Capital Expenditures Evaluation

Capital Expenditures Evaluation

[Author]

[Instructor]

[Course]

[Date]

Capital Expenditures Evaluation

PepsiCo vs. Coca Cola:

PepsiCo Incorporation is a multinational beverage and snack food manufacturing company that has been globally recognized, known and famous for its diverse product range. The company has wide range of products all over the globe and still it is sustaining its position by launching new products in the market. Many competitors exist in the market that are continuously competing the firm by introducing new and innovative products in order to attract customer’s attention. Coca Cola is giving the closest and tough competition to PepsiCo by introducing the same category of products but with different and appealing taste as well as quality.

Capital expenditures:

While comparing the capital expenditure of the two firm, it has been found that the capital expenditure of PepsiCo during the year 2012, 2011 and 2010 is $22, 399, $20,899 and $21, 476 respectively whereas; that of Coca Cola are $2,698, $9,094, and $6954. A clear and significant difference can easily be seen in the capital spending figures of both companies as in 2012 the Pepsi spent 22,399 million dollars while Coca Cola just spent $2,698. It means Pepsi’s capital structure is based on its debt and this ratio is higher as compared to Coca Cola. If we look critically at the capital invested by both the firm, then we could easily find out that PepsiCo has been spending more than Coca-cola however, a major portion in the capital spending of PepsiCo is that of debt that might negatively affect it in case it becomes tough for the company to timely pay-off its debts. Apart from the capital expenditure, other factors that might affect the debt capacity and capital structure of both the companies are as under (Dhar,  Chavas,  Cotterill& Gould, 2005):

The cash flow position strongly influences a company’s ability to borrow an additional debt as well as its capital structure. Companies only receive debt when their cash flows show positive figures.

1. Cash flow:

The return earned on different investment projects also plays a great role in deciding capital structure since higher the return on investment; more will be the capacity of a firm to utilize on more debt.

1. Return on Investment:

This ratio explains that whether the firm is able to pay off its debt interest or not so, the ratio must be good. A good interest coverage ratio would mean that the firm has sufficient earnings before income tax to make the interest payment on debt.

1. Interest coverage ratio:

This ratio is most reliable than the interest coverage ratio by considering the cash flows of the companies and therefore, helps in removing flaws in the previous ratio.

1. Debt service coverage ratio:

These costs are incurred when a firm is issuing securities in the market to raise its capital. The cost of borrowing debt is usually lower than that of equity. That’s why many firms get attracted towards debt financing.

1. Floatation cost:

There has been a negative relation between the tax rate and cost of debt. If tax rate is low, cost of debt will be higher and if the tax rate is high, then cost of debt will be low.

1. Tax rate:

The cost associated with issuing equity is called cost of equity. It is extremely greater as compare to debt, that’s why most of the companies rely on debt as compare to equity for raising capital.

1. Cost of Equity:

Financial and business risk also plays a vital part in determining a company’s ability to acquire debt as well as its capital structure. So, the firms must ensure the risk prevailing within business premises and outside the business.

1. Risk consideration:

Market condition either favorable or unfavorable might also be considered. The market risks are currently facedby both companies especially by Pepsi due to sudden change in soda drinks acceptability. The firms should make future decisions by keeping in view the changing market conditions.

1. Market condition:

The capital structure of other rival firms might also affect the capital structure decisions of a firm. Therefore, both PepsiCo and coca-cola must also keep in consideration the capital structure of other firm.

1. Capital structure of other firms:

If sales do stable it means the company is progressing profitably and creditors will also be willing to extend credit to the firm believe that with such steady and stable sales and revenues, they will get timely payment of their interest. Pepsi is stable in its sales from previous 3 years however Coca Cola is not stable in earning revenues as it showed significant low figure in the year 2012 as compared to Pepsi.

1. Growth and stability of sales:

Profit margin stability also gives signals in the market that this company is profitable and is good for making investment in it.

1. Profit margin stability:

The company’s size also plays a vital part in determining the funds flow into that organization. Say if the company is big, it could easily rise up fund but if it is a small company, it would face difficulty in raising funds for expansion, growth and other purposes. Both the companies have abilities to raise the significant fund whether to start new projects or to sustain the old ones.

1. Size of the Company:

Marketability of a company’s shares also plays a significant part in determining the capital structure of a firm and affects the company’s ability to borrow debt.

1. Marketability:

A low agency cost is preferable for determining the capital structure of a firm. But the firm would have to rely on debt capital if there arises agency problems due to any reason.

1. Agency cost:

Development of capital markets has also revolutionized the company’s choice of raising fund for its business and stability.

1. Development of Capital market:

Capital structure of Coca Cola and Pepsi:

It can easily be analyzed by using the debt-to-equity ratio. The facts regarding both companies capital structure will be revealed.

For coca cola:

Debt to equity ratio = total debt (liabilities) / total equity

= $24,276 / $ 24, 465

= 0.99 times

For PepsiCo:

$52,239 / $22,417 = 2.33 times

Interpretation:

The worth of debt is 0.99 for every dollar of shareholder’s equity but PepsiCo’s worth is 2.33 times higher than Coca Cola. It shows that PepsiCo is dependent on debt more than the Coca Cola and it may create problems in future regarding payment of debts.

References

The Coca Cola company, (2012). “FORM 10-K”, Annual Report, retrieved from:

http://www.coca-colacompany.com/annual-review/2012/pdf/form_10K_2012.pdf

The Coca Cola Company, (2011). Annual Report, retrieved from:

http://annualreport.2011.coca-colahellenic.com/downloads/ar2011.pdf

The Coca Cola Company, (2010). Annual Report, retrieved from: http://www.coca-colacompany.com/investors/2010-annual-report-on-form-10-k

Pepsico, (2012), “Management’s discussion and analysis, Annual report, Retrieved from:http://www.pepsico.com/download/PEP_Annual_Report_2012.pdf

The PepsiCo Incorporation, (2011). Annual Report, Retrieved from:

http://www.pepsico.com/annual11/downloads/PEP_AR11_2011_Annual_Report.pdf

The PepsiCo Incorporation, (2010). Annual Report, Retrieved from:

http://www.pepsico.com/Download/PepsiCo_Annual_Report_2010_Full_Annual_Report.pdf

Dhar, T., Chavas, J.P., Cotterill, R.W. & Gould, B.W.(2005). An Econometric Analysis of Brand-Level Strategic Pricing Between Coca-Cola Company and PepsiCo.Journal of Economics & Management Strategy.Volume 14, Issue 4, pages 905–931