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, 2008 (amounts in millions):
| Coca-Cola Co. | PepsiCo., Inc. |
Net revenues | $31,994 | $43,251 |
Net income | 5,807 | 5,142 |
Total assets, January 1, 2008 | 43,269 | 34,628 |
Total liabilities, January 1, 2008 | 21,525 | 17,394 |
Total liabilities, December 31, 2008 | 20,047 | 23,888 |
Total stockholders’ equity, December 31, 2008 | 20,472 | 12,203 |
Required:
a.Calculate ROI and ROE for each company for 2008. (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 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 2008.
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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