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Essay / Research Paper Abstract
4 pages in length. This paper explains the aspects of financial diversification. Numerous studies have been conducted which point to the conclusion that financial diversification is not a cure-all for the disease known as business risk. While the focus of the paper is on PepsiCo this information can be applied to any company. Bibliography lists 6 sources.
Page Count:
4 pages (~225 words per page)
File: D0_JGApepsi.doc
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the conclusion that financial diversification is not a cure-all for the disease known as business risk. Burgman (1996) points out that because multinational corporations operate in many different correlated
economies simultaneously the capital structures in these organizations should be able to support more debt than those of purely domestic corporations. Diversification such as this should therefore result in
a less volatile earnings market and probably less chance of bankruptcy. Multinational corporations in this case would appear to have not only less expected bankruptcy costs, but also a
higher leverage ratio because of a trade-off between expected bankruptcy costs and the tax shelter of debt. However, Burgman (1996) goes on to explain that evidence exists that multinational
corporations, in fact, have less debt in their capital structure than do many purely domestic corporations. This leads us to surmise that international financial diversification does not necessarily lead
to less business risk. In fact it is possible that even though diversification can sometimes make earnings less volatile, there are also new factors introduced such as the risk
of exchange rate and political changes. Such risks are not something that can easily be factored out of the equation. According to Geiger (1998) there have probably
been more studies of diversification within the framework of corporate performance than in any other strategic management area. However, study after study has shown a marked inconsistency. Results
sometimes point to related diversification being most profitable, while other studies show the opposite, that is, that unrelated diversification is the more profitable venture. Yet further studies showed no
differences at all. Because it is generally believed that firms with less business risk such as bankruptcy cost and other financial concerns are able to assume more financial risk, it
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