Pepsico Inc.

PepsiCo’s Incorporation

PepsiCo’s Incorporation cited in its information about the company that their investments are expected to generate cash returns in excess of its long term capital which is estimated at 10% at year-end 1995. PepsiCo operates three lines of business, soft drinks which include Pepsi Cola, Diet Pepsi and Mountain Dew; restaurant which includes Pizza Hut, KFC and Taco Bell and snack foods which are sold domestically by Frito-Lay. Costs of capital was not reported separately but represented the combination of all three divisions.

Below is a table showing the extract of information from PepsiCo’s annual report that will be used to generate WACC for PepsiCo and cost of capital for restaurant. The WACC will be calculated using long term target data as this is the capital investment target in assets that PepsiCo is working with.

Short-term debt | $706M (assumed to be the market value) |

Long-term debt | $8,747M (market value) |

Cash and cash equivalents | $$382M (assumed market value) |

Short-term marketable securities | $1,116M (assumed market value) |

Pepsico’s Beta | 1.00 |

Equity shares outstanding | 788M |

Share price year end | $55.875 |

Income tax rate | 34% |

Long term risk free rate | 6.00 |

Long term market risk premium | 7.00 |

Long term borrowing rate | 6.75% |

Question 1

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

Market value of debt = short-term debt +long-term debt

$000 (million)

Market value of long term debt 8,747

Add Short term borrowings 706

Total market value of debt 9,453

Question 2

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

Value of equity = market value of shares outstanding * current price per share

Market value of ordinary shares = 788,000,000

Share Price = $55.875 per share

Total market value = 788,000,000 shares * $55.875 = $44,030 million

Question 3

Calculate...