PepsiCo's Capital Structure Choices - Essay Example

o is used in the analysis of the financial statements and this helps analyze the protection that the company has available to the creditors (Samuels, Wilkes, & Brayshaw, 1995). A high ratio generally expresses that the business has a high level of risk and this is mainly because the company requires meeting the principal and interest on its own obligation, without any external financing as the creditors are unwilling to finance the company due to the high debt position. A lower ratio shows that the company is more financially stable and is in a better financial position to avail debt in the future.

The net debt ratio is a useful tool to bring out the current performance of the company and also helps the investors gain a clear idea of the financial standing of the company. Either too high net debt ratio or too low are both not acceptable. Here a ratio above 1.0 should be avoided as this clearly indicates that the investors have a greater stake in the business (Bull, 2007). However, a ratio that is too low simply implies that the business is too conservative and not realizing its potential.

The net debt ratio of the firm is found using: The total debt of a company simply implies the overall combined value of the current liabilities, long term liabilities and the capital liabilities (Chapman, Hopwood, & Shields, 2007). Although in most theories the book value of the debt is considered, in reality, the market value is normally taken into account. The market value of debt is generally more difficult to obtain since most firms do not keep their debts in the form of outstanding trading in the markets.

In most cases companies tend to keep the debts in the form of book value (Clayman, Fridson, & Troughton, 2008). It is important to also understand here that use of book value can give mis-leading values as the actual values might be significantly different. Using a book value can have three main mismeasurements. Firstly, it can have an impact on the cross sectional