Question

Analytical case-comparative analysis of profitability and financial lever-age measures The annual reports of the Coca-Cola Co. and PepsiCo. INC., indicate the following for the year ended December 31, 2014 (amounts in millions):

	Coca-Cola Co.	PepsiCo. INC.
Net revenues	$45,998	$66,683
Net income	7,124	6,558
Total assets, January 1, 2014	90,055	77,478
Total liabilities, January 1, 2014	56,615	53,089
Total liabilities, December 31, 2014	61,462	52,961
Total stockholders' equity, December 31, 2014	30,561	17,548

Required:

a. Calculate ROI and ROE for each company for 2014. (Hint: You will need to calculate some of the numbers used in the denominator of these ratios.)

b. Based on the results of your ROI and ROE analysis in part a, do you believe that either firm uses financial leverage more effectively than the other?

Explain your answer. (Hint: Compare the percentage differences between ROl and ROE for each firm. Is there a significant difference that would suggest that one firm uses leverage more effectively than the other?).

c. Calculate the debt ratio and debt/equity ratio for each firm at the end of 2014.

d. Compare the results of your analysis in part e to your expectations concerning the relative use of financial leverage in part b. Do the debt and debt/equity ratios calculated in part c make sense relative to your expectations? Explain your answer.

Answer 1

	Coca Cola	Pepsi Co
ans a	7.82	8.86 %
ROI=Net Income/Avg Tota lassets	7123/((90055+92023)/2)*100	6558/((77478+70509)/2)*100
Total assets for 2014	92023.00	70509.00
	61462+30561	52961+17548
2) ROE
Net Income/Avg equity *100	22.26	31.28
	7123/((30561+33440)/2)*100	6558/((17548+24389)/2)*100
Equity as on Jan 1 2014	33440.00	24389.00
	90055-56615	77478-53089
ans b Yes Pepsi Co uses financial leverage better than Coc cola company :
1) ROI of Pepsi co is 8.86% as compare to ROI of coca cola 7.82%
2) ROE of Pepsi co is 31.28% as compare to ROE of coca cola 22.26%
In ROE there is significant difference of approximately 9%, which is due to financial leverage
ans c
Debt ratio	0.67	0.75
Total liabilities/Total assets	61462/92023	52961/70509
Debt/equity ratio	2.01	3.02
Total Debts/Total Equity	61462/30561	52961/17548
ans d
Yes, the effect of financial leverage can be proved by analyzing Debt ratio and Debt to equity ratio
Pepsi co debt ratio is .75 that means 75% of total assets are financed by debts which is higher than Debt ratio of Coca cola
Also Debt to equity ratio of Pepsi co is 3.02 is higher than of Coca cola company whose ratio is 2.01
So, Pepsi co ROI and ROE is higher due to financial leverage.
But at the same time it is more riskier to invest in Pepsi co as it is more dependent on debts rather than equity, Coca cola
is less riskier
If any doubt please comment