PepsiCo, Inc.: Cost of Capital case

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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.

  1. 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.
  2. What are the costs of capital for the individual
    business segments? Estimate these using data in the case and the
    pure-play method.
  3. Do the costs of capital for the business segments add up to the overall cost of capital? Why or why not?
  4. 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?

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