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Table of Contents
1.PA-I: Risk analysis of the PepsiCo.......................................................................................................2
1.2 Qualitative risk analysis......................................................................................................................4
2. PA2 Cost of capital and capital structure at PepsiCo.....................................................................5
2.1 Fixed charge coverage ratio................................................................................................................5
2.2 Debt to Equity ratio.............................................................................................................................5
3. Capital structure and the value of PepsiCo.....................................................................................8
4. PA4 Dividend payouts and the suggested structure........................................................................9
5. PA-5 Capital Investment decision : PepsiCo joint venture at “Changchun” CHINA................10
6. PA-6 Critique of companies net working capital decision making..............................................11
7. PA-7 Integrated Risk management strategy of PepsiCo...............................................................12
8. PA-8 The recommendations for PepsiCo.......................................................................................13
Conclusion................................................................................................................................................15
1.PA-I: Risk analysis of the PepsiCo
The likely risk assessment should incorporate both qualitative and quantitative factors that would
determine the overall risk on the entire business portfolio, Therefore the bellow analysis would
highlight both the factors respectively.

1.1 Quantitative risk analysis factors

1.1.1 Net sales analysis

Net sales are the most preferred form of risk calculation where the reduction in the sales would
directly amount to increase in the risk of losing market share cash flow and net value of the firm.

Chart 01: Net sales movement

Source: PepsiCo Annual report (2021)

As shown in the chart the net sales in 2020 is 76,980 million US dollars, and the climb will
continue for the next for years. The forecasted net sales values suggest that the sales will increase
more than 5% in year to basis. Hence in this market, the industry net sales growth is recorded
below 4% ,therefore in the comparative terms the growth has surpassed the growth rate of the
industry the risk associated to the financial growth is not high therefore.

1.1.2 GPRV analysis

In the GPRV the aspects such as Growth, profitability, Revenue and Value creation are
considered in the measurement. Bellow map can be derived on the GPRV calculation
Chart 01: GPRV analysis

Source: Author created (based on the PepsiCo Annual Report)

As indicated in the report the profitability growth of the firm higher comparative to the industry
while the ROE is also at least 25% higher than the industry norm, indicating very less risk from
the profitability , However in the context of the volatility the company has higher volatility
comparative to the NASDAQ benchmark , however more analysis is needed in this regard as the
NASDAQUE standards are not the most accurate as it doesn’t reflect on the coal market
behavior.

Table 01: Peer comparison on the market volatility

Source: annual report PepsiCo (2021)

The PepsiCo has the second highest market cap. And the lowest beta value compared to the main
competitors like Coca Cola, Monster beverage and Dr.Pepper , therefore the despite the fact that
the NASDAQ slandered is low comparing the related industry the share price risk associated
with Pepsi is lessor than its rivals.
Table 02: Payout ratio comparison

Source: Aabri (2021)

As indicate the payout ratio is significantly favorable for the PepsiCo comparative to the other
industrial standards. Hence it can be argued that the overall financial risk associated with the
organization is lessor. However further review can be done to understand the qualitative impact
on the risk factor.

1.2 Qualitative risk analysis

According to marketline (2019) the demand for cola products will decline in future due to the
health preservations of the consumers and the Companies like PepsiCo should be able to find
alternative products, hence also though there is no direct tangible risk in hand the future social
norms might create a market risk for the organization. On another note the PepsiCo (2020)
revealed that they had a cyber attack in the 2018, where some damage was done on the
information system, further in the same report it was also identified that the employee retention
at PepsiCo is shorter increasing the risk further in talent draining and information draining hence
although the quantitative risk doesn’t indicate a clear risk factor in the aspect of qualitative risk
the risks are high therefore the company and to increase their risk reporting format to
accommodate more non tangible risks in their reports so that the companies risk representation
strategies will be increased.
2. PA2 Cost of capital and capital structure at PepsiCo
The overall capital structure will be derived in this regard and the implication related to the
WACC and the capital adequacy will be reviewed.

