Okay, think about what we've done, right?

The idea here is that if the debt is fairly priced, right?

Meaning that if the interest rate is the same as the discount rate,

so if PepsiCo is paying interest, exactly at the required rate of return, right?

Then what's going to happen, this is what the math is reflecting, what's going to

happen is that the cost of issuing new debt, which is this $200 million annual

interest, is going to exactly compensate for the benefits, right?

So, the benefits are exactly the same as the present value of the cost, right?

That's why we have a zero NPV, right?

And of course, what's going on here is that we are relying

on the assumption of efficient markets, which again,

is something we talked about a lot in Corporate Finance I, right?

So, we are relying on the assumption that the debt is going to be

fairly priced by the marketplace,

that PepsiCo is issuing debt exactly at the required rate of return.

Right, if the debt, for some reason, is not fairly priced,

then obviously the NPV would not be zero.

So, if PepsiCo can issue debt at a cheaper rate, for

example, then it might be positive NPV to issue debt.

But if you think about it, why would that be the case?

If the debt issuance, it should be correctly priced by the market.

The zero NPV is actually a very reasonable answer to this problem.

What about equity, right?

We covered debt.

What about equity?

Now we have $5 billion of cash coming in, and

we have the new shares being issued, right?

I put a couple more numbers there that we're going to need.

The first is the current market value of equity, right, and

the second one is the number of shares outstanding.

We're going to need those numbers.

Right, and the question is what is the NPV of equity issuance?

This is a little bit trickier, right, because as we already figured out,

we don't really have the counterpart of the interest payments.

The cost of issuing equity is that the number of shares is going up, right?

So here, what we're going to use is we're going to think in terms of

stock prices, right?

Remember that maximizing the net present

value is exactly the same thing as maximizing the stock price.

This is another idea we covered in Corporate Finance I the equivalent

between net present value and stock price.

So, NPV and stock price are the same thing, and

we can actually think in terms of stock prices here.

Let me show you, right, we have the old stock price, which I'm expressing

as the market capitalization divided by the number of shares, $94.

With 138 billion divided by 1.468 billion shares, right?

And then what's going to happen?

If PepsiCo issues new shares, right,

PepsiCo is going to get $5 billion in cash.

Right, the cash is going to come in, right?

Who owns the cash, the cash is going to be owned by the shareholders.

Right, so the cash that PepsiCo gets is going to increase

the company's market capitalization, right?

And then what I've done, so that's the numerator, what I've done in

the denominator, you can see there is to add the number of new shares, right?

So, PepsiCo receives cash, but

the counterpart is that their new shares being issued, right?

If you do the math, what you get is that the stock price is $94 a share, okay?

Okay, so the stock price hasn't changed.

Again, the answer then is since the stock price hasn't changed,

what this means is that the NPV of the equity insurance, again, is 0.

And it's exactly the same idea, right, that made the NPV of debt equal to 0.

The idea is that, the new cash that comes into the company

exactly compensates for the issuance of new shares.

So, the stock price remains constant, and again,

this notion relies on the assumption of efficient market, or

at least on the assumption that the equity is fairly priced.

Of course, if Pepsi Cola manages to sell shares at a higher price

than what the shares should be worth, of course, that's going to be a good deal.

If you're selling a product, you want to sell at a high price.

Right, if you sell the product at a low price, you can think

of the equity of the product, then PepsiCo is going to make money.

But if you sell just at the right price, you know the NPV is zero.

You don't lose money, you don't make money.