2-2 Milestone One: Time Value of Money
Ariel Dorsey
Southern New Hampshire University
FIN 550: Corporate Financial Management
Professor Stotler, James
March 10, 2024
PepsiCo is a leading global beverage and convenient food company with a
complementary portfolio of brands, including Lays, Doritos, Cheetos, Gatorade, Pepsi-Cola,
Mountain Dew, Quaker, and SodaStream. The Quaker Foods unit makes Quaker oatmeal, Cap'n
Crunch cereal, Life cereal, Quaker rice cakes, Quaker Simply Granola, and Rice-A-Roni side
dishes. Through its operations, authorized bottlers, contract manufacturers, and other third
parties, PepsiCo makes, markets, distributes, and sells a wide variety of beverages and
convenient foods, serving customers and consumers in more than 200 countries and territories.
The US accounts for approximately 55% of total sales. In the first quarter of 2022, PepsiCo sold
its Tropicana, Naked, and other select juice brands to PAI Partners for approximately $3.5 billion
in cash (“PepsiCo, Inc. (PEP) Stock Price, News, Quote & History - Yahoo Finance”).
This comprehensive analysis will provide a clear understanding of PepsiCo INC's
valuation, risk factors, and investment recommendation. To calculate the Present Value (PV) of
PepsiCo INC, the provided interest rate and free cash flows for the latest three fiscal or calendar
year-end values are used to compute the present value of PepsiCo INC. The recalculation of the
PV with Changed Risk assumed unanticipated decrease of 10% annually in free cash flows and
recalculation the present value of the company. The determination of the Future Value with
Projected Cash Flow Increase incorporates the projected 3% annual increase in free cash flows
over the next three years, along with the buyer's required rate of return of 9%, to determine a
reasonable amount for the potential buyer to pay for PepsiCo INC three years into the future. The
implications of change in Present Value based on risk is discussed by the implications of the
change in present value due to the increased risk. The considerations of how the change impacts
PepsiCo INC and how a financial manager would interpret the data are important to the
determinant of future performance and investments. The recommendation on purchasing the
company as an investment is based on the present value calculated and consideration of the need
to balance portfolio risk with return. To provide a recommendation on purchasing the company
as an investment at the future price, all capital must be allocated.
Present Value
To compute the Present Value (PV) of PepsiCo Inc., we'll use the discounted cash flow
(DCF) method, which calculates the value of future cash flows in today's terms by discounting
them using an appropriate interest rate. For this analysis, the discount rate of 8%, representing
the required rate of return for investors. The free cash flows (FCF) for the latest three fiscal or
calendar years. Considering the fiscal years 2022, 2021, and 2020 for PepsiCo Inc, the
calculations are as follows. Where (PV) is the present value of cash flow, (FCF) is the free cash
flow, (r) is the discount rate, and (n) is the number of years into the future. The sum of these
present values finds the total present value of PepsiCo Inc. Based on the provided interest rate
and free cash flows for the latest three fiscal years, the present value of PepsiCo Inc. is
approximately $25.45 billion.
To recalculate the Present Value (PV) of PepsiCo Inc. with a changed risk scenario,
where there's an unanticipated decrease of 10% annually in free cash flows, we need to adjust
our previous calculations accordingly. This decrease in free cash flows signifies increased risk,
which may affect investors' required rate of return. Adjusting for a 10% decrease, the FCF for
2022 becomes $9 billion. Adjusting for a 10% decrease, the FCF for 2021 becomes $8.55 billion.
Adjusting for a 10% decrease, the FCF for 2020 becomes $8.1 billion. Discounting each
adjusted year's free cash flow to its present value using the same discount rate of 8% creates a
decrease in the present values. In the scenario of an unanticipated decrease of 10% annually in
free cash flows, the recalculated present value of PepsiCo Inc. is approximately $22.92 billion.
This decrease in free cash flows due to increased risk lowers the overall present value of the
company.
