Debt does not affect the un-levered value of the firm due to the fact that debt finance does not affect the operating risk of the company, however, it does affect the financial risk. The Equilibrium Theory to Diageo: According to the Equilibrium theory, Diageo has a high leverage capacity.
Normal distribution has been used to simulate the three variables which are the exchange rate, the interest rate and the ROA.
As the debt to vale ratio will increase the tax shield amount will also increase and the financial distress cost will also increase. Please place the order on the website to get your own originally done case solution Related Case Solutions: The simulation model is shown in the chart below: Question 2 Monte Carlo Simulation The Monte Carlo Simulation model has been generated on the basis of the guidelines provided and using the inputs provided in this question.
The capital structure which Diageo should look for is one Diageo plc capital structure case solution decreases the probability of financial distress and maximizes the value of the tax-savings due to additional borrowing.
It seems that the management at Diageo prefers to maintain the low debt leverage by using internal financing in order to have larger flexibility and control within the company. The present value of tax shield is deducted by the present value of bankruptcy…………… This is just a sample partial work.
The graph for the NPV for the most optimal capital structure and the graph for the random values of the simulated variables for 10 years are shown below: Secondly, the financial distress is not a benefit for the company like the tax shield. In another words, when PV of tax-shield is counterbalanced by increases in PV of financial distress costs.
Along with this, cash would also be received from the sales of Burger King. By maintaining a low debt level and high rating, the management at Diageo can use its capability of acquiring debt at low rates for important events, such as strategic takeovers or investments.
The main focus of Diageo was on the beverage alcohol business and it wanted to utilize cash for growing and expanding this business.
Because extra interest expenses will now have to be paid to the lenders in priority, this will also make the earnings attributable to the share holders decreased due to increase in the finance costs. The growth could be either through acquisitions or through organic means. The present values of tax shield and the distress costs become different at different level of debt to value ratio.
Diageo PLC Case Solution The equilibrium theory suggest that the value of the leveraged firm equals to the value of unlevered firm Firm with no debt financing, only equity financing plus the present value of tax shield resulting from the interest payments minus the distress costs associated to the levered firm.
As the financial distress shows from its name that the company will face increase financial risks as a result of debt financing. The case also highlights that Diageo has been working on a joint bid for the acquisition of its rival alcohol business, Seagrams. Based on these simulated variables, the EBIT has been computed as well as interest coverage has been calculated.
The mean values and the standard deviations have been taken to be same as provided. The financial distress is deducted from the unlevered firm value with the addition of tax shield benefits to give the levered value of the company.
There are different advantages of the debt financing for example; the interest expenses are tax allowable deduction and if the interest expense will increase the tax expenses will be decreased.
The average NPV for each capital structure has been then computed and the decision has been made. On the other hand the debt financing is considered generally to be cheap source of financing because the debt interest is deducted from profits before the dividends and the debt is secured on the fixed assets of the company.
If Diageo will borrow more funds the default risk will also increase parallel to the increase in debt ratio. As the leverage increases, the expected return from equity holders also increases along with risk.
Financial distress is derived basically from the interest covering ratio of the firm, the process of finding financial distress is that first calculate the interest covering ratios at different debt ratio and from that covering ratio the rating of the company is estimated and every rating has different percentage of financial distress this percentage is multiplied with the value of unlevered company to give exact costs of the financial distress.Diageo plc Case Solution,Diageo plc Case Analysis, Diageo plc Case Study Solution, Diageo Plc Introduction The report presents a case about Diageo plc, world’s leading consumer product company, which intends to sell its packed food subsid Capital structure policies of Diageo and comparison with its best competitors; Hire us for.
Diageo Plc Capital Structure Case Solution Introduction Diageo was created when Grand Metropolitan, plc and Guiness, plc merged in While the Diageo name is not well known to consumers, its brands are among the most famous including Guinness, Smirnoff, Johnnie Walker and Cuervo.
Diageo PLC Case Solution, The Equilibrium Theory to Diageo: The equilibrium theory suggest that the value of the leveraged firm equals to the value of unlevered firm (Firm with no.
Case Analysis, Diageo Plc. Case Study Solution, Challenges Faced The organization is having some challenges with respect to finance and portfolio criteria. Diageo Plc. Harvard Case Solution & Analysis. Diageo Plc. Case Solution. Facebook.
Diageo manages its capital structure with the help of debts and equity in which. Diageo plc case analysis, Diageo plc case study solution, Diageo plc xls file, Diageo plc excel file, Subjects Covered Capital structure Debt management Financial strategy Models by George Chacko, Peter Tufano, Joshua Musher Source: HBS Premier Case Collect.
Diageo Case discussion. Question 1: How has Diageo historically managed its capital structure? What sorts of financial "targets" has the Diageo treasury staff been managing toward?
Followed a conservative capital structure and focused more on the same. Had more equity and less debt in their capital structure.3/5(2).Download