Corporate finance over the last few years has really evolved, decisions regarding economic growth, resource allocation in projects by organiation requires a through systematic, analytical approach along with sound judgment. Investment (projects) appraisals and capital budgeting involves in-depth assessing of financial feasibility of the projects and the best recommended financials tools are Discounted Cash Flow (DCF), as this technique can effective be used to calculate the and carry out a costs and benefits analysis in different time periods and moreover most importantly the calculation of Net present value (NPV) uses DCF to project decisions, which would focus on the ones that generate maximum revenue and create value for the organisation undertaking the project. The costs and benefits associated with development programs can be either be social, environmental or economic in nature, but as often found has the involvement of all the three elements.
This investment review report, would look into the investment proposal made by Wonderland confectionaries Ltd, and involves diversification in business and investment in a theme park. Wonderland intends investing a total of £500 million in the project and wants to ensure the feasibility of the investment both in terms of financial and non-financial terms.
This report on the basis of the information provided by Wonderland would be using the Net Present Value (NPV) as the financial tool to calibrate the financial feasibility of the project, undertake and consider the project appraisal options and at the end recommend and comment on the overall feasibility of the proposed investment.The key objective of this report is to analyse, calculate and comment on the overall cost, in terms of employee cost, operations and insurance cost along with other overheads, also considering the source and cost of finance and its returns in regards to the expected revenue generated and the cola reflect and comment on the feasibility of the investment.
PepsiCo is found in the 1965 through the merger of the pepsi-cola and Frito Lays. Tropicana was acquired in 2001and PepsiCo merged with the Quaker Oats company including Gatorade, in 2001. PepsiCo’s main headquarter in New York. Now at present time there are around 200 brands available in the market. All around the world it is the 2nd number company in soft drinks. In 1987 it PepsiCo was ranked 29th in the fortune 500 whereas the cola was at 54th ranked. It is the most successful consumer product company in the world. Now it consist of Frito lays, Pepsi colas company and Tropicana products. Some of the established consumed brands are Doritos, Fritos, ruffles and lays (snacks food) and Pepsi cola; diet Pepsi and mountain dew (soft drinks).
We report our operations results as follows, by six segments:PepsiCo Americas Beverages (PAB)Frito-Lay North America (FLNA)Quaker Foods North America (QFNA)Latin America Foods (LAF)EuropeAsia, Middle East & Africahttp://www.pepsico.com/Investors/Corporate-Profile.htmlPepsiCo mission is:”To be the world’s premier consumer Products Company focused on convenient foods and beverages. We seek to produce financial rewards to investors as we provide opportunities for growth and enrichment to our employees, our business partners and the communities in which we operate. And in everything we do, we strive for honesty, fairness and integrity”.
Pepsico’s capital structure Objectives:-
To evaluate the standard of behavior and general directions in the corporate finance.To find out and assess the nature of different sources of corporate finance.To express deep and proper knowledge in the area of corporate finance development.To express effective pathway to examine the corporate finance students.Possess the ability to plan and effective tools at professional level; make decisions in complex and able to frhold context of using reasonable decision making approach.Brief introduction to the PepsiCo capital structure:
PepsiCo is the world leader in convenient food, snacks and beverages with revenue more than $60 billion and over 285,000 employees. It generates sales at the retail level of $98 billion. Over the next 30 years, net sale grew up at an average compound rate 15% per year, with the sale doubling about every five years.PepsiCo has book liability of $18.1billionand book value for stockholders’ equity of $7.3 billion. The market value of stockholders’ equity is much greater. With the 788million common shares outstanding and a market share price is of $55.875,the market value of its stockholders’ equity is $44.0 billion, roughly six times its book value.Pepsico’s capital investing has reflects strategic investment in both industry segments as well as acquisition and investment in unconsolidated affiliates.pepsico expects its investments to generate cash returns in excess of its long term cost of capital, which is estimates to be approximates 10%. About 75% of PepsiCo’s total acquisition and investment activity represents international transactions.
PepsiCo’s vision and mission:-
Our mission is to be the world’s premier consumer Products Company focused on convenient foods and beverages. We seek to produce financial rewards to investors as we provide opportunities for growth and enrichment to our employees, our business partners and the communities in which we operate. And in everything we do, we strive for honesty, fairness and integrity.
“PepsiCo’s responsibility is to continually improve all aspects of the world in which we operate – environment, social, economic – creating a better tomorrow than today.”
Our vision is put into action through programs and a focus on environmental stewardship, activities to benefit society, and a commitment to build shareholder value by making PepsiCo a truly sustainable company.http://www.pepsico.com/Company/Our-Mission-and-Vision.html
Leverage is the relationship between debt financing and equity financing, also known as the debt-to-equity ratio. A method of corporate funding in which a higher proportion of funds is raised through borrowing then stock issue, the use of fixed costs in order to increase the rate of return from an investment.Financial leverage is the ability of the firm to use fixed financial charges to magnify the effect of change in earning per share. It indicates the effects on earning due to rise of fixed cost funds.financial leverage: operating income/net incomeThe tool which we used to identify the fianancial leverage of pepsico’s are the market value and historical cost and net debt play a prominent role in quantifying the financial leverage .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.
The most important factor before investing the money in a company is to consider that how much debt a company is carrying. It is helpful to find out the net debt of a company. After calculating the net debt ratio people who will be able to find out the financial position of the company in which they going to invest in.As per given in the statement:-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.In order to determine the net debt ratio, we have to put the values in the formula mentioned 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* = $0.19After ascertaining the net debt ratio, we can say that it has increased by 1% from last year and if we look at debt ratio graph above, we see that PepsiCo’s net debt ratio kept on fluctuating at a higher rate in last few years. But this year it has increased only by 1% which is good for the company.
For each firm in the table 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 rate of cash flow to long term debt, and the ratio of cash flow to total debt.
ANNUAL RENTAL EXPENSE
CASH AND MARKETABLE SECURITIES
MARKET VALUE OF LONG-TERM DEBT
MARKET VALUE OF TOTAL DEBT
ANNUAL CASH FLOW
MUNBER OF SHARES (MILLIONS)
YEAR-END SHARE PRICE
Interest Coverage Ratio = EBIT / Interest Expense