10. Effect of foreign operations on income tax rate and future effective tax rates] PepsiCo [PEP] reported the following tax rate reconciliation in its 2000 Annual Report: 1998 1999 2000 Statutory rate 35 0% 35.0% 35.0% Effect of lower foreign tax rate (3.0) (2.7) (3.0) Settlement prior years (5.7) 0.0 00 audit issues Puerto Rico settlement (218) 0.0 0.0 Bottling transactions 00 10.6 0.0 Asset impairments and 3.4 0.0 0.0 restructuring Other effects (net) 40 1.0 0.0 Effective tax rate 11.9% 43.9% 32.0% PepsiCo's pretax earnings were ($ in millions): United States Foreign 1998 1999 2000 $1,629 $2,771 $2.126 634 885 1,084 Selected Additional Data The company reported bencficial effects of two settlements, one related to prior years' tax audits and the second to a tax case in Puerto Rico. The bottling transactions refer to: $1.0 billion ($476 million after tax) gain on issuance of stock by a subsidiary, Pepsi Bottling Group (PBG). The majority of the taxes are expected to be deferred indefinitely, and An after-tax loss of $206 million on a similar transaction with another group.

a. Using these data, calculate the following: (i) U.S. dollar reduction in income tax expense in 1998 to 2000 due to lower foreign tax rates (ii) Effective tax rate on foreign income for each year (iii) Net foreign income (after tax) for each year (iv) Effective tax rate on U.S income for each year (v) Net U.S. income (after tax) for each year

b. Using your answers to part

a, calculate the percentage changes in foreign and US income for 1999 and 2000: (1) Pretax (il) After tax

c. Discuss the differences in the pretax and after-tax growth of income calculated in part b

d. List and justify the questions you would want to ask PepsiCo management about their tax position based on your answers to parts a through

c. e. Explain why the asset impairment and restructuring charges increased PepsiCo's effective tax rate in 1998.

f. Using the data provided, predict the 2001 effective tax rate. for PepsiCo. g. In the Management's Discussion and Analysis section of its annual report, PepsiCo says that its effective tax rate on com- parable operations was 31% in 1998. 32.2% in 1999, and 32% in 2000. Determine the tax effects the company must have deemed noncomparable. h. Discuss whether carnings used to value PepsiCo should in- clude or exclude the tax effects of the 1998 Puerto Rico set- tlement and the 1999 bottling transactions