9-1 Final Project Submission: Financial Analysis Report
SNHU
FINAL PROJECT | 1
PepsiCo Inc.
A) As per the guideline provided in the question, it is quite clear that the proposed buyer will
get a discount rate of 9% to cover the uncertainty regarding the cash flows for future years.
The current cash flow needs to be discounted as per 9% present value. So, the proposed buyer
will be willing to buy the company at $ 629190 million which is discounted value of cash
flow of 2021 @ 9%.
B) Impact of cash flow changes
⚫ In case the PV factor of 5% is considered, there has been a steady cash flow for the years
2021, 2020 and 2019 respectively. There has been some sort of stagnant position in the
cash flow for the last two years. It is a sign of increasing risk, which doesn’t augur well
for the company.
⚫ In case cash flow decreases by 10% in each year, there would be a substantial decline in
present value of cash flows, in total there would be a decline of $3078627.8million,
which is quite a substantive amount of decrease and there needs to be a proper analysis as
to what lead to such a decrease in cash flows and a deliberated proper plan should be
ready to counter such situation.
⚫ In a case of 3% increase in cash flows and increase of PV to 7%, it leads to a scenario
where actual present value of cash flow doesn’t change much. In fact in relation to Year
2020 there have been slight decrease in comparison to present value of original cash flow
calculated, it reflects that if PV factor changes, increase in cash flow of company doesn’t
show much difference and it shows little change, so in case of present value factor
changes, Company has to increase its cash volume in much greater value to achieve the
desired result in its true sense (Bragg, 2017).
C) Seeing the current trend of company’s cash flow ,since there is an increase in cash flows
position in terms of cash flow in next 3 years, which suggests that there will be less risk
involved in purchasing the company , reasons are hidden and unclear so, discounting factor
should decrease to 6% to with the increase cash flow of coming 3 years it may decline to
around 6% , which will suggest that in current scenario offer price to purchase this company
should be around $6595283 million.
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Stock valuation:
B ) At current dividend yield of 5%, valuation of shares throughout the three years have been
quite similar , overall increase in value of shares in 2021 is 41 million in comparison to year
2019.in year 2021 its shareholders value stands at $16 million, compared to 15 million in
2019, while in 2020 it has decreased to $13 million.
While the dividend per share has been increased by 1.75, Dividend yield increases to 6.3% in
2019 and 6.32% in 2020, while for the year 2021 it has increased to 5.82%. Shareholder value
remains the same over all the years. Total outstanding shares also remain the same through
these changes. So, if Company was looking to maximize shareholders wealth, there has not
been much change, or we can say rather there has been no change at all in spite dividend per
share has been increased by 1.75 (Fabozzi & Markowitz, 2011).
After split of shares condition has applied in that scenario dividend yield would go down also
market value of shares go down but value of shareholders remains at same level, total number
of outstanding shares increase to 3 million for each of the years in consideration (Jordan et al.,
2021).
* If a company’s objective is to maximize its profit in all these scenarios, company is not able
to do so as overall value remains same in all other conditions, so company is not able to
achieve its objective in terms wealth maximization of shareholders.
C) The company’s dividend policy is hindering their strategies, since the dividend given to
shareholders does not increase the value of shares, overall return on investment is negative in
the years 2019, and 2020. So, Company should really think of to reinvest their profit rather
than distributing it to shareholders (Werner, 2010).
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Bond Issuance Analysis
B) In case there is increase in interest rate by 2% annually then PV also increases by 2300$.
But at same time fixed obligation in terms of interest payment also increases by $3000
semiannually. Issuing bonds increases the leverage position of company and gives tax
advantage to company as it is allowed as deduction before payment of tax. But on the other
hand, it also increases its risk profile since a fixed liability towards interest payment is
created , so if company has good base of equity , which is there in this situation for the
company in consideration , company can use it in such a way that its overall WACC remains
minimum.
If the interest rate decreases by 2%, then PV also decreases by 1765$ but at the same time its
fixed obligation related to semiannual payments also decreases by $3000 semiannually. Since
issuing of bonds provides company necessary leverage as well as tax advantage (Hackel,
2011). If fixed liability doesn’t increase by much, then it could be a good option to have for
the fund raising.
In present case of interest rate of 5%, company has PV of bond as 302922.97$ and fixed
interest obligation as semiannual payments. Looking at company Capital structure it can be a
good idea to issue bonds as its increases leverage position as well as gives tax advantage.
* Company’s bond issue policy can support its strategies if it is used for capital structure
changes as overall WACC can be minimized through the right mix of equity and debt. But if
it is used for funding operating exp., refinancing of debt, it would be a hindrance in its
strategies because it will present a wrong picture in eyes of shareholder and company’s
solvency will be in doubt and its risk profile can be increased significantly.
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Looking at the alternative chosen by me, from the alternatives available, its NPV is positive
by $ 41,575, which is quite substantive and if we take into consideration WACC of 5%, in
that regard also IRR comes down to 5.1% , which also suggest that project is financially
viable, and it should be accepted. If we look at the calculation table it is quite evident that
there has been quite a consistent cash flow in each year, there is not much variance in cash
flow, on the contrary there has been quite consistent increase in cash flow, which gives the
strength to my point that looking at different aspects of the project, the project should be
accepted, as it fulfills the every criteria required for financially viable project.
