FIN 550 - Milestone Four -Macroeconomic Items

docx

School

Southern New Hampshire University *

*We aren’t endorsed by this school

Course

550

Subject

Finance

Date

Jan 9, 2024

Type

docx

Pages

Uploaded by SargentSandpiperMaster672

1 | P a g e Milestone Four: Macroeconomic Items Southern New Hampshire University FIN 550 – Corporate Financial Management November 05,2023 Macroeconomic Items Analyze the implications of interest rate changes on any of the calculations you performed.

2 | P a g e Current Market Interest Rate at 8% Interest Rate 8.00% Years 2020 2021 2022 Amounts* 6,373.00 $ 6,991.00 $ 5,604.00 $ Pv* (5,900.93) $ (5,993.66) $ (4,448.64) $ Total Pv* (16,343.22) $ *In millions If the current market interest rates are 8%, we notice that PepsiCo’s PV will continue to increase in ’20 & ‘21 because the FCF is increasing as well. In 2022 the FCF decreased significantly, causing the PV to decrease as well. When analyzing the relationship between FCF and PV at a high level we notice that they move in the same direction. When FCF increases so does PV and when FCF decreases, PV goes down as well. Lower Current Market Interest Rate to 4% Interest Rate 4.00% Years 2020 2021 2022 Amounts* 6,373.00 $ 6,991.00 $ 5,604.00 $ Pv* (6,127.88) $ (6,463.57) $ (4,981.94) $ Total Pv* (17,573.39) $ *In millions If the market rates were to decrease from 8% to 4% over the same three-year period, we notice that the total PV for PepsiCo will increase by $1,230. The company finances most of its operations by debt, at the end of 2022 PepsiCo had a total long-term debt of $74.9B. When market rates go down, PepsiCo’s interest expense on debt will decrease. The decrease in market interest rates allows the company to allocate less of its cash flow to service debt. As a result, its FCF increases, allowing the company to pursue other investments or increase its shareholder

3 | P a g e value. When market rates decrease, the value of existing bonds will increase because the fixed coupon rates on existing bonds become more attractive for the investors when compared to newly issued bonds which offer lower coupon rates. Therefore, the bond prices will increase above their face value which in return will make investors pay a premium to acquire them. The increase in price and demand for the bonds will have a positive effect on the company that is trying to raise capital and they will raise more capital than originally anticipated. A decrease in market interest rates also impacts the PV of the company because it impacts the DCF analysis by lowering the discount rate. A lower discount rate means that future cash flows are worth more in today's terms. Therefore, the PV of a company's future cash flows will increase. As a result, the company looks more attractive to investors, as its assets and expected cash flows are more valuable. (Ehrhardt, M. C., & Brigham, E. F. 2019) 3. Increase Current market Interest Rate to 12% Interest Rate 12.00% Years 2020 2021 2022 Amounts* 6,373.00 $ 6,991.00 $ 5,604.00 $ Pv* (5,690.18) $ (5,573.18) $ (3,988.82) $ Total Pv* (15,252.18) $ *In millions When market interest rates increase from 8% to 12% for the same three-year period, we notice a decrease in FCF and a decrease in total PV of $1,091.04. An increase in market rates means that the company will have to pay a higher interest rate for existing debt, and it will cost the company more to raise new debt. Since PepsiCo is allocating more funds towards the higher interest rate, that means that their FCF will decrease. This will also lead to a decrease in capital investments which will result in smaller revenue and lower FCF. An increase in market interest