2.1 Fixed charge coverage ratio

In this ratio the companies capability to meet their fixed payment requirements such as loan
repayment and other fixed cost like rent. Which can eb denoted by bellow formula

Fixed-charge coverage ratio = (EBIT + fixed charges before tax) / (fixed charged before tax +
interest)

As per the annual reports the ratio stands at 3.09 which is better value that benchmark value of 1
comparative a company like Coca-Cola industries this would be a much better value as the Coca-
Cola value is 1.4, according to the dept. performance it can be seen that the PepsiCo current debt
do not prevent them from making fix payments , however more analysis is needed understand the
overall structure of the company.

2.2 Debt to Equity ratio

Table 03: Debt equity ratio

Source: Mosammat and Nobanee (2021)

As indicated in the above table the debt to equity ratio has fluctuated over the time period, hover
it remained in the margin of 2-4. Although this this indicates a higher risk more evaluation has to
be done in order to arrive at productive findings, therefore industry standards can be compared
as follows.

Table 04: benchmark of debt to equity

However based on the industrial review it can be argued that the Food and beverage sector has
an average debt to equity ratio of 3.32 although competitors like Coca-Cola has recorded a lower
ratio. Therefore it can be argued that the debt to equity ratio of the firm is risky however it has
not moved to a dangerous position, although the company is at a risk full position.

To identify the position further the weighted average cost of capital should be used. Bellow
would be the demonstration of the weighted average cost of capital.

Table 05: WACC analysis

Source: PepsiCo Annual report (2021)

As shown in the table the cost of the debt for the triple A instrument is least while the B rated
instruments has higher 9.14% cost of capital. Further based on the analysis it can be seen that the
majority of the company’s debt is financed through B graded debt instruments making the
overall capital cost to go higher. Therefore the Weighted average cost of capital can be denoted
as follows.

Chart 02: WACC of PepsiCo

As indicated above , the WACC is 7% which is relatively lower value compared to the Coca-
Cola which is a the range of 7.8% however comparing the industry average more than 10% the
companies WACC is better , and compared to rivals the WACC is better. Hence it can be argued
that the PepsiCo has relatively high debt composition in their capital structure although the
company’s performance and the debt repayment capacity is high the company has to look at the
long run of the business and try to reduce the long term debt , best way would be to engage in a
right issue.
3. Capital structure and the value of PepsiCo
As indicated in the above analysis the capital structure of the organization PepsiCo is briefed out,
however the comparison among the WACC and the ROIC is needed to identify the connection
between value creation and the cost of capital, therefore bellow review can be entailed

Chart 03: Debt ratio

As demonstrated in this chart it was clear that the both the debt to equity and the debt to capital
ratios has moved in a parallel manner however the debt to equity ratio has reduced indicating
some leverage control regained by the company over the years however the overall debt to equity
ratio is still high.

Further in the interpretation of the overall findings of the WACC , as the chart mentioned the
WACC value stands at 7 and comparative to that value the rate of return expectations of the
investors are 10% , however at current state the PepsiCo has recorded 11.89% ROIC making a
premium return of 1.89% hence the performance wise the capital structure rate of return and the
debt performance level is high. Therefore the clear conclusion can be arrived on the value
creation by debt and equity sources of PepsiCo that is those value creations by both Debt and
Equity are higher than the industry standards, thereby the company need not be worried about
eliminating the debt instead redeeming them once the time lapses , this would provide a better
gearing for the organization.

4. PA4 Dividend payouts and the suggested structure

The company PepsiCo has been consecutive in paying out quarterly dividends for their
shareholders for 48 years since 1965 hence the dividend policy of such a company like PepsiCo
is near to error proof. This years’ annualized dividend stands at $ 4.3 with a dividend yield of
2.72% which is a good yielding rate. The NASDAQU (2021) claims that the PepsiCo dividend
pay out culture created a momentum among the shareholders where every time the dividend pays
out the shareholders expectations increased , this is directly shown in the price earnings ratio
where the P/E is 26.59 where the NASDAQU standard is 17.6. This implies that the share price
growth expectation is very high. To identify the context further the historical data can be
analyzed.

