Assignment
Case Study: Probability (Pepsi Co)
For the remainder of this project, Pepsi Co will be the company you will work on. Make sure to keep all assignments as you will need it to complete the remaining parts of the case study.
To view financial statements for your company, please view Morningstar, Yahoo Finance, or Reuters. Reuters is free but will require you to sign up.
To begin your analysis of your firm's profitability, you must first find the following ratios for your firm and its industry averages: Total Debt to Equity, Interest Coverage, Net Profit Margin, Total Asset Turnover, Return on Assets an d Return on Equity . Please note that Reuters displays all of these ratios as whole numbers, but all except Interest Coverage and Total Asset Turnover should be followed by a % sign. For example, if ROA (TTM) is shown as 16.17, it should be read as 16.17%. Interest Coverage and Asset Turnover are shown in times per year, so turnover of .59 indicates that the firm's assets turn over less than once per year while interest coverage of 23 indicates its operating income is 23 times larger than its interest expense.
Use, Yahoo Finance, or Reuters to find your firm's financial reports.
Then answer the following 6 questions below:
1. How does your firm's profit margin compare to that of firms in its industry?
2. How does your firm's asset turnover compare to that of firms in its industry?
3. Generally we see a trade-off between profit margin and turnover, as high margin products often have lower sales volume than low margin products. Which describes your firm's ratios best: high margin or high turnover? Does that seem to be consistent with what you know about the firm's strategy? (Ex. We know Wal-Mart positions itself as having the lowest prices, so we expect them to have low margins and high turnover.) Is this an industry-wide approach in your industry or are some firms the "low price leaders" while others are the "luxury" brands?
4. Return on Assets (ROA) is one measure of the effectiveness of a firm's investment policy. Using DuPont Analysis, ROA is equal to Net Profit Margin times Total Asset Turnover. How does your firm's ROA compare to that of firms in its industry? Would you say your firm's approach to the trade-off between margin and turnover is successful? (Ex. A firm may lower margins to increase turnover but the resulting increase might not be enough to make the firm's ROA as good as or better than its competitors. That would be unsuccessful.)
5. Return on Equity (ROE) measures the effectiveness of a firm's investment policy and its financing or capital structure policy. Using DuPont Analysis, ROE equals ROA (the investment results) times Equity Multiplier (the effect of debt financing); therefore larger differences between ROA and ROE indicate more leverage. Does your firm appear to use a lot of debt to "lever up" ROE? Does your firm's use of debt seem risky (interest coverage < 4)?
6. Complete or reword the following sentence, filling in the blanks: ( Enter your firm's name) has relatively ______ margins and ______ turnover. Net profit margin times total asset turnover equals ROA, which is a measure of the effectiveness of a firm's investment policy. ROA times the equity multiplier equals ROE. Firms can therefore boost their return to stockholders by using debt to finance investments. The more debt used, the greater the boost but also the greater the risk of bankruptcy. ( Enter your firm's name ) ROE is relatively ______ because _____ (enter margin, turnover, and/or leverage) is ______. My firm _______(should or should not) consider using more debt because ______ .
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.