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Corporate Finance And Ratio Analysis Of Pepsico Finance Essay

INTRODUCTION:

The study is based on the financial analysis of Pepsi co ltd, also this is to find the global business positing of the company in the market. .it else are project different pictures based on the mind on the observation these observer are different people who are related to company in some way like managers is a person who as to observe the growth of the company to frame policy to improve it.

ABOUT PEPSI CO:

Pepsi co is one of the leading hygienic food corporation, due to lot of invest to produce the good, hygienic, and use full products to the customers. They started their business in the year of 1965, Initially they are developed step by step and get the profit of 15%, after, they work full-fledged, encouraging their employees, than they get profit as double the term of they get initially.

After they are very much of interest in develop their business in worldwide and their market shares also increases. Finally they successes, they develop their business in the world wide in the last few years.

Now they are the leading competitors, and they need to repay the money if they borrow from any bank, and they must have the liquid money in hand because, sometimes they need to face the critical situation at any time or else suddenly some fluctuation will happen.

Net Debt Ratio:

CALCULATION

D + PVOL - CMS

L* = _________________

NP + D + PVOL – CMS

D = total market value of the net debt

PVOL = the present value of the operating lease commitments

CMS = is the cash and marketable securities

N = is the number of common shares

P = is the common stock price

According to case study of the PepsiCo,

D = 9453 $

PVOL = 479 * 5 = 2395

CMS = 1498 (1498*25/100) = 1123.50

N = 55.875

P = 790

NP = 55.875 * 790 = 44, 141.25

9453+ 2395 – 1123.50

Net debt ratio = ____________________________ = 19.54 %

44,141.25 + 9453 +2395 – 1123.50

Ratios

How it Works

PepsiCo

Cadbury

Schweppes

Coca-Cola

Coca –Cola

Enterprise

Mac Donald

Interest Coverage ratio

EBIT/INTEREST

4.8 %

4.9 %

16.9 %

1.4 %

7.3 %

Fixed charge coverage ratio

EBIT +Fixed cost before tax/interest+fixed cost before tax

3.09 %

4.2 %

16.9 %

14.06 %

3. 58 5

Long-Term debt ratio

Long-term debt ratio/longterm debt+ Equtiy (No of shares * No of Prices)

1.657 %

.9031 %

.9031 %

51.76 %

11.251 %

Total debt to Adjusted to total capitalization

Long-term debt+short term/Long-term debt+short-term debt +common stock

17.6 %

14.61 %

1.65 %

15.21 %

12.6 %

Ratio of cash to long-term debt

Cash flow/long-term debt

42.7 %

52.694 %

27.3 %

15.56 %

53.9 %

Ratio of cash to total debt

Cash flow/Total debt

39.55 %

33.02 %

18.39 %

15.32 %

47.47 %

Interest coverage ratio = EBIT/INTEREST

= 3114/682

PepsiCo interest coverage ratio is = 4.6%

Fixed charge coverage ratio = EBIT+ Fixed cost before tax/interest+ fixed cost before tax

= 3114+479/682+479

Fixed charge coverage = 3.09%

Long term debt ratio = Long-term debt / long term debt+ Equity (No of shares * share Prices)

= 8747/8747+ (788.00*55.875)

Long term debt ratio = 1.657%

Total debt to Adjusted to total capitalization = ( Long-term debt+ short term / Long-term debt+

Short-term debt +common stock )

=9453/9453+ (788.00*55.875)

Total debt to Adjusted to total capitalization = 17.6%

Ratio of cash to long-term debt = Cash flow/long-term debt

= 3742/8747

Ratio of cash to long-term debt = 42.7%

Ratio of cash to total debt = Cash flow/Total debt

= 3742/9453

Ratio of cash to total debt = 39.55%

The net debt ratio is mainly based on the following steps

A measure of a company’s ability to repay all debt if it were immediately or for a long time period. Many investors use net debt in making investment decisions, as it gives them an idea of a company’s financial status and its level of leverage compared to liquid assets, investors often company’s net debt to others in the same business.

It can be calculate by

D + PVOL - CMS

L* = _________________________

NP + D + PVOL – CMS

The Net Debt ratio of the PepsiCo is 19.45% so the company overall debt profit is high. The company has long term and the short term debt which is 8,747 $ & 706 $ while compare with the last year the debt ratio is increases, this shows the improvement in the balance sheet.

debt graph.jpg

From the above graph we can easily find out the debt ratio for the last few years, and easily compare to the last years and tell that they are still developing.

