Financial Statement And Position Of Pepsico Finance Essay

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Fiscal statement are accounting studies issued by the house sporadically ( normally quarterly and yearly ) that present past information and snapshot of the houses fiscal place. Fiscal statements are of import tools through which investors, fiscal analysts and other interested outside parties ( such as creditors ) obtain information about a corporation. They are besides utile for directors within the house as beginning of information for corporate fiscal determinations, ( Jonathan & A ; Peter, 2007 ) . Analysis of fiscal statements involves designation of major alterations in tendencies and relationships and the probe of grounds underlying those alterations. The relationships are ascertained by the usage of fiscal and accounting ratios. Financial ratios supply a speedy and comparatively simple agencies of measuring the fiscal wellness of a concern ‘ ( Peter & A ; Eddie, 2008 ) . Fiscal ratios are quantitative factor which shows the relationship between two or more variables. It is a fraction or per centum that expresses the relationship between one point in a set of fiscal statements and another in the same fiscal statements. Fiscal ratios are used by investors and analyst in measuring a house ‘s public presentation and worth. Ratio analysis is used to find the strengths and failings of a house. These ratios are classified under five ( 5 ) of import classs ; I ) Liquidity ratios: This group of ratios are used to mensurate the ability of a company to run into its maturating short ‘term current duties from hard currency and other assets that are comparatively easy convert to hard currency. They are used to mensurate short-run liquidness utilizing current or on the job capital ratios, quick or acerb trial ratio and hard currency ratio. two ) Leverage or Long term solvency ratios: It is used to mensurate the load of the house in footings of its entire debt including involvement and other fixed duty therefore they show the grade of safety of a concern from failure in long-run if adoptions and involvement are high so the endurance of the concern becomes threatened. Ratios under this class includes entire debt ratio, pitching ratio, entire debt to stockholders equity, involvement coverage ratio, fixed dividend screen and fixed charges coverage ratio. three ) Activity ratios: This is besides referred to as activity ratio. This type of ratios steps how efficaciously a house utilises its assets. Examples are debitor ‘s turnover ratios, entire assets ratios, fixed assets turnover, mean aggregation period, stock list turnover. four ) Profitability ratios: This ratio measures the success of the house in footings of its ability to bring forth net income from its gross revenues and investings. Examples of this ratios are gross net income ratios, net net income border, return on investing. V ) Investors ratios: This class of ratios is used by stockholders to determine the quality and value of an investing in the equity portions of the company. It shows the existent possible growing of the concern. Examples of these ratios are net incomes per portion, dividend per portion, net incomes output, and dividend output.
PepsiCo was formed in 1965 when the Pepsi-Cola company merged with Frito-Lay Inc. PepsiCo, Inc. is a universe leader in the bites, nutrient and drinks with grosss more than $ 60 billion and over 285,000 employees. PepsiCo was ranked 2nd in the soft drink industry. ‘Our mission is to be the universe ‘s prime consumer merchandises company focused on convenient nutrients and drinks. We seek to bring forth fiscal wagess to investors as we provide chances for growing and enrichment to our employees, our concern spouses and the communities in which we operate. And in everything we do, we strive for honestness, equity and unity ‘ . hypertext transfer protocol: // This paper will concentrate on liquidness, fiscal purchase construction and efficiency of PepsiCo, Inc. It will besides analyze PepsiCo aims of keeping a individual A senior debt evaluation and will be compared with Coca Cola Company being besides a major rival in the industry. In this class of this paper, we shall be analyzing those ratios associating to liquidness, profitableness and fiscal purchase which are largely used by investors to determine the fiscal position of the house including its strengths and failings. Debt is used to increase the rate of return on stockholder ‘s equity. It is the ability of a company to mensurate its borrowed money and be able to refund. Harmonizing to concern lexicon, the usage of debt in a house ‘s fiscal construction creates fiscal purchase that can multiply give on investing provided returns generated by debt exceed its cost. Because the involvement paid on debt can be written off as an disbursal, debt is usually the cheapest type of long-run funding.