Table 06: Payout ratio of Pepsi

Source: Nasdaq(2021)

As indicated the earning per share has been above 3.38 dollars while the Dividend per share has
gradually increased over the years. In the meantime the payout ratio has increased from 2018
onwards, the payout ratio other than in one occasion is above 60% . This pay out ratio is
considered unhealthy in the long term. Hence the organization has to re structure their capital
structure maybe by not issuing the ordinary shares but issuing the redeemable shares. And most
ideal condition would be to reduce the payout ratio less than 50% which will be sustainable in
the long run as the higher payout means lessor reserves and lessor financial contingency for the
future. However the constant dividend policy should be continued as the rivals like Coca-Cola is
also doing the same, In the meantime the company would have to reduce the pay out and
increase the net revenue that would increase the stability if the share price, since the constant
dividend policy would make the share price volatile with the volatility of the net sales.

5. PA-5 Capital Investment decision : PepsiCo joint venture at “Changchun” CHINA

Table 07: Capital Structure of Project Chang

Company Stake of share

PepsiCo 57.5%
Food Factory (China) 37.5%
Beijing Chong Yin Industrial & Trading Company. 5%

As explained the capital structure of the organizations are as above , where the PepsiCo holds the
majority shares while the Chinese two partners are holding a share of 40%. The expected WACC
at the beginning of the project was 13% which is higher than the current PepsiCo standards
however with the Chinese firms’ prediction of ROIC of 20%. The expected ROR and cost of
capital have already created a complicated environment. To get a further understanding bellow
sensitivity analysis is done by the investors.

Table 08: Sensitivity Analysis

Source: Csimarket (2021)

However with the sensitivity analysis results it was clearly indicated that the discount rate is
much more than the predicted, where the five 5% rate of growth is not at all sufficient to meet
the projects’ hurdle rate of 16%. This will definitely result in a negative NPV , even if the new
project records the 11% growth still the end result would be non-favorable. Therefore with
regarding this project PepsiCos’ investment decision making has shown weakness , mainly their
lack of preparation and consideration about the volatile nature of the Chinese market and its
investors.

6. PA-6 Critique of companies net working capital decision making

Working capital management is a critical part of firms value creation as the firms capability to
function will directly dependent on this. Further the business operation is influenced largely with
the working capital , where key operational activities related to resources flow ,information flow
and decision flow is largely dependent on the working capital practices of the organization.
Tuovila, (2019) claims that the working capital management depend on the asset and liability
management of the firm , where the optimal utility of current assets and current liabilities would
increase the capability of the firm to maintain a healthy working capital cycle.

Table 09 Financial facts (all values are in millions USD)

Item/Year 2020 2019 2018 2017

Inventories 3,338,000 3,128,000 2,947,000 2,723,000

Receivables 6,447,000 6,079,000 5,956,000 5,709,000
Accounts Payables 8,013,000 7,213,000 6,727,000 6,158,000
Sales 67,161,000 64,661,000 63,525,000 62,799,000
Cost of Goods Sold 30,132,000 29,381,000 28,785,000 28,209,000

Further based on those data the ratios associated with the working capital management is derived
as bellow
Table 10: ratios relating to working capital cycle
 Ratio/Year 2020 2019 2018 2017

Inventory Period 40.43 38.86 37.37 35.23

Receivable Period 35.04 34.31 34.22 33.18

Payable Period 97.06 89.61 85.30 79.68

Operating Cycle 75.47 73.17 71.59 68.42

Cash Conversion -21.59 -16.43 -13.71 -11.26

Cycle
Net Trade Cycle 9.63 11.26 12.50 13.22

To start with the receivables and the payables in 2017 was accurate with the firms ability
generate frequent sales and ability to collect the debt was high, followed by the quick movement
in the finish goods allowing the firm to improve their repayment capacity, however after the
2017 in all 2018,2019 and 2020 years the ratios are not favorable as the inventories took long
time to be sold and the company took loner time in collect the debt and make sales, resulting in
the reduction in the total working capital performance thereby extending the working capital
cycle. Hence it can be argued that the PepsiCo’s working capital cycle might have been extended
due to poor debt collection efficiency.

On the other hand the other areas such as trade turnover , net trade cycle and the cash conversion
ratios are favorable and has improved gradually over the period, therefore it can be conclude that
the despite the poor management in the receivables and payables control the companies working
capital management practices are healthy.