In other aspects PepsiCo too much long term debt will find themselves with interest, a risk having too little capital and ultimately bankruptcy.

In other words the ratio of debt of PepsiCo is the analysis of balance sheet to show the amount of protection available to creditors. The 19.54 % ratio indicates that the business has a lot of risk because if more principal and interested on its obligation. Its depends upon the share holders are reluctant to give financing with a high debt position. However, the status of debt varies on the type of business. According to PepsiCo it has liquid cash which can maintain the share holders compensation.

Usually old value is used to measure a firms of debt security in calculating the ratio. Market value may be more realistic measures, anyhow because it takes account into current market conditions.

Measure of a firms assets financed y debt and therefore, a measure of its financial risk. PepsiCo generally the better off the firm.

RATIO ANALYSIS

Ratio is a general term; it is obtained by one value divide by another. It is denoted in the form of percentage of profit, there are certain ratio’s to calculate. Ratio analysis is mainly used when compression made with different companies. Here we have to calculate six different ratios to PepsiCo and we going to compare with other companies.

Interest coverage ratio

Fixed charge coverage ratio

Long term debt ratio

Total debt to adjusted total capitalization

Ratio of cash flow to long term debt

Ratio of cash flow to total debt

INTEREST COVERAGE RATIO

It is a type of gearing ratio, (i.e.) it tells to extent business from current finance by the outside factor for the accessing risk, because how much they we can tell how much is the own money we have inside huge amount of outside finance, the currently profitability decreases for the finance raises very high, in that situation they can’t pay back. The company will go bank erupt.

Interest Coverage Ratio = EBIT (earnings before interest tax) / Interest

For PepsiCo is 4.6 %

EBIT is $ 3,114

Interest is $682, finally

Interest Coverage Ratio 4.6

For the Cadbury Schweppes

EBIT is $ 4,600,

Interest is $ 272,

Interest coverage ratio is 4.9%

For McDonald

EBIT is $2,509,

Interest is 340, finally

Interest coverage ratio is 7.3%.

From the above the PepsiCo is better than others; this means more strong in earning to back the interest the only way to solve this problem, company should increase the sales and repayment to the concern parties. Pay back ratio comes down means the company profit will be down and it will leads to company to get bank tarp. The only way to solve the problem (i.e.) it should try to increase the shares and payback certain amount to the leaders thus, once the depth are come down. We can Pay Back within the time period to the bank.

TOTAL DEPTH TO TOTAL CAPITAL

It measures the company growth, that is how fast company wants to grow. If receives lot of depth and expanses business it’s going it has lot of risk and it has to pay back to outside financers, that means the cost of depth is greater than the earning from the depth profit.

Total debt to total capitalization= (Long-term debt+ short term)/(Long-term debt+

Short-term debt) +common stock

PepsiCo

Market Value of Total Depth is 9453,

No of Shares is 788

Year stock price is 55.875

Total Debt to Total Capitalization is 17.6%

Cadbury Schweppes

Market Value of Total Depth is 1490,

No of shares 247.75

Year Stock Price 35.125

Total Debt to Total Capitalization is 1.65%

McDonald

Market Value of Total Depth is 4836,

No of shares 699.70

Year Stock Price 48

Total Debt to Total Capitalization is 12.6%

From the above data PepsiCo has 17.6; it’s more high compare to other companies in the field. In PepsiCo they maintain gradual level to reach the 17.6%. If the debt is higher than the capital risk, PepsiCo should avoid the risk by reducing the debt. PepsiCo have to reduce their debt ratio then risk become less .By this, we can reduce the Total debt to total Capitalization.

FIXED CHARGE COVERING RATIO [1] 2

Fixed charge coverage ratio is a strong reason for company will face the future problems, If sales drop in any environment. It is especially important for a company who spends more investments.

Fixed charge coverage ratio= (EBIT + Lease Expenses) / (Lease Expenses + Interest)

The result of the fixed charge coverage ratio is the number of times the company can cover its fixed charges per year.

PepsiCo

The EBIT is $ 3,114,

The Fixed Cost is $ 479,

The Interest is $682,

The Fixed Charge Coverage ratio is 3.09%

Cadbury Schweppes

The EBIT is $ 661,

The Fixed cost is $ 25,

The interest is $ 135,

The Fixed Charge Coverage ratio is 4.2%.

McDonald

EBIT is $2509,

The interest is $340,

The fixed cost is 498,

The Fixed Charge Coverage ratio is 3.58 %

From the above PepsiCo Fixed Charge Coverage is very low comparing to others, to improve that fixed charge coverage ratio Pepsi co must develop the sales and profit simultaneously.

