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Analyzing Debt Reclassification in PepsiCo, Inc.

This analysis evaluates the appropriateness of reclassifying debt in PepsiCo, Inc. and discusses the impact on the company's current ratio and liquidity.

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Analyzing Debt Reclassification in PepsiCo, Inc.

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  1. Group 8 Jennifer Chan Jesse Lee Nick Rosas

  2. Analyzing the Reclassification of Debt PepsiCo, Inc. is a $25 billion company is the beverage, snack food, and restaurant business. PepsiCo’s annual report included the following note: At year-end, $3.5 billion of short-term borrowings were reclassified as long-term, reflecting PepsiCo’s intent and ability to refinance these borrowings on a long-term basis, through either long-term debt issuances or rollover of existing short-term borrowings.

  3. As a result of this reclassification, PepsiCo’s current ratio improved from 0.51 to 0.79. Do you think the reclassification was appropriate? Why do you management made the reclassification? As a financial analyst, would you use the current ratio before the reclassification or after the reclassification to evaluate PepsiCo’s liquidity?

  4. Answer: It was appropriate because the management reclassified the short-term current liability of the short term loan into a long-term non-current liability. They made this reclassification most likely because they wanted to extend the life of the loan. This in-turn improved their current ratio. As a financial analyst would want to use the current ratio before the reclassification because it gives the most accurate reading of PepsiCo’s liquidity. Since the reclassified current ratio does not include the newly adjusted long term liability, the ratio cannot be used to evaluate PepsiCo’s liquidity correctly.

  5. Group 8 Jennifer Chan Jesse Lee Nick Rosas

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