ACCT 4204
September 26, 2014
Sinclair
PepsiCo
PepsiCo (NYSE: PEP) is a global food and beverage company that was founded in New Bern,
North Carolina in 1919. Currently, it is headquartered in Purchase, New York, although has recently
been moved for the time being to White Plains, New York while their Purchase building is undergoing
construction. As of market close on September 22, 2014, PepsiCo’s common stock price was trading at
$93.58 (close to a 52-week high, reached $94.21 on September 19) and its market capitalization is
$141.0 billion. PepsiCo has operations in over 200 countries throughout the world and employs 274,000
people according to their 2013 Annual Report. At the helm of these operations is CEO and Chairman of
the Board Indra Nooyi, who has been in that position since 2006. Notable companies that are
subsidiaries of PepsiCo are Frito-Lay, Gatorade, Quaker Oats, Tropicana, Smiths Crisps Australia,
Walkers Crisps United Kingdom, Naked Juice, and Lipton.
According to PepsiCo’s form 10-K for 2013, which was released on February 14, 2014, PepsiCo
had overall sales of $66,415 million in 2013, with $21,068 million coming from the Americas. These
revenues also included $6,507 million in sales coming from Asia, the Middle East, and Africa. $13,752
million came from Europe. Other revenues came from food sources; Frito-Lay North America had
$14,126 million, Quaker Foods North America had $2,612 million, and Latin America Foods had $8,350
million.
For PepsiCo’s cost of equity I have chosen to use the CAPM model, by taking the risk-free rate of
a U.S. 10-year bond, which is currently at 2.57% as of September 24, 2014. I thought that this was a safe
bet to use since there was no default risk. Since we used the 10-year Treasury bond, I have chosen that as
a time horizon for all factors in order to keep consistency. This includes the average S&P 500 return,
which is 8.12% for 10 years. Another variable that we needed for the equation for CAPM is PepsiCo’s
beta – which I computed by taking the weekly historical stock prices of PepsiCo and the S&P 500 since
September 13, 2004 – September 15, 2014 and did a regression analysis of them to get PepsiCo’s beta of
.464*. The last variable in the equation was the weighted regional risk premium; this was determined by
weighting the revenue allocated to each region and multiplying it by the risk premium for that region
(below is a detailed worksheet of this), I had determined this number to be 2.67%. I was looking to add a
lambda into my equation but was so far unsuccessful because since there is no information about the
percentage of sales by country, only by region, it is not likely to get an accurate idea of a lambda at this
moment unless more detailed information arises. Therefore, our cost of equity could be determined by:
Cost of Equity = U.S. Risk-Free Rate + Beta (U.S. Market Risk Premium + Weighted Regional Risk
Premium)
=2.57% + .464 (8.12%+2.67%)
=7.58%
One going concern that is staying consistent with me through my PepsiCo cost of equity analysis
is that PepsiCo is reliant on prices of commodities, especially sugar, wheat, and corn. However, in the
10-K, they state that their risk is managed through their “use of fixed-price contracts and purchase
orders, pricing agreements and derivatives. In addition, risk to supply of certain raw materials is
mitigated though purchases from multiple geographies and suppliers.” With that being said, I am
continuing to use the CAPM model for now, but it is subject to change to the APM model.
According to the S&P ratings, PepsiCo had earned a credit rating of an “A”, the company’s bond
rating is at 2.75% (after tax) as of February 17, 2014. Also determined was the weighted average marginal
tax rate among the regions that PepsiCo had earned its revenues. This again, was taken by finding an
average tax rate by each region and multiplying it by the percentage of revenue that PepsiCo had
allocated to that region (see worksheet below for detailed work), this was determined as 27.07%. Our cost
of debt equation is as follows:
Cost of Debt = Firm’s Bond Rating x (1-Weighted Marginal Tax Rate)
=2.75% x (1-27.07%)
=2.01%
Sources consulted:
www.pepsico.com
http://www.sec.gov/Archives/edgar/data/77476/000007747614000007/pepsico201310k.htmhttp://www.treasury.gov/resource-center/data-chart-center/interestrates/Pages/TextView.aspx?data=yield
http://www.stockresearching.com/2014/02/17/pepsico-fundamental-analysis-wacc-cost-of-debt-andcost-of-equity-pep/
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html
http://quicktake.morningstar.com/index/IndexCharts.aspx?Symbol=SPX
http://www.kpmg.com/global/en/services/tax/tax-tools-and-resources/pages/corporate-tax-rates-table
.aspx
*Calculations of beta are in attached excel spreadsheet
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