Persuasive Speech Paper

Case Study Part 1 – Statements (Pepsi Co)

DUE 1/22/19 Late work will not be accepted

For the remainder of this project, Pepsi Co will be the

company you will work on. Make sure to keep all assignments

as you will need it to complete the remaining parts of the case

study.

To view financial statements for your company, please view

Morningstar, Yahoo Finance, or Reuters. Reuters is free but will

require you to sign up.

Please see the PDF file to get the statements for the firm you selected. Use those common-sized

statements to answer the following questions in your DB post.

• EXPENSES: What is the average common-sized cost of goods sold or cost of sales for your firm

over the past five years? Firms in highly competitive industries tend to have CGS above 60% of

revenues (Gross Profit Margins less than 40%), while those in fiercely competitive industries

have CGS above 80% (GPM < 20%). How would you categorize your industry? Has CGS been

generally rising or falling as a percentage of revenues for your firm? Do you know why? If CGS is

not the largest expense as a percentage of revenues for your firm, what is? Try to explain why

the general business model of your industry requires relatively high expenses in that area.

• INVESTMENTS: Does your firm have more money invested in current assets, in fixed assets or

roughly equal investments in both? (Note: look at common-sized total current assets to answer

this question.) In which asset classes does your firm have the highest investment (cash,

inventory, PPE, intangibles, etc.)? Discuss how your firm's business model determines the

current and fixed assets investments you see. For example, big box retailers (like Walmart) must

invest in significant amounts of both current assets (all the inventory they sell) and fixed assets

(their retail locations and warehouses). Smaller retailers might have high current assets, but low

fixed assets because they don't own their locations. Service firms are likely to have little or no

inventory, and business-to-business firms may have high accounts receivable. Firms that make a

lot of acquisitions may have significant levels of goodwill, an intangible asset.

• FINANCING: Does your firm hold a lot of cash and short-term investments (10% of total assets

or more)? Does your firm use a lot of liabilities (40% of total assets or more)? Most firms do one

or the other, though a few do both.

o If it tends to hold a lot of cash and short-term investments, why do you think your firm

might need ready access to large amounts of cash? Why might it not be able to rely on

borrowing to get cash when needed? Firms in fast-moving industries, those that rely heavily

on research and development and/or acquisitions, and those whose cash flows are volatile

are among those that tend to hold a lot of cash.

o If your firm has a lot of liabilities, are they mostly current liabilities or mostly long-term?

Why do you think your firm needs and is able to get access to a lot of that type of

debt? (Note that the need for debt and the ability to access debt are two very different

things. Just because I need a loan to buy a house doesn’t mean I can easily find a lender

willing to lend me money at an affordable interest rate.) Generally current liabilities are

used to finance current assets and day-to-day operations, while long-term liabilities are

used to finance purchases of fixed assets. Does that seem to be true for your firm? Justify

your answer.

Guidelines for responding to a class mates post

Read your classmates’ posts and find a firm that differs from yours in regards to either FINANCING,

INVESTMENTS or OPERATIONS. (Choose only one of these three areas.) Describe how they differ and try

to explain why they differ. For example, if your firm is in retail and has high cost of goods sold, you might

compare your firm to a service firm that has low cost of goods sold but high labor expense. These firms

differ because retail is the reselling of items, whereas service firms do not resell items, they offer a

service, generally performed by employees. You can do this either in your first post for this DB or in a

follow up post.

To get full credit (10 points) be sure to do the following:

• Fully address all bullets (8 points)

• Write using complete sentences with minimal typos and other errors (1 pt)

• Use data to support your answers. For example, don't just say, "My firm holds a lot of

cash." Say, "At 20% of total assets, my firm's cash holdings are relatively large." (1 pt)

Student 1 Post (GENERAL MILLS)

