Corporate finance is the field of finance dealing with financial decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize corporate value while managing the firm's financial risks. Although it is in principle different from managerial finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms.
The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, short term decisions deal with the short-term balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers).
PepsiCo is a world leader in expedient foods and beverages, with revenues of about $25 Billion and over 143,000 employees. PepsiCo brands are available in nearly 200 countries and territories. Many of PepsiCo's brand names are over 100-years old, but the company is fairly young. PepsiCo was found in 1965 through the merger of Pepsi-Cola and Frito-Lay. Its shares are traded predominantly on the New York Stock Exchange in the United States. The company is also scheduled on the Amsterdam, Chicago, Swiss and Tokyo stock exchanges. PepsiCo has consistently paid cash dividends since the business was found in 1965. It pays $0.60 per share in dividends to its stockholders. PepsiCo's success is the effect of finer products, high standards of performance, unique competitive strategies and the high reliability of its public.
Net Debt Ratio of PepsiCo.
L* = (D + PVOL - CMS)/(NP + D + PVOL - CMS)
D = $ 9453
PVOL = 5*479 = $ 2395
CMS = 1498 - (1498*25/100) = 1123.50
NP = 788*55.875 = 44029.5
L* = 9453+2395-1123.5/44029.5+9453+2395-1123.5
= 20%
A healthy net debt ratio is about 35% or below. The ideal net debt ratio for an organization must be at least 15%. Here, the company has a ratio of 20% which states that the organization is maintaining a handle on their finances and is in good control of debt, regardless of whether or not they have a lot of money, what the company does have is under control and ready to go where it needs to go.
Interest coverage ratio [ICR]
A calculation of a company's ability to meet its interest payments on debt. Interest coverage ratio is equal to earnings before interest and taxes for a time period, often one year, divided by interest expenses for the same time period. The lower the interest coverage ratio, the larger the debt burden is on the company. Also called as interest coverage.
ICR for PepsiCo
ICR = Earnings before interest and tax [EBIT] / Interest Expense
ICR = $ 3114 / $ 682 = 4.56
ICR for Cadbury Schweppes
ICR = EBIT / Interest Expense
ICR = $ 661 / $ 135 = 4.89
ICR for Coca - Cola
ICR = EBIT / Interest Expense
ICR = $ 4600 / $ 272 = 16.91
ICR for Coca - Cola Enterprises
ICR = EBIT / Interest Expense
ICR = $ 471 / $ 326 = 1.44
ICR for McDonald's
ICR = EBIT / Interest Expense
ICR = 2509 / 340 = 7.37
From the above status of ICR of various organizations in comparison with PepsiCo, the outcome of debt burden is nominal and better for PepsiCo as compared to other companies in the same line of industry.
Fixed charge coverage ratio
The fixed charge coverage ratio is a broader measure of how well a firm covers their fixed costs than the times interest earned ratio. The fixed charge coverage ratio includes lease payments as well as interest payments. Lease payments, like interest payments, must be met on an annual basis. The fixed charge coverage ratio is especially important for firms that extensively lease equipment. EBIT, Taxes, and Interest Expense are taken from the company's income statement. Lease Payments are taken from the balance sheet and are usually shown as a footnote on the balance sheet. The result of the fixed charge coverage ratio is the number of times the company can cover its fixed charges per year. The higher the number, the better the debt position of the firm, similar to the times interest earned ratio. Like all ratios, you can only make a determination if the result of this ratio is good or bad if you use either historical data from the company or if you use comparable data from the industry.
Fixed charge coverage ratio = EBIT + Fixed charge / Fixed charge + Interest
Fixed charge coverage ratio for PepsiCo
Fixed charge coverage ratio = EBIT + Fixed charge / Fixed charge + Interest
Fixed charge coverage ratio = $ 3114 + $ 479 / $ 479 + $ 682
Fixed charge coverage ratio = $ 3593 / $ 1161
Fixed charge coverage ratio = $ 3.09
The ratio is one way of analyzing gearing and reflects the vulnerability of a company to changes in interest rates or profit fluctuations. A highly geared company, which has a low interest cover, may find that an increase in the interest rate will mean that it has no earnings after interest charges with which to provide a dividend to shareholders.