7. PA-7 Integrated Risk management strategy of PepsiCo

PepsiCo is known for its innovation across the markets and the diverse segments the company
caters, however the company has to always be innovative and therefore be risk-full indecision
making to please their diverse customer groups. Due to this reason the company can be
categorized as a risk seeker than a risk averse

7.1 Chart 04: risk categorization

As indicated above the risk categorization allows the firms to understand the necessary risks
associated with the firm. Based on the annual reports of PepsiCo. It is obvious that the company
faces strategic, operational, and reporting and compliance risk, as the strategic risk s exposed to
the company when their strategies related to the mergers, acquisitions and strategic alliances are
not paying of as expected, while operational risk can happen as the question six explains the
operational issue reducing the value creation of the firm, while the compliance and reporting
structure risk will be associated to the business protocols and legislative environment.

The PepsiCo Risk committee (PRC) is comprise of both employees and non-employee social
groups , who would look in to the business risk in the social and macroeconomic manner, hence
this diverse teams intention is to identify the risk that could be arise in the cooperate
environment.

Another strategy that would allow the firm to reduce the risk is their nature of financial
reporting, the firm is committed to generate integrated financial reports hence the report has lot
of forward looking content. This reporting format allows the organization to identify the future
risks associated with the various subsidiaries of the PepsiCo.

Another strategy at use was the diversification strategy of the firm that allows them not move
away from depending too much on the restful markets and move in to more emerging markets,
therefore the company has enter in to several joint ventures and mergers with the local and
foreign organizations, there move to acquired food brands parallel to beverage brand can be
shown as a clear example.
8. PA-8 The recommendations for PepsiCo
Figure 01: Inverse triangular structure

Instead of the existing multi divisional and functional MNC structure , the PepsiCo should adopt
the Inverse triangular structure where the decision flow and the information flow is clear and
transparent , therefore the issues associated the working capital efficiency identified in the PA-6
could have been easily solved through this method as the information flow is accurate the
process take time is less thereby reducing in inefficiencies from the cycle.

Another recommendation would be to incorporate a strategic financial decision making software

with the ERP system that would bring more options for the decision makers based on the macro
economic factors like world economic condition, financial and capital market moves. Although
the PepsiCo current ERP is advanced ERP focused on production improvement it is not focused
sufficiency on the financial management related aspects.

Another recommendation should be to reduce the dividend payout ratio in order to increase the
sustainability of the organizations, since the higher dividend pay out is the main trend of the firm
the P/E ratio is significant however in the long run the value creation by the organization would
be minimal as the retained earnings will be dried up and the reserves available engage in special
projects will reduce resulting in the reduction in the overall performance, innovation and the
sustainable outcomes.

Include the human capital aspects in the financial report is the next best thing that can be done,
as the organization PepsiCo is already facing an issue of high employee turnover and talent
turnover. Inclusion of the human capital related information in the financial report would urge
the top management and the human resource management to reconsider the employee
recruitment, training and talent management policies of the firm that would have an automatic
implication on the organizational performance.

The final recommendation would be to increase the redeemable preference shares quantity in the
capital structure of the organization, as the analysis done in the PA-2 to 4 clearly indicate that the
PepsiCo is currently experiencing the gearing issue where the debt y is larger compared to the
equity structure inside the firm, with a redeemable preference shares the share value would also
be maintained as once the preference shares are redeemed the ordinary shares will dominate the
capital structure and always the ordinary shares will be powerful in the capital structure of the
firm which is ideal for the organizations gearing ratios.

Conclusion
Overall it can be argued that the growth perspectives and the measures of the PepsiCo is taken
accurately , as the profitability and growth related aspects the company is doing way ahead of
the market norms , however the organization should be concerned about the long term financial
method that has overall higher debt related financial set up which will increase the risk aspects of
the organizations. However the organization is yet prove the creditors and debtors collection
efficiency as those measures indicate that the firm is underperforming in those working capital
management aspects, however it is obvious that the organization is using sufficient strategic tools
to cater their diverse stakeholder needs and their integrated financial reporting is essential in their
overall value creation system. While the integrated risk management strategy would allow the
organization to mitigate and hedge risk of the firm whenever possible.
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