And then what we did in this financial planning model was to think

about whether PepsiCo could finance it using only their own capital,.

So can PepsiCo finance this out of it's own cash flow and cash balances, right.

So the way we did this is we forecasted cash flow from operations

using a simple forecasting model, right?

We included the capital expenditures under

the assumption that there is no new financing in the next few years.

So you can see that it's all zeros here in 2015 and 2016.

The answer we got is that PepsiCo would have a negative

change in cash of about 2.7 billion dollars by 2016.

So the answer right is that,

if PepsiCo does not want to reduce it's cash holding, right.

Assuming that the company has a target amount of cash holding that it

wants to keep for example, right.

Then PepsiCo would need to raise new funds, right.

Because of this expansion plans

the company would need to raise some money, right?

Some new funds, let's say that the amount that PepsiCo will raise is $5 billion.

We talked about this in module one as well.

It might make sense for

a company to raise a little bit more than what it needs, right?

So that it has a little bit of a financial cushion, okay?

Again, we talked about this in module two of corporate finance month, right.

So this is the new question we are talking about now.

We are going to think about this very important

choice that companies have to make when deciding how to raise new financing, okay.

Which is whether you are going to go to the debt markets or

whether you're going to issue equity, all right?

So that's the major topic of this module, of this session, and

we're going to start with this example.

The first thing we're going to do is to talk about mechanics, okay?

So we have the financial statements ready.

We have our financial planning model ready.

So what I want to do with you, and I think it's a very useful exercise.

Is to look at the financial statements and figure out what will happen

after PepsiCo issue debt in equity, okay.

Let's start with debt.

Suppose that PepsiCo issues $5 billion in new debt, okay.

And suppose that the interest rate is 4%.

I doesn't have to be exactly that, but let's say that those are the numbers,

right.

That means that PepsiCo will pay new interest of $2 million per year, right.

So how will that affect the financial statements?

You can check, this is the old financial statement,

it has the interest expense here, right.

That's the item, okay.

The new income statement is going to have an increased the amount of interest

expense.

Right, so you have 200 million additional interest expense.

So I have it here in bold.

PepsiCo will have to pay additional interest,

because you financed the new investment using that.

Right, so the interest expenses here.

The interest expenses of course going to reduce your earnings, right.

So you pay interest, your earnings, your net income is going to go down.

You can check that.