To receive full credit, all 5 bullets must be answered. You will also need to reply to 1 other student. Please read all documents and follow the instructions. This will be a 6 part case study.  In or

Case Study Part 2 – Leverage & Coverage (Pepsi Co) Your Compan y is PEPSI CO DUE 3/7/19 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 Morningst ar , Yahoo Finance , or Reuters . Reuters is free but will require you to sign up. To begin your analysis of your firm's debt usage, you must first gather the data described below. 1. Use Morningstar, Yahoo Finance, or Reuters to find your firm's credit ratin g and financial reports. Then select Key Ratios, Financial Health, and scroll down to Debt/Equity. Make note of whether the DE ratio has been increasing, decreasing or steady for the past 5 years to answer question 1 below . Morningstar usually defaults to descending years, so check the dates in the column headings. ** Reuters.com is free to subscribe, you just have to sign up *** If Morningstar does not have a credit rating for your firm, it could be... a. That it is rated but not by Morningstar. Perhaps Moody's or Standard and Poor's have rated it instead. You can try doing a Google search on your firm, such as Dillard’s credit rating. If the rating has been updated in the last few years, there will be a press release of some sort that will come up. b. That your firm does not have a credit rating. Ratings are actually on the bonds a firm has issued rather than on the firm itself. If your firm has no bonds, it will not have a rating. If you have checked Morningstar and done a Google search and found no credit rating, make note of that in your post. In this case, your interest expense and long -term debt on the income statement and balance sheet will be minimal. 2. Using the instructions or video lecture link posted above, you can also try using Reuters.com to find financial ratios for your firm and industry average benchmark ratios. For this post, you will need the debt -equity ratio , the interest coverage ratio (sa me as times interest earned), the return on equity , and the beta for your firm and the industry . You may be able to copy and paste the data into an Excel spreadsheet or you might want to use print screen or some other method of recording the data for fut ure use, or you can just plan to come back to this site later in the semester for remaining DB posts. 3. Go to our DB 2 and reread what you wrote about your firm's investments to help answer question 1. Then answer the following 5 questions below: 1. Is your firm's debt usage higher, lower, or similar to that of the industry? Has it been increasing, decreasing or maintaining its debt levels over the past 5 years? What does that suggest about the firm's debt policy? What do you think your firm uses most of its debt for, current assets or fixed assets? 2. Is your firm’s credit rating high or low? Explain that rating by comparing its debt level and coverage to the benchmarks. Generally large firms (market capitalization > $5 billion) with interest coverage of at least 9 times and smaller firms with interest coverage of at least 12 times will have AA or AAA ratings. Firms with interest coverage of at least 4 times will usually be considered investment grade. Does it appear that your firm easily afford its debt? 3. One disadvantage of using debt, other than the possibility of bankruptcy, is that debt adds volatility to a firm's stock returns, which increases the beta. Compare your firm's beta to the industry average beta. Are both your debt -equity ratio and beta either higher or lower than industry average? If not, some other factor (business risk or operating leverage) may have a greater impact on your beta than financial leverage. 4. One advantage of using debt (or leverage) is that it increases the firm's retu rn on equity (ROE). Does your firm seem to be benefiting from leverage? 5. Please fill in the blanks with high, low or average: My firm has ___________ leverage, ___________ coverage, a _________ beta and a __________ return on equity. Together these indicate that my firm’s approach to debt is _____________ (too risky, too conservative, or just right). To get full credit (10 points) you must do the following: • Fully answer all five questions (6 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." (2 pts) • Compare your firm to at least one other firm from another student's post, either in your first post for this DB or in a follow up post to this DB before the due date. For example, "At 20% of total assets, my firm's cash holdings are relatively large. Howev er, John Smith's firm Acme Inc. in the same industry appears to hold even more cash, at 30% of assets. Perhaps Acme is preparing for an acquisition. (1 pt) **** Respond to ONLY 1 classmate s post below **** 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 i s 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. Student 1 Post ( GENERAL MILLS ) 1. General Mills’ debt to equity ratio of 258.41 is more than four times that of the i ndustry’s 51.64. The Debt/Equity Ratio has been fluctuating for the past ten years. Over this time frame the lowest Debt/Equity Ratio was 0.87 and the highest was 2.06. Over the last five years, General Mills has seen more increases than decreases in the d ebt/equity ratio. The pattern seems to be two years of an increasing debt/equity ratio and then a year of decreasing debt/equity ratio. This pattern suggests that General Mills is regularly financed by creditors. The fluctuation between an increasing and d ecreasing debt to equity ratio could be because the firm gets loans and then pays them off in a couple of years and then turns around and gets another loan. The pattern also leads me to speculate that General Mills chooses to use a large amount of debt to obtain their goals. If the decrease in the debt to equity ratio every few years is because General Mills is paying off their debts, then they have a good handle on their finances, it also signals that they don’t like to have a lot of long -term debt, but wa nt to pay liabilities off in a matter of years. I have learned that General Mills has a lot of goodwill and performs a lot of acquisitions and because of that I think it uses most of its debt for fixed assets. The type of fixed assets General Mills invests in are very costly so it makes sense to me that they would use financing to undertake these investments rather than using financing for their current assets like inventories of flour. 2. General Mills has a decent credit ranking of BBB, which is the lowes t investment grade rating. If I were the one investing, I would want an AAA rating but that is understandably challenging to achieve. General Mills has a higher amount of debt than others in the industry, about four times more. On the other hand General Mi lls has a lower interest coverage ratio (11.19), about a fourth of the industry’s ratio (43.29). General Mills has a market cap of 27 billion dollars, so it is most definitely considered are large firm.

