Diageo Plc. Harvard Case Solution & Analysis

Solution 2

Based on the analysis of the case exhibits 2 indicates the Pillsbury contributes 32.11% revenue of the entire group of the organization. This is a better indication from the basic norms of the business. On the other hand Burger Kings contribute 7.93%, that’s means packed goods have much more value in term of the revenue. This trend also reflects in the operating profits of the company where is represents 24.85% and 10.2% for Pillsbury and King Burger respectively. This is the strength of the company and creating value among their transactions. This effect will beneficial in every aspect of the enterprise. This will rank as 2nd division of the organization with respect to the stability of the product

The wines and spirits ranked in the First and largest division in term of the revenue and operating income. The revenue and operating profits depict 41.88% and 50.61%, which itself is the high percentages respectively. This division is not only the biggest division as well as the fastest division, which has the sales growth of the 8%, which is mean full in the term of the groups. This division was the second largest since the merger and the merger is done with watching the potentiality of this division. So this is the main line for the company with respect to profitability as well as the growth of it.

The company has board perspective to divest the shareholding in Pillsbury and Burger King that will raise the funds through the expansion of the alcohol industry. This was the key sign for the company which lies in the movie on the profitable side. This effect will also improve growth with the new dimensions of technology and unrivaled portfolio brands and image of the enterprise.

Moreover, the General Mills will pay $5.1 billion cash and 141 million newly issued shares of the company, which amounts approximately $5.4 billion. These funds can be invested to enjoy certain efficiencies and synergies, which could benefit the firm to save cost of manufacturing, procurement and supply.

  1. What does the model developed by Diageo’s treasury group recommend for Diageo’s optimal capital structure going forward?

Solution 3

From the figure # two represents the output chart of Monte Carlo Model. The horizontal axis of X the model represents the decrease in interest coverage or increase in gear whereas the on the vertical axis of Y represents the present value of taxes paid and distress cost. The best structure is the point which maximizes the present value of cash flows to the equity holders. Interest coverage of 4.2 signifies the financing mix which maximizes the expected sum of financial distress costs and taxes paid. The strategy will substantially threaten the rating of the company and the results in Exhibit 5 shows that at the median interest coverage of 4.94, the company will have the rating of BBB. The lower yield firms would not be able to generate sufficient funds for expansion, the worse the rating, the greater the difficulty in raising funds

The Model of Monte Carlo simulation considers different variables, which include local 15- year sequence, operating cash flows, EBIT, interest rates, foreign exchange and market correlations but it fails to consider the nature of the instruments that is compound instruments have usually low interest rate due to its nature to convert into equity stake. Moreover, the model also fails to consider the potential conflict of interest between management and debt holders. Increased debt will increase the risk and return to the debt holder, but also give rise to agency cost

Furthermore, the potential forthcoming acquisitions are also missing, so it must be incorporated as a part of the strategy. Additionally, some of the trials represent a 20% reduction in asset value and there were no provisions in the model for issuing equity to pay down debt when coverage ratio fell. This substantially reflects that the possibility of the firm to handle financial distress is minimized, so some actions are required in order to produce or reduce the impact of financial distress. That is issue equity to pay debt

Solution 4

  1. Critique the model. Does the model capture the dynamic nature of the capital structure problem? What features, if any, are missing from the model?

This model represents the future settlements of underlying assets fluctuations with respect to the random variation of the prices. This model is totally referred to derivatives product and their stimulation. The capital structure is sort of financial restructuring in which debt and equities are changing with respect to the returns. On the other hand, this model covers the all areas of the portfolio management in which investors attract towards the enterprise future asset value. The basic model for capital structuring is debt and equity mixtures which will sustain the organization value.................................

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