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Diageo Case

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Diageo plc
A Harvard Business School Case Study

Part I
1) Diageo plc is a conglomerate formed in 1997 through the merger of Grand Metropolitan plc and Guinness plc, two consumer product companies. Their goal was to become an industry leader by achieving cost savings through marketing synergies, cutting overhead expenses, and developing production and purchasing efficiencies. Although diversified within the packaged food, beverage alcohol, and fast food industries, Diageo sought to focus exclusively in beverage alcohol by selling their packaged food (Pillsbury) and fast food (Burger King) enterprises. This would create more investment dollars to purchase other leading beverage alcohol companies without taking on excessive debt, thereby realizing Diageo’s goal of becoming a market leader in the industry. The company’s capital structure strategy was crucially important in terms of credit rating and predicting financial distress, and the company intended to maintain the highest rating possible to keep debt maintenance costs down. Ultimately, the company conducted a Monte Carlo Analysis to analyze the trade-off of restructuring the company’s capital structure.
2) Corporations routinely face decisions regarding new investments and must determine the best way to finance those investments. The method by which this financing occurs can have a significant impact on the overall value of the firm, therefore financing decisions must be made very carefully.
Corporations finance new ventures either through debt or equity or some combination of the two. When choosing the optimal mix of these elements, firms must carefully consider the effects of taxes and the costs of bankruptcy and financial distress. Market timing effects as well as readily available financial slack may also come into play when firms are determining their capital structure.
Some firms adhere to the

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