Diageo Plc. Harvard Case Solution & Analysis

Challenges Faced

The organization is having some challenges with respect to finance and portfolio criteria. Mr. Cray has researched on the financial management according to the text book. In that book it defines the gearing status, interest coverage ratio and tax benefit advantages. These are thought to be new to the head of the organization and they should implement for improving the financial position of the company. The enterprise is also planning to its exit strategy which is an essential part of the business. On the other hand organization also have some challenges with respect to expansion or re-engineering of the business process which is depicted in the case scenario. These are the core elements that determine the financial strength, stability and sustainability over the period of time.

Analysis

The analysis is done in due light of a case exhibits and their criteria of financial management, which plays an important part of maintaining the capital structure of the enterprise. In this analysis report is conducted on the operation of the business for the better improvements in the major area of lacking. The recommendations are also based on the further development of the enterprise with regards to interest shield and tax relief. The following are the main areas that are to be highlighted to cover possibly in understanding the scenario in real terms:

  • Revenue of Pillsbury and Burger Kings
  • Different Strategies of the capital structure
  • Additional Changes must be reviewed
  1. How has Diageo historically managed its capital structure?

Solution 1

The historical capital structure policy

Diageo manages its capital structure with the help of debts and equity in which major part was covered by debt portion. They have been using this policy since their merger to maintain its high crediting rating in the market. Prior to the merger their credit rating was AA and A respectively, then later after merger their ranking moved to A+. This strategy continues in the future and interest coverage rate should be maintained between 5 to 8 times and operating profit to total debts should be in between 30% to 35%. These are basic guidelines for the understanding of the environment of capital structure. The analysis is also done with interest and debt effects which is reflected in the excel sheet file name as “Industry comparison” and also mentioned in the Appendix B.

For evaluating the better assessment, the company should compare its segments with the geographical segments which is reflecting the industry results. This technique is good to evaluate competitor with respect to the finance as well as management sides.

In the industry comparison the interest coverage times represent 5 times of the company. While on other side industry of alcohol, beer, packed foods and restaurants depict 8.05, 10, 7.88 and 7.9 times respectively, and the average results show that 8.46 times of interest covers which higher than the company. Interest coverage time is good when it is low and it is bad when its move to on high notes. This is also positive sign or negative sign depend on the nature of the organization. As per the case scenario its show lower times, which could go in the negative side of the enterprise. This indicates that the company needs more funds to re-measures its debt finance structure.

Now move to the analysis of operating income with respect to total debts of the Diageo public limited corporation represents the 34% with the comparison of average industry results which 58%. This average covers the segments of alcohol, beer, packed foods and restaurants which indicates 38%, 86%, 55% and 54% respectively. These results depict that company has been failed to extract the real punch of industry and it will reflect on the investor’s point of view which they will prevent to be stakeholders of this enterprise. The company has to make certain changes with respect to increase its shares otherwise it will lose the image in the market environments.

Moreover the organization gearing ratio is 59%as compare to industry average, which showing 66%, which is positive sign for the enterprise because it reflects the low debt consumption with respect to competitors. The average is calculated on the alcohol, packed foods, beer, and restaurants that are 62%, 41%, 77% and 85% respectively. This analysis is done with the help of case exhibits and the financial management concerned. On the other hand, market capitalization represents 25% of the industry average of alcohol, beer, packed food and restaurants that are 28%, 17% 19% and 21% respectively. It accumulated average in the different parts which is 21%. These effects reflect that market is slightly lower than in the comparison of enterprise.

Organization desires to continue the operation of the alcohol beverage part, but the beneficial part for it to compete with the competitor who they are majors rivals of the......................

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