for packaging
Recycle
Achieve Best-in-Class recycled content for Beverage primary packaging
Increase recyclability of rigid (Beverage) packaging
Increase recycling of post-industrial packaging related to PepsiCo packaging (trimmings, etc at suppliers)
Renew
Innovate and develop commercially viable biodegradable packaging (Snacks & Foods)
Reuse
Increase reuse of consumer, operational or transport packaging
PROTECTION AND PROPER USE OF COMPANY ASSETS
PepsiCo's technological resources, including computers, voicemail, e-mail and Internet access, are to be used for proper purposes in a manner consistent with the Code and all other Company policies, including those related to discrimination, harassment and intellectual property. As with all PepsiCo assets, these resources are to be used for business purposes.
It is generally not PepsiCo's intent to monitor Internet access or messages on the voicemail and e-mail systems. However, the Company reserves the right to do so in appropriate circumstances, consistent with applicable laws and regulations.
If you have access to PepsiCo information systems, you are responsible for taking the precautions necessary to prohibit unauthorized access to the system. You should safeguard your passwords or other means of entry.
Employees must not reproduce software assets licensed to PepsiCo, use illegally obtained software or distribute the original software media or unauthorized copies of software which the Company does not own or license.
ACCOUNTS AND RECORD-KEEPING
We will continue to observe the most stringent standards in the keeping of our financial records and accounts. Our books and records must reflect all components of transactions, as well as our own standard of insisting upon an honest and forthright presentation of the facts.
We will ensure that the disclosures we make in reports and documents that we submit to the Securities and Exchange Commission and in other public communications are full, fair, accurate, timely and understandable.
Top Leaders In The Growth Of PepsiCo
ï‚·
Indra K. Nooyi
Chairman and CEO, PepsiCo
ï‚·
John Compton
CEO, PepsiCo Americas Foods
ï‚·
Massimo d'Amore
CEO, PepsiCo Beverages Americas
ï‚·
Eric Foss
CEO, Pepsi Beverages Company
ï‚·
ZeinAbdalla
CEO, PepsiCo Europe
ï‚·
Saad Abdul-Latif
CEO, PepsiCo Asia, Middle East, Africa
http://www.pepsico.com/Company/Leadership.html
It is the responsibility of each employee to uphold these standards. Appropriate records must be kept of all transactions and retained in accordance with PepsiCo's Records Management Policy and Records Retention Schedule. Employees are expected to cooperate fully with our internal and external auditors. Information must not be falsified or concealed under any circumstance, and an employee whose activities cause false financial reporting will be subject to disciplinary action, including termination.
Financial Leverage
The dictionary meaning of leverage is burden but in terms of finance it stand for the burden of borrowed money and the organization can unable to pay their debt if this burden increases.The company's goodwill and market value(share price) will result in downfall if the organization is unable to pay their debt in result of this the organization will hardly survive in the competitive market.
Financial leverage is formulydefined[8] as:
There are three types of Leverages:
1) Operating Leverage
2) Financial Leverage
3) Combined Leverage
For evaluating the financial leverage of Pepsico the tools they used are Market Position(Share value),historical cost and net debt which actually plays an important role in finding the financial leverage of the company.
Questions
1 Question
Calculate PepsiCo's net debt ratio, assuming that the present value of operating leases is five times the annual rental expense and that remitting the cash and marketable securities to the United States reduces them by 25% due to taxes and transaction costs.
When people think to invest in any of the organisation, the most important factor which they looking for is how much the debt the organization is holding. The net debt ratio which actually tells the position of the organization or we can say its helps in calculating the net debt of the organisation. By evaluating the net debt ratio of the organisation people can analyse the financial postion of it before investing in it.
The net debt ratio, L*, is defined as
L* = (D + PVOL - CMS)/(NP + D + PVOL - CMS)
Where D is the total market value of debt,
PVOL is the present value of operating leases commitments which is five times the annual rental expense,
CMS is cash and marketable securities (net of the cost of remitting these funds to the United States),
N is the number of common shares,
And P is the price of common stock.
For calculating the net debt ratio,i have to put the respective values in the formula given above.
L* = (D + PVOL - CMS)/(NP + D + PVOL - CMS)
L* = ($9453 + [$479 x 5] - $1498)/([788.00 x $55.875] + $9453 + [$479 x 5] - $1498)
L* = ($9453 + $2395 - $1498)/($44029.5 + $9453 + $2395 - $1498)
L* = ($10350)/(54379.5)
L* = $0.19
After calculaing the net debt ratio, I can say that the current net debt ratio is increased by one percent from previous year and if i look on the graph of debt ratio given above, It shows the net debt ratio of Pepsico is keeps on fluctuating at a high pace rate in previous years. But in current year it has increased only by 1% which is realygood for the organisation.