Net Debt Ratio
A net debt ratio shows a company ‘s overall state of affairs by sacking the value of a company ‘s liability and debts with its hard currency and other similar liquid assets. Harmonizing to Sunday I. Owualah, this ratio measures the proportion of entire assets provided by a house ‘s creditors. ‘This ratio is merely known as debt ratio or debt to plus ratio. It measures the entire liabilities ( current and long-run liabilities ) relative to entire assets or the proportion of entire assets financed by entire debt thereby mensurating the extent to which debt financess are exposed to hazard. A ratio of 40 % would intend that 40 % of the entire assets were financed by entire debt and 60 % by equity ‘ ( Ogiedu, Eragbhe, Ibadin, 2007 ) . ‘ Net debt is the entire outstanding debt subtraction hard currency balances ‘ ( Jonathan & A ; Peter, 2007 ) A metric that shows a company ‘s overall debt state of affairs by sacking the value of a company ‘s liabilities and debts with its hard currency and other similar liquid assets. hypertext transfer protocol: // Calculated as:
The debt ratio compares a company ‘s entire debt to its entire assets, which is used to accomplish a wide thought as to the sum of purchase being used by the house. A low ratio will show a satisfactory state of affairs to creditors since it implies a greater claim of proprietors. On the other manus, high ratio implies high hazard to creditors since their claim is greater than that of the proprietors. A company with a high debt ratio may happen it hard to borrow more financess or be able to borrow on really restrictive footings and conditions. The lower the per centum, the less purchase a company is utilizing and the stronger its equity place. In general, the higher the ratio, the more hazard that company is considered to hold taken on. For the intent of PepsiCo analysis, net debt ratio is defined as:
L* = ( D+ PVOL ‘ CMS ) / ( NP + D + PVOL ‘ CMS )
Calciferol: entire market value of debt
PVOL: present value of runing rental committednesss
Centimeter: hard currency and marketable securities
Nitrogen: figure of portions
Phosphoruss: market monetary value of portions.
Analysis of PepsiCo net debt ratio:
Calculation of net debt ratio for PepsiCo
Net debt= D+PVOL ‘ CMS/N ( P ) +D+ PVOL-CMS
= 10724.5
= 19.58 % .
PepsiCo ‘s net debt ratio shows a consequence of 19.58 % which is as a consequence of revenue enhancement and dealing cost decrease in hard currency and marketable securities, which of class is a more sensible attack to net debt calculation of PepsiCo. This shows the degree of purchase in PepsiCo, it means that 19.58 % of the capital formation of the company is debt financed. Taking into history the fact the PepsiCo is into the bite and drinks concern, it can bring forth net incomes all twelvemonth long. Therefore, 19.58 % is a good ratio for the company ; although the debt ratio can be improved upon by increasing its debt degree to run into its mark of 20-25 % aims.
Interest coverage ratio
Interest coverage ratio relates the involvement on debt to the net net incomes before the tax write-off of involvement and revenue enhancements. This ratio shows the figure of times the entire involvement on debt is covered by the net net income available for their payment. It is used to mensurate the ability of the company to run into involvement payment on outstanding debt. The ratio tells us the safety border that the concern has in footings of being able to run into its involvement duties therefore the higher the involvement screen ratio, it means that the concern is easy able to run into its involvement duties from net incomes similarly a low value in the involvement screen ratio will bespeak that the concern is potentially in danger of non being able to run into its involvement duty. hypertext transfer protocol: // Interest coverage ratio is measured as
A degree of at least two is required in order to bespeak a healthy place therefore EBIT is twice the sum of involvement payable. This degree allows for sensitiveness within future net incomes and besides revenue enhancement. Where involvement screen is high, this indicates that a company is likely able to take on more debt funding without a damaging consequence on net income. The involvement screen is measured as:
EBIT/Interest payable.
