1. How has Diageo historically managed its capital structure?
Diageo sought to maintain the low-debt (conservative) financial policies of the Guinness and Grand Met with goals to keep * its interest coverage ratio (EBITDA / Interest Payments) between 5 and 8 and * its EBITDA / Total Debt around 30-35%
Although not quite as conservative as other UK firms (with Equity/Assets ratios of 42%), it was successful in achieving these goals and retaining a credit rating of A+ (a rough average of Guinness’ AA and Grand Met’s A ratings) by re-levering the firm via * issuance of debt to repurchase and retire shares in fiscal years 1998 and then again in 1999 * and ensuring that cost of capital was managed down at …show more content…
One risk that is not considered is the lost opportunity cost for Diageo to utilize additional leverage for acquisitions of new companies or reinvestment into their core business. While the model focuses primarily on the tradeoff between tax shield vs. financial distress, it does not directly account for potential benefits to shareholder value through increases in Diageo’s asset base. Diageo estimates its ROA, defined as EBITDA / Asset, at 17.7%. As part of Diageo’s growth strategy for the next 5 years, the firm calculates “midrange” of $2.5B in acquisitions over the next 5 years. Assuming