Financing decisions of Diageo plc Harvard Case Solution & Analysis

Financing decisions of Diageo plc Case Solution

From the following case, it has been analyzed that the financing decision of the firm was better for future, but it faced the threat in the policy of the related country, in which the company was operating. So according to the scenario, British government was not allowing companies to increase the debt ratio over 28% because of the high equity margin involved and less threat to default under high debt ratio.

However,the situation was favorable forth company with regards to increase in the debt amount under high credit rating because of the established business and brand recognition in the past few years.Moreover, the company was considered to be on the top ten list of consumer food industry.

So the decision that the company took was to sell its subsidiary in order to receive the cash and apply for the leverage to increase business operations in future. However,it was risky to maintain the interest coverage ratio due to the threat of high currency exchange and the economic inflation that could hinder the expected results of the company.

Therefore, Diageo plc should take the decision of maintaining the interest coverage ratio by borrowing the commercial papers under flexible interest payments. It should also consider the senior debt due to the nature of low-interest margin and secure the payment by the particular time intervals of the payments.

The second point to be noted is that the company should go for the hedge under debt amount to secure itself from the expected inflation that could increase the interest payments by a considerable amount. Therefore,this activity would allow ditto maintain its interest coverage ratio by covering the loss in future.

Historical capital structure

Diageo was considered to be one of the top consumer companies in the world, it was successful because of its strong operational results over the past couple of years and therefore it had the largest shares in the beer market in most regions of-Europe and North America. The company had its main operation in Britain. The main issue of the country was the restricted policies of issuing debt. Thus, it would hurt the company's structure if this situation would suddenly happen in the future.

The historical structure of Diageo was followed by the conservative policies of the company over the past few years,whick contributed to the success of the company and was expected to show the same results if the continuous growth flourished.

While in 1998, the company planned to sell out Burger King and to cover the amount in order to apply for leverage. The company was also planning to acquire mid or small-sized firms formless value in order to increase its operational activities and to reduce the cost so as to enlarge the profitability.

After 1998, Diageo was also considering to change the policy by increasing the debt figure through borrowing commercial papers under less interest rates because the company had strong credit ratings rated by the credit rating agencies. Thus being an A+ credit rating company, it could easily borrow debt up to 8 billion for the development of the business and to increase the company's worth in the future.

By doing this, the company was still enjoying the conservative results due to the already established position within a market. Guinness and Grand were also considering to increase their debts by 40% in the upcoming periods and to sell some of the renowned subsidiaries as soon as possible in order to improve their results.

Targeted interest coverage debt ratings

By using the debt as a mode of borrowing to increase the operations of the company, Diageo fixed the interest coverage ratio by eight times in order to maintain the status of the company and to generate the desired results in future to satisfy the lender as well as equity holders. Thus,fixing the rate means that it would be a critical factor for the company's performance......................

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