FIRM
DEBT RATING (MOODY'S/S&P)
ANNUAL EBIT
ANNUAL RENTAL EXPENSES
ANNUAL INTREST
CASH AND MARKET ABLE SECURITES
MARKET VALUE OF LONG-TERM DEBT
MARKET VALUE OF TOTAL DEBT
ANNUAL CASH FLOW
NUMBER OF SHARES (MILLIONS)
YEAR-END SHARE PRICE
PepsiCo
A1/A
$3114
$479
$682
$1498
$8747
$9453
$3742
788.00
$55.875
Cadbury Schweppes
A2/A
661
25
135
129
864
1490
492
247.75
35.125
Coca-Cola
Aa3/AA
4600
__
272
1315
1141
1693
3115
2504.60
40.250
Coca-Cola Enterprises
A3/AA-
471
31
326
8
4138
4201
644
385.65
10.000
McDonald's
Aa2/AA
2509
498
340
335
4258
4836
2296
699.70
48.000
Table 1: contains the selected information concerning PepsiCo and comparable firms (Dollars in millions).
2 Question
For each firm in table given above, calculate the interest coverage ratio, the fixed charge coverage ratio, the long-term debt ratio, the total debt to adjusted total capitalization (recall that adjusted capitalization includes short-term debt), the ratio of cash flow to long-term debt, and the ratio of cash flow to total debt.
FORMULAS
Interest Coverage Ratio = EBIT(Earning before interest and tax) / Interest Expense
Fixed Charge Coverage Ratio = EBIT(Earning before interest and tax) + Fixed Charge(before tax)/Fixed Charge(before tax + interest)
Long Term Debt Ratio = long term debt / long term debt + equity
Total Debt to Adjusted Capitalization = Total Debt / Adjusted Capitalization
Ratio of Cash Flow to Long Term Debt = Cash flow / Long term Debt
Ratio of Cash Flow to Total Debt = Cash flow / Total Debt
FIRM
INTEREST COVERAGE RATIO
THE FIXED CHARGE COVERAGE RATIO
LONG-TERM DEBT RATIO
THE TOTAL DEBT TO ADJUSTED TOTAL CAPITALIZATION
THE RATIO OF CASH FLOW TO LONG-TERM DEBT
THE RATIO OF CASH FLOW TO TOTAL DEBT
Pepsico
$ 4.57
$ 3.09
$ 0.17
$ 0.18
$ 0.43
$ 0.40
Cadbury Schweppes
$ 4.90
$ 4.29
$ 0.09
$ 0.15
$ 0.57
$ 0.33
Coca-cola
$ 16.91
$ 16.91
$ 0.01
$ 0.02
$ 2.73
$ 1.84
Coca-cola enterprises
$ 1.44
$ 1.41
$ 0.52
$ 0.52
$ 0.16
$ 0.15
Mcdonald's
$ 7.38
$ 3.59
$ 0.13
$ 0.14
$ 0.54
$ 0.47
Table 2: shows the ratio calculations of all the firms.
3 Question
Suppose PepsiCo's real objective is to maintain a single-A senior debt rating. Does its net debt ratio target seem reasonable, or would you recommend a different target?
Senior debt refers to that type of debt which holds higher priority debt companies with other kinds of debts at the time of closure/dissolution of an organization. It refers if the the organization is going to bankrupt ,the holder of senior debt should be paid firstly before the payment of other debts. This type of debt is considered less risky in comparison to other kinds of debts. There are different tupes of debts. Debts may be private investor who invest into an organization or it may be loan from bank,etc.
Reimbursement Of Debt
Reimbursement of Debt refers to make payment of debt. Mostly debts came up with guarantee to repay it. The borrower have to pay the debt to the lender and even sometimes an interest on loan paid by borrower to lenders which comes as a part of gain to lender. There are so many lenders who are ready to lend money to the borrowers but the organisation/company mostly chooses those lenders/lender who gave them low Rate Of Interest(ROI) or who gave them best deal in other word.
Every organization/company would like to stands high or we can say would like to be on topmost position in the market. It is only can be possible by maintaining financial position in the market.
Conclusion and Recommendations:
If the law of the conservation of value works when you add up cash flows,it must also work when you subtractthem. Therefore ,financing decision that simply divide up operating cash flows don't increase overall firm value.This is the basic idea behind Modigilani and Miller's famous Preposition 1: In perfect markets changes in capital structure do not affect value.As long as the total cash flow generated by the firm's assets is unchanged by capital structure,value is independent of capital structure.The value of the whole pie does not depend on how it s sliced.
Of course,MM's preposition is not The answer ,but it does tell us where to look for reasons why capital structure decision may matter . Taxes are one possibility . Debt provides a corporate interest tax shield ,and this tax shield may more than compensate for any extra personal tax that the investors has to pay on debt interst. Also ,high debt levels may spur managers to work harder and to run a tighter ship. But debt has its drawbacks if it leads to costly financial distress.
Brealey,Myers, and Allen Ninth Edition (2008) Principles of Corporate Finance
Learning Outcomes:
This assignment realy has given me the chance to bring my academic knowledge to practicle implementation ,solutions,recommendations,mathematical calculations,ratio analysis and thoughts involved in obtaining my views has realy broadened my knowledge,skills,horizon and this will further help me in corporate financing decisions,investment decisions and capital funding decisions. This report has given me great learning towards capital structure of companies. If in my academic life I will get a chance I will definitely do a deep study in this area of finance either by my some case courseworks or dissertation and reading of books in relation to this.
