La Comunidad

PepsiCo’s fiscal year ends on Dec 31. This company just released to the public their latest financial statements for 2004. In terms of forecasting PepsiCo’s financial statements for the next 10 years (Balance Sheet, Income Statement and Statement of Cash Flow) we used all the financial statements for the past 5 years (Refer to Exhibit A, B and C). PepsiCo is number two company in the non-alcoholic beverages, currently behind Coca-Cola, while they are number one in the snack industry due to Frito Lay. After careful analysis of this company we have concluded that PepsiCo is not affected by seasonality. Because of this we decided to uses the moving weighted average to forecast PepsiCo’s financial statements for the next 10 years (Refer to Exhibit AA, BB and CC).

We did this by computing the percentage increase or decrease for each line item from 2000 to 2004. After getting this percentage we computed the average of these four numbers to get an expected future change. We then multiplied this number with the 2004 financial statements line to get the forecasted information for 2005. To find 2006, we just did the same thing, but we didn’t include the percentage increase or decrease from 2000 to 2001 and we included the percentage increase or decrease from 2004 to 2005. We used the same approach for most of the lines on the Balance Sheet, Income Statement and Statement of Cash Flow to arrive to the forecasted numbers for each year till the year 2014. For example when we forecasted Total Sales we first found the increase or decrease from year 2000 to 2001, 2001 to 2002, 2002 to 2003 and 2003 to 2004 which were 31.7%, -6.8%, 7.4% and 8.4% respectively. Then we find the average which was 10.1% and we multiplied this number with the total sales of 2004 to find the forecasted number for 2005 which was $32,238 (in millions) So we did the same thing to forecast 2006 but this time we didn’t take the average of the increase from year 2000 to 2001 but instead we substitute it with the increase from year 2004 to 2005 that we forecasted. And we multiplied this new average with the forecasted total sale of 2005 to find 2006. We didn’t use the weighted moving average to calculate the income taxes rate for PepsiCo. We took the average of the four income tax rate that we founded to be 3% and we multiplied each year till 2014 with 1.03 to obtain the forecasted income taxes. There was

another line that we didn’t use the moving weighted average because of the percentage increase or decrease during the years. One of these lines was Cash Flow from Investing Activities. In this line we saw a big decrease from 2001 to 2002 from 2,367 million to 527 million and increase from 2002 to 2003 from 527 million to 2,271 million. This happened because PepsiCo during 2002 didn’t have any big investment and the increase in the investment line in the financial statement was very small during this year. This big decrease and increase would have caused our future Cash Flow from Investing Activities not be forecasted in a smooth way. So the forecast for this line was not going to have a normal growth in the next 10 years. Instead to forecast this number we just measured the percentage increase from 2003 to 2004 and we calculated a growth of 8%. After that we multiplied this line with 1.08 to find the Cash Flow from Investing Activities for the next 10 years.

Based on our forecast we conclude that PepsiCo is going to have a steady growth during the next 10 years. The firm has the potential for growth in the next years and history has shown this trait. PepsiCo used to own Pizza Hut and Taco Bell but they didn’t realize any profit on their acquisition, so they decided to sell them. This has been shown as a good decision for the company for the future. But at the same time, they have made some good decision by acquiring good company like Gatorade and Frito Lay that have good profits and sales. So our forecasted financial statements are free of errors and we don’t assume that our forecast it is going to be accurate. The longer the period of the forecast the less accurate the forecast will be and the past economic practices have shown this. PepsiCo can buy other bad companies like Pizza Hut and Taco Bell and this is going to decrease their reputation and decrease their net income. Maybe during the next 10 years they can win the war against Coke and increase their global reputation. Another reason that PepsiCo will not perform as forecasted is if there is the change of economic fluctuations. For example the decrease of the economy or the decrease of the value of the dollar may turn the growth of sales the other way around. Competition is another reason that PepsiCo might not perform as forecasted. During the next 10 years other companies can surge and gain more market share in the non-alcoholic beverage. This is going to decrease the market share for PepsiCo and decrease their sales and reputation as well.