Long Term Debt Ratio [3] 

Long Term Debt Ratio shows the financial leverage of firm, If a Long Term Debt is outstanding mean, the company can run in the profit side. 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 risk exposure.

The Long Term debt ratio = long Term Debt / Long Term debt +Equity ( no of shares * share price )

PepsiCo

Long Term Debt is 8747

No of Share is 788

Share Price is 55.875.

Long Term Debt Ratio is 16.57%

Cadbury Schweppes

Long Term Debt is 864

No of Share is 247.75

Share Price is 32.125.

Long Term Debt Ratio is 4.2%

McDonalds

Long Term Debt is 4258

No of Share is 699.70

Share Price is 48.

The Long Term Debt Ratio is 11.25%

From the above data PepsiCo long term debt ratio is higher than the all other companies. The ratio is high because due to this developing and expanding, introduce the new ideas to the field.

Ratio of cash flow to Long term debt

Expense flow that changes a cash account over a particular period cash inflows usually arise from activates financing, operations or investing, cash outflow are expenses or investor. Long term debt obligations such as bond and note, which have maturities greater than one year, would be considered long term debt .

The cash flow to long term debt = Cash flow / Long term debt

PepsiCo

Cash flow is 3742

Long term debt is 8747

Ratio of Cash Flow to Long Term 42.7%

Cadbury Schweppes

Cash flow is 492

Long term debt is 864

Ratio Cash Flow to long Term is 56.94%

McDonald

Cash flow is 2296

Long term dept is 4248

Cash Flow to Long Term is 53.9%

From the above data Cadbury higher compare to PepsiCo, if the ratio of cash flow and long term is higher compare to all the other companies in the field, debt will reduce, when the cash flow is higher, If we focus on PepsiCo its nearly to 43% of growth in this ratio, when the cash flow higher than the return so debt will be reduce.

Ratio of Cash flow to total debt

The ratio of cash flow to total debt representing a company ability to satisfy debt, Increment of cash flow is really positive sign , it shows company is in less risk financial position. The ability to satisfy its company’s debts there useful in bankruptcy the ratio equals cash flow from operation divided by total liabilities.

The cash flow to total debt=cash flow / total debt

Data’s as per given in the exhibit.

PepsiCo

Cash Flow is 3742

Total debt is 9453

Ratio of cash flow to total debt is 39.55%,

Cadbury Ratio

Cash Flow is 492

Total debt is 1490

Ratio of cash flow to total debt is 33.02%

McDonald Cash Flow is 2296

Total debt is 4836

Ratio of cash flow to total debt is 47.47%

From the above data double digit percent ratio would be the sign of financial strength, Pepsi Co is in sign of finical strength, In low percentage companies has too much of debt and weaker in cash flow generation .it’s important to invest the large amount, without no risk.

RATINGS

Rating is defined in the form of how much quality they produced and how much amount of product they released each and every year, sometimes it is combination of both & quantity they produced and delivered each year based on that we can define the ratings.

In rating they have two types here

Standard & Poor’s Ratings

Moody ratings

Standard & Poor’s Ratings [4] :

Based on, all financial companies are rated. They are mainly about the financial and research analysis of stock and bonds. It is well known for the stock based indexes.

Moody Ratings: [5] 

It is the international financial business analysis and research on commercial and government entities. It is standardized commercial rating scale. It’s all are mainly mentioned in grades.

Moody’s long-term ratings have a lot of opinions

Moody’s numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The Modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid - range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category

Ratings.gif

Standard & Poor’s Ratings [6] 

A - A means it is string capacity to meet the financial commitments and – represents the relative standing with in the majority categories. (i.e.) strong capacity to meet the financial commitments, but somewhat suspensible to adverse economic change in circumstance.

Pepsi co A

McDonalds A

Cadbury Schweppes AA

What we going to explain about the ratings?

By the above ratings of S & P, PepsiCo & McDonalds get the ratings as A because of the interest in develop the business widely and they are eager to reach the high position, for that they need to working hard, then only company will be top compare to others. (i.e) It is a strong capacity to meet the financial commitments.

By that I conclude and suggest, encourage & motivate the workers to achieve the same work and introduce the more new ideas, to maintain the same level so as for the forth coming years. Then only the company can shine in the field for the long time as in the same position and move to the next high level.

What we going to explain about the ratings?

By the above ratings of S & P, Cadbury Schweppes get the ratings as AA. They are more strong compare to the PepsiCo and McDonalds (i.e.) It is a very strong capacity to meet the financial commitments.

