An EPS/EBIT analysis is one of the most widely used techniques for determining t

Question

An EPS/EBIT analysis is one of the most widely used techniques for determining the extent that debt or stock should be used to finance strategies to be implemented. This exercise can give you practice performing EPS/EBIT analysis.

Instructions:

Amount PepsiCo needs: $1B = to acquire Monster Beverage

Interest Rate: 3%

Tax Rate: 2090/8304=25.2% is PepsiCo's tax rate in 2012

Stock Price: $83 in may 2013

Number of shares outstanding: 1.544B

Prepare an EPS-EBIT analysis for PepsiCo. Determine whether PepsiCo should use all debt, all stock, or a 50-50 combination of debt and stock to finance this market-development strategy.

Develop an EBS-EBIT chart after completing the EPS-EBIT table.

Give a three sentence recommendation for PepsiCo's CFO,

Explanation / Answer

COMMON STOCK FINANCING DEBT FINANCING COMBINATION

ITS BETTER FOR PEPSICO TO GO FOR DEBT FINANCING, AS HERE IS ONLY SLIGHT DIFFERENCE IN EARNINGS, BUT ALTHOUGH LITTLE RAISE OF EARNINGS ARE IN DEBT FINANCING ONLY.

RECESSION NORMAL BOOM RECESSION NORMAL BOOM RECESSION NORMAL BOOM EBIT 2.090B 5.197B 8.304B 2.090B 5.197B 8.304B 2.090B 5.197B 8.304B INTEREST 0 0 0 0.03 0.03 0.03 0.015 0.015 0.015 EBT 2.090 5.197 8.304 2.06 5.167 8.274 2.075 5.182 8.019 TAX 0.53 1.31 2.09 0.52 1.30 2.09 0.52 1.31 2.02 EAT 1.56 3.887 6.214 1.54 3.867 6.184 1.555 3.872 5.999 NO. OF SHARES 1.556 1.556 1.556 1.544 1.544 1.544 1.550 1.550 1.550 EPS 1.00 2.49 3.99 0.99 2.50 4.00 1.00 2.49 3.87

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