case study - finance

Professor Charles Wasley 2

Overview

◼ This case requires you to value the common equity (per share) of Pepsi as of 12/28/2019. Use 12/28/2019 as the valuation date.

◼ Assume the firm’s cost of equity capital is 8%.

◼ On the valuation date, the firm has 1,391,000 (in 000s) shares outstanding.

◼ An Excel file with Pepsi’s financial information is available on Blackboard (BB).

Professor Charles Wasley 3

Required Analysis

◼ 1) For some finite horizon you deem appropriate (be sure to provide the economic rationale for your choice), forecast Pepsi’s performance beginning with its fiscal year ending on 12/28/2020. You have data on actual results up through the fiscal year ending on 12/28/2019 (see the Excel file on Blackboard). Be sure that all of your income statement and balance sheet forecasting parameter choices are explicitly stated and justified. (110 points)

◼ 2) Just prior to developing your forecasts in Q1, suppose you were an equity analyst taking part in a Conference Call with Pepsico’s top management. To improve the quality of your forecasts in Q1, what 5 questions would you have asked Pepsico’s top managers? Be specific and be brief. (10 points)

◼ 3) How does your forecasted performance in Q1 compare with Pepsico’s performance in the period prior to the start of your forecast period? Be specific and be brief. (20 points)

Professor Charles Wasley 4

Required Analysis

▪ 4) Using the approach developed in the course, perform a DCF valuation of Pepsi’s common equity per share. As noted previously, use 12/28/2019 as the valuation date. (75 points).

◼ 5) Using the approach developed in the course, perform a Residual Net Income valuation of Pepsi’s common equity per share. As noted previously, use 12/28/2019 as the valuation date. (75 points)

◼ 6) Using the approach developed in the course, perform an Abnormal ROE valuation of Pepsi’s common equity per share. As noted previously, use 12/28/2019 as the valuation date. (75 points)

◼ Note: The valuations in #4-#6 should produce the same per share valuation. Have fun!