PepesiCo external financing
Finding funds can prove challenging for businesses at any stage of operations depending on factors such as size and scale of operations. Therefore, small-scale businesses find more challenging to fund expensive business ventures as compared to large businesses that have access to a large pool of fund sources. Listed companies are faced with financial needs such as business loans, equipment leases, and purchase, mortgage and cash advance loans which can be sourced through bank loans, crowdsourcing, and sale of bonds. This essay focuses on PepsiCo, a listed company to evaluate various methods that it uses to access funding. The essay will also evaluate the motive of accompanies of maximizing shareholder earnings and considerations into choosing a financing option. Moreover, investors are the owners of business undertakings providing the most require capital by taking risks.
The expectation for buying shares and taking risks is thus in the hope for returns which is directly proportional to the level of wealth made (Lau and Tong, 2008). Therefore, the maximization of net present work of a firms profit is the basis of financial decisions within a company. Ideally, the time value of money associated with earnings per share and the capitalization rate leads to wealth maximization. PepsiCo, Inc, similarly to other listed company is also concerned with profit maximization as a source of additional capital for financing its operations (Eljelly, 2004). Sales maximization is also a major concern of PepsiCo and other listed companies. The objective may fail to focus on the maximization of profits but is concerned with the growth of a firm’s share market (Smallbusiness.
chron. com, 2018). An increased market share is a means of achieving a monopoly in the long run which is helpful in increasing profits and realizing profitability for the organization. External sources of funding are within private means and financial markets available both in the long term and in the short term. Debt Financing is externally done through fixed payment includes bank loans, corporate bonds, leasing, trade credit, and debentures. Equity financing involves sharing of ownership and interests where shares can be sold to Ordinary shares and preference shares (S, 2018). Bank Loans These are fund borrowed externally from banking institutions for real estate, equipment, and inventory funding and business expansion. Loan obligations are entered into with the obligation of paying back to the financial institutions (Ayyagari et al, 2010).
Often, commercial paper is used to fund unsecured and short-term debt obligations usually for meeting short-term liabilities, inventories and accounts payables (Kacperczyk and Schnabl , 2010). Typically, a commercial paper financing instrument has a maturity date of less than nine months and is issued at a discount from the market face value that reflects the going interest rate at the time of acquisition. A commercial paper does not necessitate registration with Securities and Exchange Commission's within the maturity timeline of 270 days making it a cost-effective method of obtaining financing. Commercial paper borrowings are only used as current assets and in the acquisition of inventory. PepsiCo relies on commercial paper borrowings to finance its liquidity and to meet anticipated share repurchases, dividend payments and as a capital resource on yearly basis (Pepsico.
As a tool of business financing, leases are used in instances where a firm has more ease of renting other than purchasing based on factors such as duration of use and cost of acquisition. PepsiCo acquires plants, building, and equipment on lease basis to meets asset operating requirements. For the accounting period ended 30th December 2017, PepsiCo leased property worth $742 million (Pepsico. com, 2018). The use of Lease to finance asset use is utilized as it preserves the beverage producer working capital allowing it to be allocated to other users. Often associated with a high risk as compared to government bonds, corporate bonds usually use assets as collateral as the interests are often high. In debt financing, corporate bonds are issued in blocks of $1000 in par value are often associated with a standard payment coupon structure.
Investors fund issuing firms and are issued with bonds where they receive interest until the maturity of the said bond. Upon maturity, investors can claim a bond although firms can allow call provisions for early bond prepayment or sell before maturity. Bonds are safer to investors as compared to stocks as they are paid with creditors while the interest does not fluctuate. Thus, debentures are unsecured by assets or any form of collateral and its purchase is based on the buyers believe that the issue is unlikely to default on its payment. They are usually issued on a long-term basis at a low and fixed interest rate and are paid before dividends. Debentures can be convertible or nonconvertible into equity. For PepsiCo to use debentures for debt financing, it is based on its interests being tax deductible and as such, they can claim it as expenses against corporate income which is a benefit to the beverage producer (Pepsico.
com, 2018). PepsiCo considers the use of equity financing instruments as they are associated with the less financial burden (Pepsico. com, 2018). Given that equity financing essentially transfers use ownership of a business, there are no repayments obligations to Pepsi which have no consequences in the event of losses. Moreover, this gives the company more cash at hand to finance day to day operations, expansion, and growth of the business. Investors who finance Pepsi through equity are well experienced in the line of its operations and in the transfer of knowledge. Therefore, in the case of maturity periods of periods in between, the calculation of risk-free rate becomes an estimate. In calculating the cost of equity there are two models used; dividend discount model and CAPM models.
The estimation problems arise in the calculation since the two models of the cost of equity calculations also rely on estimated variables. The variations in the methods used in the calculation of Weighted Average Cost of Capital, assumptions, and estimates considered, calculations of Weighted Average Cost of Capital for PepsiCo are likely to vary with each analyst. rd 4. Weighted Average Cost of Capital informs a corporate entity such as PepsiCo on the amount of debt that is yet to be made. However, the process of Weighted Average Cost of Capital is problematic as it is often faced with numerous assumptions and estimations. A capital structure of a firm defines how the said firm finances its operations and growth requirements through debt acquisition and equity issuing (Baker and Wurgler, 2002).
The debt accrued at $33, 789 million at PepsiCo are high as compared to the equity at $10,981 million as at 30th December 2017 (Pepsico. com, 2018). Ayyagari, M. , Demirgüç-Kunt, A. and Maksimovic, V. Formal versus informal finance: Evidence from China. The Review of Financial Studies, 23(8), pp. , Levine, R. and Loayza, N. Finance and the Sources of Growth. Journal of financial economics, 58(1-2), pp. Economicshelp. No pain, no gain? Effecting market discipline via reverse convertible debentures. Capital adequacy beyond Basel: Banking, securities, and insurance, pp. Husted, B. W. and Allen, D. Q. Are Malaysian government-linked companies (GLCs) creating value. International Applied Economics and Management Letters, 1(1), pp. Norman, G. Weighted Average Cost of Capital. , Fu, X. and Ligon, J. A. Lease financing and corporate governance. Financial Review, 43(3), pp.
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