Pillsbury belongs to the packaged food industry, and the industry has an average of 7.88 interest coverage ratio. We can assume that Pillsbury follows suit and has a similar interest coverage ratio. Diageo as a whole has an interest coverage ratio of 5.0, smaller than the 7.88 industry average. We can infer that Diageo’s other lines of business must have more debt than its packaged food business due this data. In addition to this, the same comparison can be drawn with its Burger King line of business. The fast food industry has an average of 7.9 interest coverage ratio. We can conclude that prior the sale of Pillsbury and the spin-off of Burger King, the optimal capital structure would likely to result a low debt level. After the sale of Pillsbury and the spun-off of Burger king, the debt level will increase.
3. Diageo’s plan was to focus and expand on their beverage alcohol business which had an unrivalled portfolio at the time. They planned on accomplishing this goal while moving away from their packaged food products (Pillsbury) and fast food industry (Burger King). By selling their Pillsbury subsidiary to General Mills, they gained $5.1 billion in cash and $5.4 billion in 141 million shares of General Mills which granted them 33% of the new General Mills/Pillsbury business. By launching Burger King’s IPO, Diageo would be able to first float 20% of Burger King without triggering any major penalties. The firm will then float the rest of Burger King after 2002 when the tax liability lapses entirely. With the additional funds from the sales of Pillsbury and Burger King, they will have more resources to focus on their beverage alcohol business. They can do this through expanding on their products and services through organic growth, or investing in future initiatives. Also, in order for them to fund their expansion, they projected that they would need to spend around 400- 500 million per year for the next five years. In addition, Diageo was in the works of partnering with Pernod Richard on a joint bid for Seagrams which would commit Diageo to 3-5 billion dollars on the bid. 4. The Monte Carlo simulation suggests Diageo should adjust its capital structure so that its interest coverage will maintain a range of 3.9-4.6. According to figure 2, the amount of taxes paid will go down as the company debt increases within its capital structure. On the other hand, the cost of financial distress will go up as well as the firm takes in more debt. The goal for Diageo is to determine the perfect capital structure where
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