Through my research of Pepsico, I have calculated the cost of capital. A
firm's cost of capital is imperative because it represents the funds used to
finance the firm's assets and operations. First you have to estimate the cost
of capital in order to minimize it.
In estimating the cost of capital, you first have to find the cost of
each capital component and then combine the component costs to find the weighted
average cost of capital. First, I calculated the cost of debt. Pepsico's bond
consisted of 7 5/8 coupon rate, maturing in 1998 at a price of $1023.80. I
figured the payments to be $38.15(.0763*1000/2). I then used my financial
calculator to find the bond yield of 5.16% by entering in 1023.80=PV, 1000=FV, 2=
N, 38.15=PMT. The bond was calculated semi-annually, therefore I multiplied the
answer for I/Y times 2 to get 5.16%.
The next step would be to calculate the preferred stock, however my
stock had none. I then went to the third step of calculating cost of retained
earnings. First I found the three growth rates which were historical, forecast,
and sustainable growth. The historical and forecast annual rates I simply
pulled directly from Value Line under Past 10 years and estimated years of the
dividends. They both were 14.0%. The sustainable growth is calculated by
taking the retention rate (b) and multiplying it by the return on equity (r ).
To find b, I first calculated the dividends payout ratio which is DPS/EPS. I
pulled DPS and EPS from value line under 1997. Then to find the retention rate,
I subtracted the ratio from 1. Next, I calculated r, by taking net income and
dividing it by net worth. These figures I also pulled from Value Line. My b=
.352, and r=28.68%. Then the third growth rate was 10.10(.352*28.68).
Still calculating the cost of retained earnings, I then calculated my
cash flows by the discounted cash flow approach. For the first three cash flows,
I took the dividend of the stock... [continues]
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