Executive Summary of Pepsico
Through my research of Pepsico, I have calculated the cost of capital. A firm's cost of capital is imperative because it represents the funds used to finance the firm's assets and operations. First you have to estimate the cost of capital in order to minimize it.
In estimating the cost of capital, you first have to find the cost of each capital component and then combine the component costs to find the weighted average cost of capital. First, I calculated the cost of debt. Pepsico's bond consisted of 7 5/8 coupon rate, maturing in 1998 at a price of $1023.80. I figured the payments to be $38.15(.0763*1000/2). I then used my financial calculator to find the bond yield of 5.16% by entering in 1023.80=PV, 1000=FV, 2=
N, 38.15=PMT. The bond was calculated semi-annually, therefore I multiplied the answer for I/Y times 2 to get 5.16%.
The next step would be to calculate the preferred stock, however my stock had none. I then went to the third step of calculating cost of retained earnings. First I found the three growth rates which were historical, forecast, and sustainable growth. The historical and forecast annual rates I simply pulled directly from Value Line under Past 10 years and estimated years of the dividends. They both were 14.0%. The sustainable growth is calculated by taking the retention rate (b) and multiplying it by the return on equity (r ).
To find b, I first calculated the dividends payout ratio which is DPS/EPS. I pulled DPS and EPS from value line under 1997. Then to find the retention rate,
I subtracted the ratio from 1. Next, I calculated r, by taking net income and dividing it by net worth. These figures I also pulled from Value Line. My b=
.352, and r=28.68%. Then the third growth rate was 10.10(.352*28.68).
Still calculating the cost of retained earnings, I then calculated my cash flows by the discounted cash flow approach. For the first three cash flows,
I took the dividend of the stock over the price of the stock, and then added the growth rate to it. My first cash flow equaled to 15.38%, second was also 15.38%, and the third one was 11.45%. To find the cash flow four, I used the CAPM approach. This formula is Ks=Krf + (Km-Krf)bs. I found beta on Value Line which was .95. The risk free rate was found by obtaining the current yield on a
20yr. T-bond from the Wall Street Journal. It equaled 6.60%. The Km-Krf was found in the book, and equaled 7.
=> rd£ = (1 + rd$)*(1 + i£)/(1 + i$) -1 = (1+ rd$)*1.043/1.027 -1
In order to do this the WACC approach will be used based on the assumption that leverage will stay constant after 2012. Industry average of debt/value is 28.1 percent and debt/equity 71.9 percent. These figures will be used as an estimate for long-term leverage because it is expected that AirThread will maintain a leverage ratio that is constant with the industry. From this the relevered equity beta is found to be 0.9847 which will give an equity rate of return of 9.42 percent. The rate of return on debt will be 5.5 percent. This is the percentage of debt because it is the interest rate of the 10 year U.S. Treasury bond. The WACC is now found to be 7.80 percent. Next, the long-term growth rate of 2.9 percent will be assumed to stay constant. In order to determine the FCF 2013 FCF 2012 of $315.60 will be multiplied by the growth rate. This will give a FCF 2013 of $323.48. The FCF 2013 will then be divided by the WACC minus growth rate. By doing this the PV of terminal value is found to be approximately $4.6 billion. To see the calculations for this step refer to Exhibit 3 in the
Some of the people saw the bombs’ effects as a good thing for the Japanese people. They saw Japanese come together, and because of it, felt an “elated community spirit” (87). Others saw the atomic bomb as akin to a natural disaster, like a flood or a typhoon. It was something incomprehensible, and so they pushed it out of their mind. One phrase they used to summarize their opinion over the bomb was “shikata ga nai” (89). For them it meant there was nothing they could have done to stop it, so they shouldn’t worry about it. The most negative of the groups felt that the blame fell upon the U.S. for using the bomb. Dr. Sasaki, one of the survivors Hersey wrote about, stated, “Those who chose to use the bomb should all be hung”
“Hiroshima,” brings to light the psychological impact the detonation of the atomic bomb over Hiroshima had. Following the atomic bomb, over a hundred thousand people were dead and another one hundred thousand people severely injured in a city with a population of 250,000. Dr. Sasaki and Mr. Tanimoto were left wondering why they had survived while so many others had perished, this is known as survivor’s guilt and it can be very heavy and dangerous baggage to carry. On the historic day of the first use of the atomic weapon, Mr. Tanimoto spent most of his time helping people however, one night he was walking in the dark and he tripped over an injured person. He felt a sense of shame for accidentally hurting wounded people, who were in enough pain
Discounted Cash Flow Method takes the forecast free cash flows during forecasted horizon. Then we estimate the cost of capital (weighted average cost of capital) and estimate continuing value (value after forecast horizon). The future value is discounted to the present value. We than add back cash ($13 Million) and non-current assets and deduct total debt. With the information provided several assumptions had to be made to obtain reasonable values (life period of 30-years, Capital expenditures not to exceed $1 million dollars, depreciation to stay constant at $1.15 Million and a discounted rate of 10%). Based on our analysis, the company has a stand-alone value of $51 Million at the end of fiscal year end 1990 with a net present value of cash flows of $33 million that does not include the cash and non-current assets a cash of and non-current assets.
