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Read the PepsiCo, Inc.: Cost of Capital case and complete this assignment, drawing upon what you have studied in this lesson. Recognize that you are developing cost of capital estimates and that different analysts may come up with different estimates. You want to use the data in the case to develop your inputs and outline the assumptions that you are making and describe the calculations employed to develop your estimates.
You should present your findings in a report to the CFO not to exceed two pages of text (typed, double-spaced, 12-point font, one-inch margins) plus one or two exhibits. Your report should contain an introduction, a summary of your analysis, and a conclusion. You will want to use an Excel spreadsheet to do the analysis for this assignment, but any exhibits should be produced in MS Word. You should upload only one Word file containing the text of your report plus exhibits. Use the following questions to focus your analysis, but your report should not be in question-and-answer format.
- What is the overall cost of capital for PepsiCo (using beta of 1.1)? Do you agree with the 11% number stated by PepsiCo? If not, why could your number differ from 11%? Use total interest-bearing debt (short-term and long-term) as debt.
- What are the costs of capital for the individual business segments? Estimate these using data in the case and the pure-play method.
- Do the costs of capital for the business segments add up to the overall cost of capital? Why or why not?
- What is the danger of using the overall cost of capital to make decisions at the divisional level? Give examples of the types of errors that could occur. Can you think of some other uses for a divisional cost of capital?