To determine a reasonable amount for the potential buyer to pay for PepsiCo Inc. three
years into the future, considering the projected 3% annual increase in free cash flows over the
next three years, first we must project the free cash flows for each of the next three years based
on the initial present value calculated above. We must then discount these projected future free
cash flows back to their present value at the buyer's required rate of return of 9%. This will give
the present value of the company three years into the future, which would be a reasonable
amount for the potential buyer to pay.
Given the initial present value of approximately $25.45 billion, the projected FCF for
2022 illustrates the growth rate for the company applied number of years equaling approximately
$10.927 billion. The discount this projected future free cash flow back to its present value at the
buyer's required rate of return of 9% is approximately $9.593 billion. Based on the projected
increase in free cash flows and the buyer's required rate of return, a reasonable amount for the
potential buyer to pay for PepsiCo Inc. three years into the future would be approximately
$9.593 billion.
The change in present value based on increased risk has significant implications for
PepsiCo Inc. and requires careful interpretation by financial managers. The decrease in present
value indicates higher perceived risk associated with PepsiCo Inc. This could be due to various
factors such as increased competition, changes in market conditions, regulatory issues, or
uncertainties in the company's future performance. A decrease in present value suggests that
investors may be less confident in the company's ability to generate future cash flows. This could
lead to a decrease in stock price and potentially impact investor sentiment and the company's
overall valuation. Financial managers need to carefully assess the reasons behind the increased
risk and its potential impact on the company's strategic decisions. They may need to revisit
investment strategies, capital allocation decisions, and risk management practices to mitigate the
effects of higher risk on the company's financial performance. The change in present value also
affects the cost of capital for PepsiCo Inc. A higher perceived risk typically leads to an increase
in the company's cost of capital, which can impact its ability to raise funds for future projects and
investments. Financial managers should communicate effectively with investors and stakeholders
about the reasons behind the change in present value and the company's plans to address the
increased risk. Managing investor expectations and maintaining transparency is crucial to
maintaining trust and confidence in the company's leadership. The change in present value based
on risk underscores the importance of effective risk management and strategic decision-making
for PepsiCo Inc. Financial managers should closely monitor market conditions, evaluate
potential risks, and take proactive measures to address them to ensure the company's long-term
sustainability and success.
Given the present value of PepsiCo Inc. and the need to effectively balance portfolio risk
with return, the recommendation regarding purchasing the company as an investment at the
future price would depend on various factors. Investors should assess their risk tolerance and
investment objectives. Investing in PepsiCo Inc. at the future price may be suitable for investors
with a moderate to high risk tolerance who are willing to accept the higher perceived risk
associated with the company. Investors must consider how purchasing PepsiCo Inc. fits into their
overall investment portfolio. Diversification is essential to mitigate risk, so investors should
ensure that investing in PepsiCo Inc. aligns with their diversification strategy and does not overly
concentrate risk in a particular sector or asset class. Investors must evaluate the potential return
on investment relative to the risk involved. While the present value of PepsiCo Inc. may indicate
a certain valuation, investors should consider whether the expected return justifies the risk taken.
They should compare the expected return from investing in PepsiCo Inc. with alternative
investment opportunities to make an informed decision. Investors must conduct thorough
research on PepsiCo Inc., including analyzing its financial performance, competitive positioning,
growth prospects, and industry trends. Assessing the company's fundamentals can provide
insights into its long-term viability and potential for generating returns. Consideration must be
given to current market conditions and macroeconomic factors that may impact PepsiCo Inc.'s
future performance. Economic indicators, consumer trends, regulatory changes, and geopolitical
events can all influence the company's prospects and investment attractiveness. The
recommendation regarding purchasing PepsiCo Inc. as an investment at the future price would
depend on individual investors' risk tolerance, portfolio objectives, return expectations, and
thorough analysis of the company's fundamentals and market conditions. It is advisable for
investors to consult with financial advisors and conduct due diligence before making any
investment decisions.
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Yahoo Finance. (1 Jan 2024). “PepsiCo, Inc. (PEP) Stock Price, News, Quote & History.”
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