If the interest income from these rates makes up approximately 35% of each company’s net
The estimated free cash flows for the two strategies are $391 million for the growth strategy and $365 million for the maintain strategy. (Please refer to the excel sheet for breakdown of calculation).
Hiroshima, is a journalistic narrative, written in third person and focusing on the action of the six main characters. The setting is in Hiroshima, Japan. The story unfolds on the morning of August 6th, 1945. In the middle of the morning, the American army swoops in on the city with a bomb of an enormous power. It is so excruciatingly powerful that it manages to wipe out almost half of the population, 100,000 people (there were a total of 250,000 people living in Hiroshima). This book traces the lives of six who survived the attack. Two men of the church, two doctors, and two average women.
The continuing value for the residual earnings was determined by taking 2010s projected residual earnings and multiplying it by 1 plus
The Damon Investment Company manages a mutual fund composed mostly of speculative stocks. You recently saw an ad claiming that investments in the funds have been earning a rate of return of 21%. This rate seemed quite high so you called a friend who works for one of Damon’s competitors. The friend told you that the 21% return figure was determined by dividing the two-year appreciation on investments in the fund by the average investment. In other words, $100 invested in the fund two years ago would have grown to $121 ($21 ÷ $100 = 21%).
This section will discuss ratio analysis for the following ratios: current ratio, quick (acid-test) ratio, average collection period, debt to assets ratio, debt to equity ratio, interest coverage ratio, net profit margin, and price to earnings ratio. Depending on the end user which ratio carries more importance, however, all must be familiar with ratio analysis. Details on each company's performance for each of these areas can be found in the attached ratio analysis worksheet.
ii. A company borrows £2,000,000 in 1998, with a fixed interest rate of 8%, payable annually for a 5 year period.
The return on equity ratio is calculated by dividing the net income minus dividends by the equity. Per the Principles of Accounting textbook, “return on equities ratio enables the comparison of capital utilization among firms…this can help assess of effective the firm is in using borrowed funds”. Kinder Morgan’s return on equity ratio for December 2015 was .59%. In 2013 the ratio was 9.14% and in 2014 it was 3.01%. The return on equity ratio, like the return on assets ratio significantly declined over the past three years. One significant decrease to cause this decline is due to the deterioration of net income. Kinder Morgan’s net income from 2013 to 2015 was $1.19 billion, $1.02 billion, and $240 million successively. This sharp decline in net income can cause misplaced judgment on the decline of the debt ratios. When Kinder Morgan had a much higher income, their debt ratios were much
This ratio would be the asset turnover. It uses net sales divided by average assets. In 2005, Pepsi Co's asset turnover was at 1.02 while Coca Cola's asset turnover was at 1.06.... ... middle of paper ...
4. Harry Davis’s common stock is currently selling at $50 per share. Its last dividend (D0) was $4.19, and dividends are expected to grow at a constant rate of 5% in the foreseeable future. Harry Davis’s beta is 1.2, the yield on T-bonds is 7%, and the market risk premium is estimated to be 6%. For the bond yield plus risk premium approach, the firm uses a 4% point risk premium.