Firm PepsiCo Cadbury Coca-cola Coca-cola Ent. McDonald ‘s
Exabit 3114 661 4600 471 2509
Interest PAYABLE 135 135 272 326 340
Interest COVERAGE RATIO 4.56 times 4.89 times 16.91 times 1.44 times `7.38 times See Appendix for Values of EBIT & A ; Interest payable
The above ratio analysis shows that PepsiCo covers its involvement liabilities four and half times despite its current degree of profitableness, Cadbury besides approximately 5 times, Coca-cola about 17 times, and Coca-Cola endeavor merely covered one time which is more hazardous, presuming at that place was any lessening in profitable degree, it will non be able to run into up with its involvement liability as they fall due. McDonalds similarly can reasonable cover its involvement payments to loaners. Comparing PepsiCo with Coca-Cola
After the analysis of the two companies, we observed that the ratio of 16.91 times coverage for Coca-Cola shows that it is a low levered company in order words, it can cover its involvement payment duties as at when due. This shows a good indicant of its fiscal strength therefore it indicates that coca-cola is a low geared company whose operations are largely financed by the usage of equity. However, a ratio of 4.5 times coverage for PepsiCo besides regarded every bit appropriate to the conventional criterion of 2 times involvement coverage. On the other manus comparing with that of Coca-Cola Company, PepsiCo is considered to be low despite the fact that coverage of 4.5 times is besides an indicant of a healthy place. So for PepsiCo to keep an A debt evaluation, there is demand for the company to increase its coverage degree by bettering on its Net incomes Before Interest & amp ; Tax ( EBIT ) . Trend analysis for PepsiCo Interest Coverage
Entire ( EBIT ) 2996 3309 3114
Interest PAYABLE 573 645 682
Interest coverage ratio 5.23 times 5.13 times 4.56 times
See appendix
However, net net income degree is higher than the degree of involvement collectible, involvement coverage for PepsiCo has been cut downing at an undistinguished rate signifier two old ages ago and the latest twelvemonth. A diminution in the involvement coverage ratio by 11.1 % between the latest twelvemonth and one twelvemonth ago, was partially caused by the addition in involvement payment in the latest twelvemonth by 5.73 % , though entire debt reduced by 3.19 % , and a decrease in operating net income in the latest twelvemonth, there was an addition in net gross revenues by 6.8 % , but runing cost increased by 8.6 % , which resulted in the overall lessening in net income degree with 6.65 % . It is of import to observe that, the lower the degree of net income coverage, the greater the hazard to loaners that involvement payments will non be met and the greater the hazard to loaners that involvement to the stockholders that the loaners will take action against the house to retrieve the involvement due. However, PepsiCo might non hold to cut down its degree of geartrain, but might necessitate to better its involvement coverage ratio by bettering on its profitableness since its ability to cover its involvement duty is a map of its net incomes. Attempts could be made in cut downing operation cost as this will ensue in increased profitableness, and as such will be able to cover well its involvement payments.
Fixed Charge Coverage ratios:
This ratio is related to the involvement screen ratio but instead than concentrating on involvement in debt, it focuses on the company ‘s ability to run into all fixed charges such as involvement and rentals. It shows the entire fixed charges in the income statement to net net income available for run intoing fixed charges. It is calculated as the followers:
So since rentals are a fixed charge, the computation finding a company ‘s ability rentals would be ( EBIT + Lease Expenses ) / ( Lease Expenses + Interest ) . The fixed charge coverage ratio is a broader step of how good a house covers their fixed costs than the times involvement earned ratio. The fixed charge coverage ratio includes lease payments every bit good as involvement payments. Lease payments, like involvement payments, must be met on an one-year footing. The fixed charge coverage ratio is particularly of import for houses that extensively lease equipment, for illustration, EBIT, Taxes, and Interest Expense are taken from the company ‘s income statement. Lease Payments are taken from the balance sheet and are normally shown as notes on the balance sheet. The consequence of the fixed charge coverage ratio is the figure of times the company can cover its fixed charges per twelvemonth. The higher the figure, the better the debt place of the house, similar to the times involvement earned ratio. Like all ratios, you can merely do a finding if the consequence of this ratio is good or bad if you use either historical information from the company or if you use comparable informations from the industry. ( hypertext transfer protocol: // ) Firm PepsiCo Cadbury Coca-cola Coca-cola Ent Mcdonalds
Exabit 3114 661 4600 471 2509
Fixed charge 479 25 0 31 498
Annual involvement 682 135 272 326 340
Fixed charge ratio 3.09 times 4.288 times 16.94times 1.406 times 3.588 times The above analysis shows that PepsiCo can run into up with its fixed fiscal disbursals as they fall due. However when compared with coca-cola in the industry, Coca-Cola can cover approximately 16 times which is good preferred. Well, PepsiCo can still cover its fixed expense duty, but when compared to Coca-Cola, it is a much lower rate and this is owing to the big sum of debt in its capital formation. Investors in PepsiCo are at hazard comparatively to those in Coca-Cola. Trend analysis on PepsiCo fixed charge coverage.
