Putting “yum” on people’s faces around the world is the mission of YUM Brands, Inc. Yum was spun off from PepsiCo in 1997. A spin-off occurs when a company separates its operations into two or more distinct companies. The company was originally composed of KFC, Pizza Hut, and Taco Bell and was operated as a part of PepsiCo prior to the spin-off. In 2002 YUM acquired A & W All American Foods and Long John Silver’s units. YUM’s long-term debt in 2007 was $2.9 billion. YUM’s net income before interest and taxes in 2007 was $1.36 million.
Required
a. If YUM’s debt remains constant at $2.9 billion for 2008, how much interest will YUM incur in 2008, assuming the average interest rate is 6 percent?
b. Does the debt seem excessive compared with the amount of 2007 net income before interest and taxes? Explain.
c. Assuming YUM pays tax at the rate of 25 percent, what amount of tax will YUM pay in 2007?
d. Assume you are the president of the company. Write a memo to the shareholders explaining how YUM is able to meet its obligations and increase stockholders’ equity.