The average common-sized cost of goods sold for General Mills over the past five years is 65.08%. Based on the provided data, I would categorize General Mills as being a highly competitive industry because over the past five years, its cost of goods sold has been slightly above 60% and its gross profit margins have been less than 40% but greater than 20%. The cost of goods sold for General Mills has not followed a steady growth or decline over the last five years. Overall, I would describe General Mills as having seen an increase in cost of goods sold over the last five years because when you take the incremental increases or decreases in cost of goods sold over the past five years and add them all up, there is a positive 1.09% increase between them all. I’m not sure why cost of goods sold is seeing an overall increase. It may have something to do with changes in the price of inputs, if the flour they use costs more per pound then they will see a higher cost of goods sold. Cost of goods sold is by far the largest expense as a percentage of revenues for General Mills. I think General Mills requires a high level of cost of goods sold because their entire business is based on making food and selling it. They wouldn’t want the bulk of their expenses coming from the rent on the production facility or paying taxes, because that takes away from their ability to produce a variety of goods. Furthermore, if they were only able to sell a small amount of goods, they might not be able to cover the costs they incur because rent and taxes are not based on production, they are more or less a flat fee. Cost of goods sold is equal to beginning inventory plus purchases minus ending inventory. The bulk of cost of goods sold probably comes from the purchases and General Mills needs to purchase a lot of inputs to be able to produce lots of food products.

General Mills has fairly equal investments in current and fixed assets. Based on the balance sheet from the last five years, total current assets has exceeded net property, plant and equipment by less than 2% each year. General Mills has the highest investments in gross property, plant and equipment and goodwill. According to CrunchBase, General Mills has completed 11 acquisitions (https://www.crunchbase.com/organization/generalmills/acquisitions/acquisitions_list#section- acquisitions), four of which occurred over the last five years. This explains why goodwill makes up over 25% of their total assets. With locations all over the world and 30 locations in the United States alone, (https://careers.generalmills.com/locations-2/) it’s no wonder their gross property, plant and equipment is high because they have to pay for these locations as well as all of the equipment inside of them.

General Mills doesn’t hold any actual cash, but their cash equivalents has constituted between 1 and 4% of total assets over the last five years. Their total current assets range between 13 and 19% of total assets which is not much compared to their liabilities. Over the past five years their total liabilities has made up approximately 80% of total assets. Most of their liabilities, about 50% of total assets, are non-current or long term liabilities. I think General Mills needs these long term liabilities in order to gain financial leverage. This long term debt is necessary to perform all the acquisitions General Mills seeks. Having a lot of long term liabilities gives General Mills the opportunity to build its credit which in turn increases the chances that it will be able to receive financial assistance in the future when they need it at good rates.

Student 2 Post (MONSTER BEVERAGE)

EXPENSES: The average size of cost of goods sold for Monster Beverage Company lays around 30%-40%. With those low percentages, Monster is not highly competitive since their gross profit margin is relatively large around 60%. CGS has been falling as a percentage of revenue for my company. To be honest, I don't know why. CGS however does remain the highest in expenses than operating income around 27%. Monster requires high expenses in CGS because those goods are the primary tool for revenue gain for the company.

INVESTMENTS: By carefully looking at the numbers for both current and fixed assets, I would have to say that my firm has more money invested in fixed assets. Current assets in the first 3 years had the most money invested with percentages of 83%, 87% and 63%. However the last 2 years, the rate has increased in fixed assets more than current assets. It seems like an reverse took place. The fixed assets in the last two years have the percentages of 65% and 56% which is higher than the last two years of current assets which have the percentages of 34% and 43%. Strange but the asset class that has the highest investment is goodwill which recently is at 27%. The second highest asset class when it comes to investments is intangible assets which has the latest has an percentage of 22%. The firm's business model determines the current asset investments by investing heavily in short term investments which at the latest is 14%, cash at 11%, and receivables at 9% which is the latest percentagebecause they do business with other businesses. For example, an grocery store selling the firms products and fixed asset investments involves little investment in plants which I assume there are not that many of since the percentage is at 5%. With the intangible and goodwill assets being so high, I assume that the firm either gets acquisitions or contributes heavily to communities and other organizations.

FINANCING: The Monster Beverage Corp tends to hold more cash and short term investments. Cash holds 11% of total assets and short term investments holds 14% of the total assets. Total cash is 25% of total assets. The liabilities are a lot smaller than the asset numbers. Since the Monster Beverage Corp has a lot of intangible assets/goodwill which could involve acquisitions may be the main reason why the firm holds on to a lot of cash for availability. The firm may be able to borrow money but wouldn't do that unless it was absolutely necessary. Why do that when you got plenty of cash at hand to assist with acquisitions and other intangible assets. Borrowing money is an good way to get in debt if the firm is foolish when it comes to decision making with money.