Diageo Simulation

Table of Content
1. Introduction 1
2. The decisions to sell Pillsbury and list Burger King 1
2.1 Volatility of cash flows 2
2.2 Probability of financial distress 3
2.3 Increased valuation of Diageo 3
2.3.1 Comparables 3
2.3.2 Cash flow 4
2.3.3 Increased leverage 4
2.3.4 Acquisitions 4
3. Implicit assumptions of the Monte Carlo simulation 4
3.1 Capital expenditure 5
3.2 Investment in intangibles 5
3.3. Working Capital 5
3.4 Consistency between implicit and explicit assumptions 5
4. Description of the working of the simulation 6
5. The results of the simulation in comparison with Diageo 's stated capital structure policy 6
5.1 Diageo 's stated capital structure policy 6
5.2 The results of the Monte Carlo simulation 7
5.3 Increase in gearing for Diageo 7
6. Conclusion 8
References II

1. Introduction
When Grand Metropolitan plc and Guiness plc merged in 1997, they created Diageo plc, the seventh largest food and drink company in the world. With annual
The main reason Diageo chose to sell Pillsbury and list Burger King was a change in business strategy, which would allow it to concentrate on its most important and profitable beverage alcohol business. The two divisions of Spirits and Wine and Guinness Brewing were the largest business segments of Diageo. Paul Walsh, the Group Chief Executive of Diageo, stated that he wanted to focus on “beverage alcohol, driving growth through innovation around our unrivalled portfolio of brands and providing an improved base for sustained profitable top line growth” (Chacko and Tufano 2003, p. 2). By eliminating the food segment from the portfolio, and focusing solely on beverage spirits, the company sought to achieve sustainable growth in the future, at higher rates than the 8% currently brought in by the Spirits and Wine business. Diageo’s strategy to focus on premium brands and pricing boosted their operating profit growth