Chapter 7, Problem 4ATC

Writing Assignment Definition of elements of financial statements

Putting “yum” on people’s faces around the world is the mission of Yum! Brands, Inc. Yum! was spun off from PepsiCo in 1997. A spin-off occurs when a company separates its operations into two or more distinct companies. The company was originally composed of KFC, Pizza Hut, and Taco Bell and was operated as a part of PepsiCo prior to the spin-off. In 2015, Yum! had total assets of $8.08 billion, long-term debt of $3.05 billion, and total liabilities of $7.10 billion. Yum!’s income before interest and taxes in 2015 was $1.92 billion. Its average interest rate on long-term debt was approximately 4.4 percent.

Required

a. Assuming Yum! incurs interest expense mostly on its long-term debt, how much interest did Yum!incur in 2015, assuming the average interest rate remains at 4.4 percent?

b. Does the debt seem excessive compared with the amount of 2015 net income before interest and taxes? Explain.

c. Assuming Yum! pays tax at the rate of 25 percent, what amount of tax will Yum! pay in 2015?

d. Assume you are the president of the company. Write a memo to the shareholders explaining why Yum! would want to finance so much of its assets with debt rather than stockholders’ equity.