Diageo has went after aggressive financing guidelines by restricting debt. Based on the data provided within the model and knowledge in the case, Diageo is under leveraged and really should undertake more debt to invest in its expansion through purchases and internal growth. Furthermore, divesture of Hamburger King and Pillsbury are shrewd steps which should benefit Diageo when it comes to elevated synergies and reduced conglomerate discount.Lastly, the Monte Carlo simulation supplies a good analysis when it comes to trade off between tax shields and charges of monetary distress. However, it ignores the potential operational and business risks as well as does not consider the possibility rise in sales that may be accomplished by financing growth by debt.
Interst Coverage Ratios
Grand Metropolitan 1997
1. What do you think about the capital structure policies Diageo has pursued in the past. Do they make sense? How does it compare to Diageo’s competitors’ policies? Which competitors would make for the best comparison? (40%)
2. Why is Diageo selling Pillsbury and spinning off Burger King? How might value be created through these transactions?
3. Based on the result of the simulation model, what recommendation would you make for Diageo’s capital structure? Does the model capture all of the important risk factors faced by Diageo? Would you want to adjust the model in any way? Note: I do not expect you to do your own Monte Carlo Simulations. The emphasis should be on understanding conceptually how the model helps evaluating Diageo’s capital structure, and what the possible shortcomings of this approach could be?