Executive Summary Of Pepsico :: essays research papers

Executive Summary of PepsicoThrough my research of Pepsico, I have deliberate the make up of capital. Afirms cost of capital is imperative because it represents the funds used tofinance the firms assets and operations. First you have to estimate the costof capital in order to understate it.In estimating the cost of capital, you first have to abide by the cost ofeach capital component and then combine the component costs to find the heavyaverage cost of capital. First, I calculated the cost of debt. Pepsicos bondconsisted of 7 5/8 coupon rate, maturing in 1998 at a price of $1023.80. Ifigured the payments to be $38.15(.0763* yard/2). I then used my financialcalculator 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 theanswer for I/Y times 2 to get 5.16%.The next step would be to calculate the preferred sprout, however mystock had none. I then went to the third step of calculating c ost of retainedearnings. First I found the terce growth rates which were historical, forecast,and sustainable growth. The historical and forecast annual rates I simplypulled directly from Value Line under Past 10 years and estimated years of thedividends. They both were 14.0%. The sustainable growth is calculated bytaking 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. Ipulled 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 anddividing 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). tranquil calculating the cost of retained earnings, I then calculated mycash fertilises 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 thegrowth 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 CAPMapproach. This formula is Ks=Krf + (Km-Krf)bs. I found beta on Value Linewhich was .95. The risk free rate was found by obtaining the accepted yield on a20yr. T-bond from the Wall Street Journal. It equaled 6.60%. The Km-Krf wasfound in the book, and equaled 7.