Year Two old ages ago One twelvemonth ago Latest twelvemonth
Exabit 2996 3309 3114
Fixed charge 420 465 479
Interest PAYABLE 573 645 682
Fixed charge coverage ratio 3.44 times 3.4 times 3.09 times
See appendix
The tendency analysis over the last two old ages shows that the fixed charge coverage has been consistent at 3 times. This degree is good plenty, but can be improved upon. A high degree of EBIT will ensue into an increased coverage degree. Long Term Debt Ratio
This ratio is besides known as the Debt/Equity Ratio. This ratio measures the company ‘s fiscal purchase and is calculated by spliting its entire liabilities by shareholders ‘ equity. It shows what per centum of equity and debt the company is utilizing to finance its assets.
Occasionally interest-bearing and long-run debt is used alternatively of entire liabilities in computation.
Long term debt to equity
Firm PepsiCo Cadbury Coca-cola Coca-cola Ent. McDonald ‘s
Long term debt 8747 864 1141 4138 4258
Equity financess 44029.5 8702.2 100,810.2 3856.5 33,585.6
Long term debt to equity ratio 19.86 % 9.93 % 1.13 % 107.29 % 12.67 %
If the debt/equity ratio is high, it by and large means that a company has been repetitive in financing its growing with debt therefore this may ensue in unstable net incomes as a consequence of the extra involvement disbursal.
If a batch of debt is used to finance increased operations ( high debt to equity ) , the company could potentially bring forth more net incomes than it would hold without this outside funding. If this were to increase net incomes by a greater sum than the debt cost ( involvement ) , so the stockholders benefit as more net incomes are being spread among the same sum of stockholders. However, the cost of this debt funding may outweigh the return that the company generates on the debt through investing and concern activities and go excessively much for the company to manage. This can take to bankruptcy, which would go forth stockholders with nil. The debt/equity ratio besides depends on the industry in which the company operates. For illustration, capital-intensive industries such as car fabricating tend to hold a debt/equity ratio above 2, while personal computing machine companies have a debt/equity of under 0.5. hypertext transfer protocol: //
Entire Debt To adjusted Capitalization
A ratio demoing the fiscal purchase of a house, calculated by spliting entire debt ( long-run debt + short term debt ) by the sum of capital available: This ratio is considered to be one of the more meaningful of the debt ” ratios – it delivers the cardinal penetration into a company ‘s usage of purchase. The capitalisation ratio measures the debt constituent of a company ‘s capital construction, or capitalisation ( i.e. , the amount of long-run debt liabilities, short ‘ term debt and stockholders ‘ equity ) to back up a company ‘s operations and growing. For this analysis, capitalization is defined as: ( Long-run debt ) + ( short-terms debt ) + ( equity portions )
A fluctuation of the traditional debt-to-equity ratio, this value computes the proportion of a company ‘s long-run debt compared to its available capital. By utilizing this ratio, investors can place the sum of purchase utilized by a specific company and compare it to others to assist analyse the company ‘s hazard exposure. Generally, companies that finance a greater part of their capital via debt are considered riskier than those with lower purchase ratios. hypertext transfer protocol: // The debt to plus ratio, the debt to equity ratio, and the debt to entire capitalisation ratio all step the extent of the house ‘s funding with debt. The entire debt to entire capitalisation ratio shows the extent to debt, like bonds and mortgages, are used for the house ‘s lasting funding. The computation for long-run debt to entire capitalisation is as follows: Capitalization Ratio = Total debt/long term debt +short- term debt + stockholder ‘s equity Firm PepsiCo ( $ 1000000s ) Cadbury ( $ 1000000s ) Coca-Cola ( $ 1000000s ) Coca-Cola Ent. ( $ 1000000s ) McDonalds ( $ 1000000s ) Total debt 9453 1490 1693 4201 4836
Shareholder ‘s equity 44029.5 8702.2 100810 3586.5 33585.6
