Pepsi Inc

1. Calculate the market value of PepsiCo’s debt at year end 1995.

2. Calculate the market value of PepsiCo’s stockholder’s equity at year end 1995.

3. Pepsi subtracts the value of its portfolio of short term investments, which is held outside the United States and is not required to support day-to-day operations, from its total debt when calculating its net debt ratio. Calculate PepsiCo’s net debt ratio.

4. Calculate PepsiCo’s overall WACC.

The WACC rate of 11.49% would be the best rate to evaluate the investment because it supports the long term investment strategy that PepsiCo wishes to pursue.

5. Should PepsiCo use its overall cost of capital to evaluate its restaurant capital investments? Under what circumstances would it be correct to do so?

PepsiCo should not use the overall cost of capital to evaluate its restaurant capital investments. Essentially, cost of capital varies by industry because some industries are more asset intensive than others, and carry varying levels of risk. In addition, companies and industries change over time, and similarly the cost of capital invested in them would also change over time. According to the case, the restaurant business had become more risky during the period 1995-1996, due to the harsh weather conditions, whereby persons preferred to stay indoors rather than going out to eat. This would have affected the snacks and soft drinks industries less because it would have been easier to purchase these items in bulk, and consume them indoors at one’s leisure. Consequently, it would be incorrect to assess the different segments as a group with regards to risk and capital structure, therefore each segment would need to be evaluated individually.

However, if the capital and risk structure were similar for the group and the restaurant business, the cost of capital could be used to evaluate capital investments. Also if one segment relies heavily on another to produce a finished product (example the...