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

4 | P a g e rates will also cause an increase in the discount rate. Since the discount rate is used to calculate a company’s PV, that means that the PV will decrease when the Market rates increase. How might an issue (negative or positive) within the overall stock market impact the company’s stock valuation numbers, other financial variables, or its overall portfolio management? The overall stock market's performance can directly influence a company's stock valuation, financial variables, and portfolio management strategies in different ways depending on the specific company. The stock market’s status of “bear” or “bull” is the one condition that affects all companies. “A bull market refers to major upswing in the markets, while a bear market is a pronounced market downturn. Bull markets often correspond to periods of economic and job growth; bear markets are often tied to periods of economic decline and a shrinking economy (Wohlner, 2023). During a bear market the stock prices of many companies decline, this results in a lower valuation for the company. Because a bear market happens during an economic decline, the consumers will not purchase items that are non-essential such as sodas and chips. The behavior of the consumer will affect sales and revenues. A decline in sales and revenue will directly influence the company’s financial variables. The downturn in the economy will also impact the company’s liquidity and financing. It can become harder for PepsiCo to raise capital by issuing new equity or debt. Meanwhile, portfolio managers need to make the necessary adjustments to balance their portfolio. They might need to sell underperforming assets and purchase safer investments. They also need to diversify their portfolio to minimize their risk exposure. On the other hand, a bull market will have the opposite effect on PepsiCo. Since the economy is in a period of economic growth, that means that consumers will be spending more money purchasing the various products owned by PepsiCo, directly increasing sales and revenue.

5 | P a g e The increase in revenue will make it easier for PepsiCo to raise capital at favorable terms. Since the bull market will have a positive impact on the company’s financial variables, that will make the company more attractive to investors and its stock price will increase. Portfolio managers will also adjust their strategies by increasing investments in riskier assets that promise higher returns. Analyze the impact of any external factor (i.e., external to the company) discussed throughout the course on the company’s financial position. PepsiCo is following a great approach to minimize the effects of external factors on their financial position. In their website the company identifies stakeholders as “groups who directly or indirectly impact our business success, or who are impacted by our operations. The insights that we receive from customers, consumers, shareholders, employees, suppliers, governments, and civil society including non-governmental organizations (NGOs) is critical to how we develop, implement, and evolve our business and sustainability agendas. Engaging with our stakeholders helps us to identify emerging sustainability risks and opportunities, prioritize our efforts, and create long-lasting value for our company and society.” (Stakeholder-engagement, 2023). Even though Pepsi has taken measures to protect itself from external factors, like other large corporations, it will be influenced by a variety of external factors such as economic, political, social, technological, and environmental. As mentioned earlier, economic conditions such as a declining economy or a growing one will affect consumers behavior which in return will directly affect the company’s revenues. Consumer behavior can also negatively affect the company during a bull market if the consumers are moving away from traditional snacks and beverages and are able to afford healthier options that could be more expensive. Since PepsiCo is a multinational corporation, it is affected by fluctuations in currency exchange rates. “The effects

6 | P a g e of exchange rates are important because the cash flows in various parts of a multinational corporate system will be denominated in different currencies.” (Ehrhardt, M. C., & Brigham, E. F. 2019) A strong US dollar can reduce the value of overseas profits when converted into the U.S currency. Some political and regulatory factors that can affect PepsiCo are government regulations and taxation. “The terms under which companies compete, the ability to curtail unprofitable operations, and the terms of trade on various transactions often are determined not in the marketplace but by direct negotiation with host governments.” (Ehrhardt, M. C., & Brigham, E. F. 2019) Domestic government regulations such as changes in health and safety standards and food labeling requirements can impact their profitability as well. Changes in tax laws and rates both in the US and internationally can cause strikingly different after-tax cash flows for identical transactions. Other external factors that can affect PepsiCo is the behavior of their main competitors, especially competitors like Coca-Cola that is strong enough to influence pricing and market share. Lasty, global events like political instability, trade issues and conflicts in different regions of the world affect the companies’ finances by disrupting their supply chain and directly impacting revenue and profits. References:

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

7 | P a g e Ehrhardt, M. C., & Brigham, E. F. (2019). Corporate Finance: A Focused Approach (7th ed.). Cengage Learning US. https://mbsdirect.vitalsource.com/books/9781337910231 Wohlner, R. (2023, September 8). Bear vs Bull Market: Key differences for investors to know | time stamped. Time. https://time.com/personal-finance/article/bear-vs-bull-market/ Stakeholder engagement. PepsicoUpgrade. (2023). https://www.pepsico.com/our-impact/esg- topics-a-z/stakeholder-engagement