Debt-to-Assets Ratios

ACC 318 Module Two Assignment Template Complete this template by replacing the bracketed text with the relevant information. Debt-to-Assets Ratios 1. Calculate the quality of the debt-to-assets ratios for both companies. Pepsi: total debt $79,366/total assets $92,918 = 0.85 or 85% CocaCola: total debt $66,012/total assets $87,296 = 0.756 or 75.6% 2. Explain the quality of the debt-to-assets ratios for both companies. Coca-Cola has a debt-to-asset ratio of 0.756 or 75.6% meaning 75.6% of their assets are financed through debt. High ratios suggest a higher leverage and increases financial risk. Pepsi has a debt-to-asset ratio of 85% which can affect investment decisions and increase financial risks. 3. Determine which company is more highly leveraged. With a debt-to-asset ratio of 85% PepsiCo is more highly leveraged than Coca-Cola's debt-toasset ratio of 75.6%. Times-Interest-Earned Ratios 1. Calculate the times-interest-earned ratios for both companies. PepsiCo 7175+(-1128)/(-1128)=(7176) or (7.18%) Coca-Cola 7768+1437+1981/1437=7.78% 2. Explain the times-interest-earned ratios for both companies. Address the following questions in your response: A. Are the times-interest-earned ratios adequate? B. Is the times-interest-earned ratio greater than or less than 2.5? What does that mean for the companies' income? C. Can the company afford the interest expense on a new loan? A. Since Pepsi has a negative ratio that makes it inadequate and Coca-Cola would be the adequate one between the two companies. B. PepsiCo's ratio is negative and is less than 2.5. This means they do not have enough to cover the interest expense. On the other hand Coca-Cola's ratio is greater than 2.5 meaning the company will have enough to cover the interest expense. C. Since PepsiCo has a negative ratio they would not be able to afford the interest on a new loan. Coca-Cola's ratio being above 2.5 will be able to pay the interest expense on a new loan. Foreign Debt 1. Explain why The Coca-Cola Company and PepsiCo, Inc. may use foreign debt to finance their operations. Using foreign debt to help pay for their debt is a good idea because other countries may have lower interest rates. When borrowing abroad the company will be subject to the currency of the country from which they choose to borrow from and can reduce the company's exposure to currency risk. 2. Explain the risks involved in using foreign debt to finance operations. Some risks that may be involved in using foreign debt to finance operations is currency exchange rates. Since foreign debt is usually in the country's currency they borrow from a depreciation in the currency may increase the debt and lead to a higher repayment. Interest rate risk is another risk. A change in the interest rate in the country they are borrowing from can have an affect on the cost of servicing the debt and can lead to an increase in their expenses. References Include any references used to complete this assignment. This section is for the full citation. Sources should be cited using APA style. Appendix C: Specimen Financial Statements: The Coca-Cola Company. (n.d.). Intermediate Accounting Wiley Reader. Retrieved November 7, 2024, from https://read.wiley.com/books/9781119778899/page/39/section/top-of-page Appendix D: Specimen Financial Statements: PepsiCo, Inc. (n.d.). Intermediate Accounting - Wiley Reader. Retrieved November 7, 2024, from https://read.wiley.com/books/9781119778899/page/40/section/top-of-page Vipond, T. (n.d.). Times Interest Earned. Corporate Finance Institute. Retrieved November 8, 2024, from https://corporatefinanceinstitute.com/resources/commercial-lending/times-interest-earned/