Fixed charge coverage ratio for Cadbury Schweppes
Fixed charge coverage ratio = EBIT + Fixed charge / Fixed charge + Interest
Fixed charge coverage ratio = 661 + 25 / 661 + 135
Fixed charge coverage ratio = 686 / 796
Fixed charge coverage ratio = 0.861
Fixed charge coverage ratio for Coca - Cola
Fixed charge coverage ratio = EBIT + Fixed charge / Fixed charge + Interest
Fixed charge coverage ratio = 4600 + 0 / 0 + 272
Fixed charge coverage ratio = 4600 / 272
Fixed charge coverage ratio = 16.91
Fixed charge coverage ratio for Coca - Cola Enterprises
Fixed charge coverage ratio = EBIT + Fixed charge / Fixed charge + Interest
Fixed charge coverage ratio = 471 + 31 / 31 + 326
Fixed charge coverage ratio = 502 / 357
Fixed charge coverage ratio = 1.41
Fixed charge coverage ratio for McDonald's
Fixed charge coverage ratio = EBIT + Fixed charge / Fixed charge + Interest
Fixed charge coverage ratio = 2509 + 498 / 498 + 340
Fixed charge coverage ratio = 3007 / 838
Fixed charge coverage ratio = 3.59
Total debt to adjusted total capitalization ratio
The Long Term Debt to Total Capitalization Ratio measures the percentage of the company's Total Assets that are financed with long term debt. For this ratio, Long-Term Debt and Total Stockholders Equity are both considered long-term, as the equity provided by stockholders is part of the total capitalization of the company. A variation of the traditional debt-to-equity ratio, this value computes the proportion of a company's long-term debt compared to its available capital. By using this ratio, investors can identify the amount of leverage utilized by the company and compare it to others to help analyze the company's risk exposure. Generally, companies that finance a greater portion of their capital via debt are considered riskier than those with lower leverage ratios.
Total debt to adjusted total capitalization ratio = total debt / total adjusted capital
Total debt to adjusted total capitalization ratio for PepsiCo
Total debt to adjusted total capitalization ratio = total debt / total adjusted capital
Total debt to adjusted total capitalization ratio = 9543 / 39559.5
Total debt to adjusted total capitalization ratio = 0.241
Total debt to adjusted total capitalization ratio for Cadbury Schweppes
Total debt to adjusted total capitalization ratio = total debt / total adjusted capital
Total debt to adjusted total capitalization ratio = 1490 / 9650.59
Total debt to adjusted total capitalization ratio = 0.154
Total debt to adjusted total capitalization ratio for Coca - Cola
Total debt to adjusted total capitalization ratio = total debt / total adjusted capital
Total debt to adjusted total capitalization ratio = 1693 / 100810.15
Total debt to adjusted total capitalization ratio = .017
Total debt to adjusted total capitalization ratio for Coca - Cola Enterprises
Total debt to adjusted total capitalization ratio = total debt / total adjusted capital
Total debt to adjusted total capitalization ratio = 4201 / 3856.5
Total debt to adjusted total capitalization ratio = 1.09
Total debt to adjusted total capitalization ratio for McDonald's
Total debt to adjusted total capitalization ratio = total debt / total adjusted capital
Total debt to adjusted total capitalization ratio = 4836 / 33585.6
Total debt to adjusted total capitalization ratio = 0.144
A company with no debt may be missing an opportunity to increase earnings by financing projects that will give a better return than the cost of the debt. A little debt can be good for a company's earnings. On the other hand, a high debt-to-equity ratio translates into higher risk for shareholders since creditors are always first in line for compensation should the company go bankrupt.
The ratio of cash flow to total debt
The ratio of cash flow to total debt = Cash flow / total debt
The Cash Flow to Total Debt ratio measures the length of time it will take the company to pay its total debt using only its cash flow. This assumes all the cash flow would be used to pay off the debt, which is not realistically possible for a company to devote all of its cash flow in this way. However, this ratio is used as a "what-if" scenario as a basis to compare company results. A high or increasing Cash Flow to Total Debt ratio is usually a positive sign, showing the company is in a less risky financial position and better able to pay its debt load.
The ratio of cash flow to total debt for PepsiCo.
The ratio of cash flow to total debt = Cash flow / total debt
The ratio of cash flow to total debt = 3742 / 9453
The ratio of cash flow to total debt = 0.395
The ratio of cash flow to total debt for Cadbury Schweppes
The ratio of cash flow to total debt = Cash flow / total debt
The ratio of cash flow to total debt =492 / 1490
The ratio of cash flow to total debt =0.330
The ratio of cash flow to total debt for Coca - Cola
The ratio of cash flow to total debt = Cash flow / total debt
The ratio of cash flow to total debt =3115 / 1693
The ratio of cash flow to total debt =1.84
The ratio of cash flow to total debt for Coca - Cola Enterprises
The ratio of cash flow to total debt = Cash flow / total debt
The ratio of cash flow to total debt =644 / 4201
The ratio of cash flow to total debt =0.153
The ratio of cash flow to total debt for McDonald's
The ratio of cash flow to total debt = Cash flow / total debt
The ratio of cash flow to total debt = 2296 / 4836
The ratio of cash flow to total debt = 0.475
The ratio of cash flow to total long term debt
The ratio of cash flow to total long term debt = Cash flow / Long term Debt
This is 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. It is the indicator of financial leverage. The ratio shows long-term debt as a proportion of the capital available. The value of the ratio is determined by dividing cash flow by the sum of long-term debt.
