Optimal Capital Structure Analysis of PepsiCo: A WACC-Based Simulation

Dantong Zhu

Co-Presenters: Individual Presentation

College: College of Business and Public Management

Major: MS.ACCOUNTING

Faculty Research Mentor: Kakolyris, Andreas  

Abstract:

This study analyzes the capital structure of PepsiCo, Inc. using real financial data. The goal is to examine how changes in leverage affect the firm’s weighted average cost of capital (WACC). All financial inputs were collected from Bloomberg. These include stock price, shares outstanding, total debt, beta, EBIT, and the effective tax rate.First, the firm’s unlevered beta was estimated using the Hamada equation. This step removes the effect of financial leverage and measures business risk. Next, different debt ratios were tested to simulate alternative capital structures. For each scenario, the interest expense and interest coverage ratio were calculated. The cost of debt was estimated using a synthetic credit rating approach. The cost of equity was calculated using the Capital Asset Pricing Model (CAPM).WACC was then computed under each leverage scenario. The results show that increasing debt lowers WACC at low levels due to tax benefits. However, higher leverage increases financial risk and raises both the cost of debt and the cost of equity. The analysis identifies a range of debt ratios where WACC is minimized. This study demonstrates how capital structure decisions influence firm value using market-based data.