Analysis of Pepsi Company Limited - Assignment Example

Analysis of Pepsi Company Limited 1. Questions a) From an analysis of the annual report of Pepsi Company, it is evident that the company’s biggest competitor is Coca Cola Company, a rival company that deals with the manufacture of soft carbonated drinks (PepsiCo, 2010). This conclusion is arrived at after considering the market demographics of the company, which indicate that Coca Cola controls the largest market share in the soft drinks and carbonated drinks industry. In the list of competitors in the industry, PepsiCo is the second competitor in the market for soft drinks. The strategy used by the company indicates that the management is in the process of creating action plans that try to augment the market share and take the lead competitor position in the soft drinks industry. The company tries to do this by increasing operations in all major cities of the world to rival the global presence of Coca Cola Company. b) The annual report also points out the fact the company uses the straight line on both depreciation and amortization, a factor which means that the company does not use reducing balance method (PepsiCo, 2010). When the different depreciation methods are compared, it can be seen that the straight-line method is the best for this type of company. This is because the straight-line method allocates the usefulness of the assets to the most productive life of the asset, meaning that when the asset is near obsolete, the depreciation allocated to the asset is small compared to the earlier life of the asset. Conversely, the reducing balance method of depreciation allocates depreciation according to the value of the asset, which ends up allocating depreciation even when the asset is near obsolete. The company also uses the straight-line method to amortize assets, loans and allocate capital expenditure. c) From the annual reports released in the fiscal year ended December 2010, the par value of Pepsi Company common stock is 1 2/3 pence per share (PepsiCo, 2010). This par value reflected by the financial statements of the company indicates that the value has remained constant since the company announced a stock split in 1996, which means that the share data have been adjusted to reflect the stock split. The par value of the shares has remained constant since the period, and capital in excess of the par value is reduced to reflect the increase in par value occasioned by the value of additional shares issued. This means that the par value is computed after the increase in quantity of shares outstanding, but the par value of the shares is not affected by the increase in capital outlay, instead, the company uses a share premium to reflect the increase in par value. d) Also from the annual reports for the year ended 2010, it is evident that Pepsi Company has repurchased (treasury stock) at the amount of 16,745 million dollars; repurchased at a value of 284 shares (PepsiCo, 2010). Stock repurchase is a strategy used by a company to return investment to shareholders of the company and is a substitute for dividend payment that helps a company to grow. Share repurchases creates treasury stock and is a strategy used by a company to ensure that the shareholders are kept satisfied, while at the same time increasing the liquidity of the company. In previous years, the company planned to increase the share repurchase contracts with customers to approximately $4 billion in 2010, a target that was achieved by the repurchase of 16,745 million shares in the year. e) At the end of the year 2010, the number of shares outstanding for Pepsi Company was 1,585 million shares, a figure that can be got from the company’s annual report for the year ended December 2010 (PepsiCo, 2010). To find the outstanding number of shares, a number of concepts have to be understood, the first concept being that a company is authorized by law to issue only a specific number of shares. From the authorized number of shares, the number of shares that investors hold and the restricted shares by the company are called outstanding shares. After the company releases outstanding shares, the remaining numbers of shares are released in subsequent periods through stock sales or rights issues. f) From the analysis of the cash flow statement presented by Pepsi Company Limited, it can be seen that the company uses the indirect method in the operating section of the cash flow statement (PepsiCo, 2010). This method of computing the amounts of cash from operations mainly reconciles net income to the cash available to the company because of operations by starting the computation with the net income and working down to compute the operation cash flow. This method is accomplished by taking the net income and adding back or subtracting those factors that are in the income statement but do not increase or reduce the cash balance. For example, depreciation expenses reduce the value of the net income, but in actuality, depreciation does not reduce the cash balance, therefore, the indirect method reduces expenses like depreciation before the cash from operations is computed. 2) From an analysis of the annual report of Pepsi Company for the year ended 2010, the first factor that is identified as affecting net income is the increase of competition, particularly from companies like Coca Cola (PepsiCo, 2010). As already discussed, the aspect of competition affects the company is several ways, because the company tries to increase the strategic influence in the world market. The company is trying to implement strategies that increase the market and competitive force of the company, therefore, the competition experienced by the company is an economic factor that affects operations. The other factor that is identified by the company as a potential influence on their net income is the effect of the legal and regulatory environment in which the company operates. This means that the legal and regulatory environment affects the operations of the company because the company has to adhere to regulations before any expansion or strategies are set. For example, if the company seeks to expand to new markets in other world regions, the regulatory environment has to be considered. An example of this is that the net income of the company will be affected by the working practices of the countries in which they operate. In a country in which customs restrict the working practices practiced by a company, the legal and regulatory environment affects the operations of the company; therefore, it can be concluded that a major factor that affects the net income of the company is the legal and regulatory environment of operation. Reference PepsiCo. (2010). 2010 Annual Report. 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