By that I conclude and suggest, encourage & motivate the workers to achieve the same work and introduce the more new ideas, to maintain the same level so as for the forth coming years. Then only the company can shine in the field for the long time as well as move to the next high level.

Moody’s rating:

Pepsi co A

McDonalds A2

Cadbury Schweppes A2

What we going to explain about the ratings?

By the above ratings of Moody’s PepsiCo get the ratings as A1 because of the interest in develop the business, (i.e.) low risk rate investment, in that when you going to invest in this so don’t need to care about the tuff situation, because in that less investment risk compare to others.

By that I conclude and suggest, encourage & motivate the workers to achieve the same work and introduce the more new ideas, to maintain the same level so as for the forth coming years. Then only the company can shine in the field for the long time as in the same position as well as move to the next high level.

What we going to explain about the ratings?

By the above ratings of Moody’s, McDonalds & Cadbury Schweppes get the ratings as A2 because of the interest in develop the business, compare to PepsiCo its very low risk investment (i.e.) very low risk rate investment, in that when you going to invest in this so don’t need to care about the tuff situation, because in that less investment risk compare to others.

By that I conclude and suggest, encourage & motivate the workers to achieve the same work and introduce the more new ideas, to maintain the same level so as for the forth coming years. Then only the company can shine in the field for the long time as in the same position and move to the next level.

If the PepsiCo get ratting A, does it’s reasonable or not?

Surely, after the ratings of PepsiCo until March 17th 2010 they getting A Ratings, because they producing and introduce the new ideas daily, then only he can stand in the field without any tuff competitive. Because it’s a competitive world without any new implements we can’t survey here.

Not only implementing the new ideas and the company should motivate the employees, to should work hard and we need to reward them, then only the employees would work for the company, and the company profit will automatically increased.

In exactly before ten years later PepsiCo get the rating A- after that they work hard and introduce the new concept and try to develop the business widely, after the tuff time of PepsiCo they improve step by step now reached the rating A.

How and which basis PepsiCo get the rating A?

Based on that financial status of the company will be rate. Sometimes they are mainly focus on the financial position and research analysis of stock and bonds. It is well known for the stock based indexes. Except all that the above main reason for PepsiCo get A and the rating given by S & P is based on some reasons are

D Total market value of the net debt

PVOL The present value of the operating lease commitments

P is Common stock price

N is Common shares N

Interest coverage ratio

Fixed charge coverage ratio

Long term debt ratio

Total debt to adjusted total capitalization

Ratio of cash flow to long term debt

Ratio of cash flow to total debt

The rating is mainly based on the above all share values, investment, profit, equity, and the ratio of the share holders, how much amount of net profit company having in the each and every year.

The above values are mostly important for the company and those are independent to others if any of the value is decreases total debt rate of the company will lose, in some case the value may have chance to increase, at time the total profit of the company is surely increased. Then only people will invest the money in the company, then the shares of the company is automatically increased.

If the shares of the company is increased means, the company earn more profit in that, by that company can easily pay the fixed expenses and other expenses and the due amount to the bank and, mainly to the borrower, after payback to the all borrowers, the company having some balance amount, based on that the profit of the company is calculated.

Sometimes the company will show the fath documents, due to the faith document we can identify that the company going earning more profit, then we automatically inverse the money in that company, for example the satyam softwares in india they show the faith documents.

For instance to avoid that faith document showing , S & P ratings are introduce and gives the rating to the company. They are fully reviewed about the company and gave the rating to the company.

By the conclusion of S & P the PepsiCo get the rating A, after verify the all the details of the company like profit, the net income and all the details mentioned above.

0000077476-02-000026_GRAPH.JPG

In that above graph we can easily, find out the improvement of S & P ratings result of PepsiCo.

GOOD THING:

By that above all conclusion, I should recommend PepsiCo to maintain the same level. for that they must to push and introduce the new ideas and services to the peoples. if they maintain the same level so far the next few years they are the leading business company.

They getting the grade A upto till march 17th 2010, before ten years that is approximately 1989 they get the rating as A-. this not happened suddenly they improve the business step by step. For that wise they are came to the High Rating.

concentrated Areas:

They are still in the same level or the past few years, they need to develop and introduce some more new products to the customer. In my point of view, if they will concentrate in those particular areas like, customer satisfaction, employee encouragement, and leadership then teamwork, they will surely achieve his target. And they will move to the next stage without any doubt. If the net profit increased means, they have possibilities to add some more new share holders and share investors.

Executive Summary:

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