B) NPV: Net present value of future cash flows at a particular discount rate suitable for the
project after deducting initial investment at current value, if NPV is 0 or positive, it is an
indication that project can be accepted, more the value of NPV is positive the more financial
viability of the project increases (Bouten et al., 2016). In a simple manner of speaking, Net
Present Value can be described as the difference between present value of cash inflows and
present value of cash outflows over a specific period of time. It is used to calculate capital
budgeting and investment planning for the analysis of the profitability of projected
investment or project. While calculating the net present value, it is necessary to make an
estimation of the timing, amount and future cash flows and determine the discount rate.
Generally, the discount rate is calculated to be equivalent to the minimum acceptable rate of
return. There is a probability that the discount rate would have impact on the cost of capital or
the returns available on alternate investments of comparative risks (PARMENTIER, 2019). If
the net present value is positive, then the rate of return will be more than the discount rate.
IRR: IRR of the project gives a rate where future cash inflow if discounted at same rate it is
equal to the PV of cash outflow. It gives a minimum criteria rate below which rate project will
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not be financially viable. The Internal Rate of Return is used to estimate the profitability of
potential investments. Internal Rate of return can be described as the rate that is responsible
for making the net present value of cash flows zero in case of discounted cash flow analysis
(Maritz, 2021). When making investments, if the IRR is higher, then the chances of profits are
better. While comparing both method my observation is NPV is much more suitable to select
the viability of the project compared to IRR as it just not gives a clear indication whether
project should be accepted but it also gives a $ value to support its case, while IRR just give a
rate and not any substantive value. So, in my viewpoint NPV is much better suited for
accepting or rejecting the project as compared to IRR.
FINAL PROJECT | 6
Macroeconomics Analysis
A) In case of interest rate changes application is taken into consideration according to
calculations performed on PV of free cash flow of Company, when interest rate is 8% , total
PV value for last three years is $162357157.70 , but when it decreases to 4% total PV of cash
flows for last three years stands as $17430005, which is quite a significant improvement in
Comparison to interest rate of 8% and when it is increases to 12%, the PV of free cash flow
goes down to $ 15178194 which is also a significant drop when comparing to rate of 8%.
Change in Interest rate plays a very important role in relation to finding out PV as important
evaluations in like investment decision and other preset standards in relation to ratios.
B) In case of positive or negative news within stock market affects how it affects the price of
shares, for e.g., if volatility index increases to more than 25%, it indicates risk portion in
investing has increased so many investors can dispose of their holding to some extent to
compensate the volatility and speculation of selling pressure increases in the market (Currie et
al., 2017). So, an increase in the volatility index can have lesser demand for shares and the
share price may go down.
In relation to positive news within stock market goes, if a new contract is obtained by the
concerned company and news spreads in the market, Company’s share price tends to increase
in the market as more investors decides to invest in the company, looking at positive outlook
of Company and cashing in the opportunity to earn in the stock of concerned company. The
risk is entirely dependent on the market trends. For instance, if the emotion about a company
is high in the market, it is highly likely that the company would be a great success. The value
of its stocks is most likely to go high. However, there are some factors in the market that
might turn out to be responsible for the crash of the market. Sometimes some events occur
that might not be related directly to the emotions of the market such as wars or natural
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disasters (NIEPELT, 2020). Such events are called black swan events. Such black swan
events might turn out to be responsible for the crash of the market.
C) In terms of an external factor affecting the company, suppose tax rate on companies is
increased by the government, it will discourage the company in large scale production in the
country and company may divert some of its production to a country which is more tax
favorable to it , company may have to lay off some of its employees as production level goes
down , it will also impact cash flow from revenue from operations and its operating profit will
also go down in result its share prices will also go down in the market, as overall financial
position will have a negative impact.
One other example is if rating agencies downgrades the economy of a country, it can have
huge ramifications on Company's investment decision in that country if Company is an MNC,
the company can cut down its investment significantly. In the same way, if any credit agency
upgrades any country’s economy, the concerned company can increase its investment portion
significantly to avail the opportunity presented by improved economic scenario.
FINAL PROJECT | 8
References
Bouten, L., Palepu, K. G., & Healy, P. M. (2016). Financial analysis. Cengage Learning
EMEA.
Bragg, S.M. (2017) Financial analysis: A business decision guide. Centennial, CO:
Accounting Tools, Inc.
Currie, D. A., Nobay, A. R., & Peel, D. (2017). Macroeconomic analysis: Essays in
macroeconomics and econometrics. Routledge.
Fabozzi, F. J., & Markowitz, H. (2011). The theory and practice of investment management:
Asset Allocation, valuation, portfolio construction, and Strategies. Wiley.
Hackel, K. S. (2011). Security valuation and risk analysis: Assessing value in investment
decision making. McGraw-Hill.
Jordan, B. D., Miller, T. W., & Dolvin, S. D. (2021). Fundamentals of Investments:
Valuation and Management. McGraw-Hill Education.
Maritz, C. J. (2021). Financial statements. EDGE Education.
NIEPELT, D. I. R. K. (2020). Macroeconomic analysis. MIT Press.
PARMENTIER, G. U. Y. (2019). Financial analysis. INTERSENTIA.
Werner, S. P. (2010). Short selling activities and convertible bond arbitrage: Empirical
evidence from the New York Stock Exchange. Gabler Verlag.
