As CEO of PepsiCo, it is still important to understand that financial analysis should also
encompass external activities and events. A company's internal financial position is important,
but corporate liquidity and other factors are affected by macroeconomic factors. Other factors
like fluctuations in the interest rate, changes in the overall market, and other macroeconomic
levels greatly influence the solvency of the company and its strategic planning (Penman, 2022).
These factors will be further discussed in this analysis to make the argument in favour of the
topic concerning research data and examples.
Therefore, changes in the interest rate, affect the cost of capital and the value of the present value
or PV of the future cash inflows and the ability of the company to attract investors to subscribe to
its bonds. For example, it is appropriate to refer to the present value calculations of the free cash
flow of Pepisco again. Given a WACC of 5%, the PV of free cash flows adds up to $18,043
million for the years 2020, 2021, and 2022. But, if the interest rates were to go up to give a
WACC of 7%, the PV of such cash flows would be reduced and therefore, represents lower
valuations. Similarly, when the interest rate is low the PV will likely increase and increase the
valuation at the same time.
For bond valuation, let us assume that there is a bond from PepsiCo with face value of $300,000,
yielding 5% with a maturity period of 10 years. In the event that the market interest rates rise up
by 2%, the present value of the bond reduces to $294,661. undefined 03a thus reducing the
attractiveness of the bond and putting pressure on PepsiCo to pay better interest rates to
investors. This increases the cost of financing the company, which leads to high cost of
borrowing. In contrast, an increase in market rates by 2% brings the value of the bond to
$337,983. 40; thus increasing investment attractiveness and reducing the cost of borrowing.
These examples enlighten the fact that changes in the interest rate can influence the company's
financial analyses and financings and evaluations on the balance sheet. Failing to consider these
macroeconomic factors may cause appropriate resource allocation decisions not to be made,
assume higher costs or undervalue them. Hence, it becomes necessary for the CEO to factor
these external factors into the calculation of its revenues and expenditure so as to have more
realistic figures and more holistic strategies for improvement.