The ratio of cash flow to total long term debt for PepsiCo
The ratio of cash flow to total long term debt = Cash flow / Long term Debt
The ratio of cash flow to total long term debt = 3742 / 8747
The ratio of cash flow to total long term debt = 0.428
The ratio of cash flow to total long term debt for Cadbury Schweppes
The ratio of cash flow to total long term debt = Cash flow / Long term Debt
The ratio of cash flow to total long term debt = 492 / 864
The ratio of cash flow to total long term debt = 0.569
The ratio of cash flow to total long term debt for Coca - Cola
The ratio of cash flow to total long term debt = Cash flow / Long term Debt
The ratio of cash flow to total long term debt = 3115 / 1141
The ratio of cash flow to total long term debt = 2.730
The ratio of cash flow to total long term debt for Coca - Cola Enterprises
The ratio of cash flow to total long term debt = Cash flow / Long term Debt
The ratio of cash flow to total long term debt = 644 / 4138
The ratio of cash flow to total long term debt = 0.156
The ratio of cash flow to total long term debt for McDonald's
The ratio of cash flow to total long term debt = Cash flow / Long term Debt
The ratio of cash flow to total long term debt = 2296 / 4258
The ratio of cash flow to total long term debt = 0.539
This coverage ratio compares a 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 the company's ability to carry its total debt.
Long Term Debt Ratio
This ratio is calculated to determine the company's leverage. Here the companies long term debt and the shareholders equity is taken into consideration for the calculation. Higher the ratio, higher is the companies leverage, but the companies with more long term debt are a liability to the company and therefore it is risky.
Long Term Debt Ratio for Pepsi Co
Long Term Debt Ratio = Long term debt / Shareholders Equity
Long Term Debt Ratio= $ 8747/ $ 1498
Long Term Debt Ratio = 5.84
Long Term Debt Ratio for Cadbury Schweppes
Long Term Debt Ratio = Long term debt / Shareholders Equity
Long Term Debt Ratio =$ 864/$ 129
Long Term Debt Ratio =6.70
Long Term Debt Ratio for Coca- Cola
Long Term Debt Ratio = Long term debt / Shareholders Equity
Long Term Debt Ratio =$ 1141/$ 1315
Long Term Debt Ratio =0.87
Long Term Debt Ratio for Coca- Cola Enterprises
Long Term Debt Ratio = Long term debt / Shareholders Equity
Long Term Debt Ratio =$ 4138/$ 8
Long Term Debt Ratio = 517.25
Long Term Debt Ratio for McDonalds
Long Term Debt Ratio = Long term debt/ Shareholders Equity
Long Term Debt Ratio =$ 4258/$ 335
Long Term Debt Ratio =12.71
Long term debt ratio indicates the proportion of debt and equity the firm uses to finance its assets to run the operation of the company. The PepsiCo has an average level leverage of the company, which is neither too risky nor safe. This can also said as ideal leverage level compared to the risk that other companies bare.
PepsiCo measures financial leverage on both a market-value and an historical-cost basis. PepsiCo believes that the most meaningful measure of debt is on a net basis. PepsiCo's capital investing has reflected strategic investments in both industry segments as well as acquisitions and investments in unconsolidated affiliates. Here, the company has a ratio of 20% which states that the organization is maintaining a handle on their finances and is in good control of debt, regardless of whether or not they have a lot of money, what the company does have is under control and ready to go where it needs to go.
Since the company aim to maintain a single A senior debt rating system, the present rate of ratio seems to be apt as it falls in the prescribed limit percentage of the net debt ratio i.e., the rate falls within the limit of 25% of the standard ratio of net debt. A firm can choose a debt rating objective. Such a choice involves a decision about
(1) The chance of future financial distress and
(2) The desire to maintain access to the capital markets.
When it looks like a firm could gain value from raising its proportion of debt financing but it chooses not to, because it has a higher debt rating objective, the value that is missed can be viewed as a "margin of safety." The desired margin of safety is determined by how much risk of future financial distress, or restricted market access, the firm is willing to bear. A single-A rating would seem to be a reasonable rating target for PepsiCo, but some firms are more or less risk averse than this standard implies.
A firm can evaluate the impact of alternative capital structures using sensitivity analysis. Here, the firm PepsiCo calculates the interest coverage ratio, fixed charge coverage ratio, and debt coverage ratios to determine whether they are able to maintain a proper handle over the net debt coverage to attain the single - A rating standard.