General Mills’ interest coverage ratio is just a litt le bit higher than the nine times minimum of large firms. Large firms with an interest coverage of at least nine times typically have AA or AAA ratings, so General Mills isn't rated very well considering they have a rating of BBB and an interest coverage o f eleven times. It appears that General Mills can easily afford its debt as it has its interest covered eleven times over and interest is the cost of borrowing money. 3. General Mills’ debt -equity ratio of 258.41 is significantly higher than the industry’s 51.64. General Mills’ beta of 0.63 is lower than the industry’s 0.93. This signals that there may be a factor other than financial leverage that has a large impact on t he beta of General Mills. 4. General Mills does seem to be benefiting from leverage because it has a higher debt -equity ratio and higher return on equity compared to the industry. However, it’s debt -equity ratio (258.41) is about four times that of the ind ustry (51.64) while it’s return on equity (28.96) is only twice that of the industry (12.69), so the benefit from additional debt exists but is not very large. 5. My firm has high leverage because it has a lot more debt than equity, approximately four time s more than the industry. My firm has low coverage (11.19) compared to the industry, about a fourth of the industry average.

However this coverage is acceptable given the firm’s size since a coverage of at least nine is allows them to have AA or AAA rating s. My firm has a low beta (.63) compared to the industry (.93). My firm has a high return on equity (28.96) compared to the industry (14.69). Comparison. General Mills’ leverage is 78 times more than Monster Beverage Corp. General Mills’ leverage is extrem ely large compared to Monster Beverage Corp. On the other hand General Mills’ coverage is really low compared to Monster Beverage Corp, only about 2.5% of Monster’s total coverage. The return on equity for both firms are strikingly similar given the stark differences in the other areas of analysis, General Mills has a ROE of 28.96 while Monster has a ROE of 21.06. General Mills’ beta of .63 is low compared to Monster’s 1.33 beta. The beta of 1.33 indicates riskiness to investors, this high risk compared to General Mills could be due to the fact that Monster has no equity. If you are preparing buy stock in a company, looking back at how the company has treated/rewarded its stockholders would help you make your decision. General Mills has stock already issued so potential investors know what to expect, which reduces the level of risk but potential investors of Monster don’t have anything to look back on to determine the investment potential, making it a risky venture.