Analytical case—comparative analysis of profitability and financialleverage measures The annual reports of the Coca-Cola Co. and PepsiCo, Inc. ,indicate the following for the year ended December 31, 2011 (amounts in millions):Coca-Cola Co. PepsiCo, Inc.Net revenues.................................................................................. $46,452 $66,504Net income..................................................................................... 8,634 6,462Total assets, January 1, 2011......................................................... 72,921 68,153Total liabilities, January 1, 2011 ....................................................... 41,607 46,667Total liabilities, December 31, 2011 ................................................. 48,053 51,983Total stockholders’ equity, December 31, 2011.............................. 31,921 20,899Required:a. Calculate ROI and ROE for each company for 2011. (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 thateither firm uses financial leverage more effectively than the other? Explain youranswer. (Hint: Compare the percentage differences between ROI and ROE foreach firm. Is there a significant difference that would suggest that one firm usesleverage more effectively than the other?)c. Calculate the debt ratio and debt/equity ratio for each firm at the end of 2011.d. Compare the results of your analysis in part c to your expectations concerning therelative 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.
Analytical case—comparative analysis of profitability and financial
leverage measures The annual reports of the Coca-Cola Co. and PepsiCo, Inc. ,
indicate the following for the year ended December 31, 2011 (amounts in millions):
Coca-Cola Co. PepsiCo, Inc.
Net revenues.................................................................................. $46,452 $66,504
Net income..................................................................................... 8,634 6,462
Total assets, January 1, 2011......................................................... 72,921 68,153
Total liabilities, January 1, 2011 ....................................................... 41,607 46,667
Total liabilities, December 31, 2011 ................................................. 48,053 51,983
Total
Required:
a. Calculate
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 ROI 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 2011.
d. Compare the results of your analysis in part c 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.
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