Adjusted capitalization ratio 17.67 % 14.62 % 1.65 % 52.14 % 12.58 %
Analysis above shows the extent to which debt is being used as a signifier of funding. 17 % of PepsiCo ‘s capital formation is debt financed, which is still sensible when compared with Coca-Cola endeavors that uses over 50 % of its capital construction as debt. Coca-cola shows 1.65 % which means that it has a low degree of debt a good per centum of equity in its capital construction therefore bespeaking a fiscal strength However, as its per centum get higher, so a higher proportion of debt is used for the permanent funding for the house as opposed to investor financess and as the proportion of debt gets higher, the is a higher degree of hazard and opportunities of bankruptcy. There is no right sum of debt, nevertheless it is believed that low debt and high equity degrees in the capitalisation ratio indicate investing quality.
Cash flow
Cash flow is indispensable to tauten ‘s endurance, particularly in tough economic times. Stockholders have to understand the difference between hard currency flow and net income likewise the construct of free hard currency flow. They should be able to fix hard currency budgets and statements of hard currency flows in order to pull strings their hard currency flows to accommodate to the economic alterations. Cash flow is the financess that flow in and out of the house from operations, funding activities, and puting activities. Net income, besides called net income, is what remains from gross revenues gross after all the house ‘s disbursals are subtracted. Cash flow ratio to long term debt
Firm PepsiCo Cadbury Coca-Cola Coca-Cola Ent. McDonalds
Cash flow 3742 492 3115 644 2296
Entire debt 9453 1490 1693 4201 4836
Long term debt 8747 864 1141 4138 4258
Cash flow to LTD 42.8 % 56.9 % 273 % 15.56 % 53.92 %
Cash flow to entire debt 39 % 33 % 183 % 15.33 % 47.5 %
The above ratio shows the degree of hard currency handiness to run into debt duties both on the short and long term. In the instance of PepsiCo, the debt burden is higher than their operating hard currency flow, giving it a ratio 42.8 % and 39 % , which means that PepsiCo current degree of hard currency can merely cover 42.8 % and 39 % of its long term and entire debt severally. This ratio is little and non a excessively good indicant for liquidness when compared with Coca-Cola that can cover up to twice of its debt duty both on the long term and short term. Under a more typical fortunes, a high-double figure per centum ratio will be a mark of fiscal strength, while a low per centum ratio could be a negative mark that indicate excessively much of debt or a weak hard currency flow coevals.
The ratios analysis calculated above are the issues that will find if PepsiCo can keep an A recognition evaluation every bit good as its mark of 20 % – 25 % net debt. Bing the universe leader in the bite nutrient concern, there is a high possibility that it generates its net incomes often. This owing to the fact that it deals with fast traveling consumer goods ( FMCG ) . From the calculation of all ratios given, it is realized that the company can bring forth easy, net incomes and hard currency flow and therefore giving it the chance to increase its debt, thereby an addition in its net debt ratio. PepsiCo will keep its fiscal evaluation place if increased by 3 % . By this addition it will still be within a mark scope of 20 % -23 % . However, any addition above this will intend that that the mark of 25 % would be met, but the entire debt will increase by over 40 % which will take to its inability to pass its charges when they are due.
For PepsiCo to keep an A recognition evaluation and still keep its current market place as ‘world leader ‘ , it is hence recommended that PepsiCo should increase its net debt to about 20 % – 23 % and besides non to yield in the attempts being pursued to increase international gross revenues.
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Definition of Footings
Mkt: Market value
Centimeter: hard currency and marketable securities
Calciferol: market value of entire debt
PVOL: present value of operating rental
Nitrogen: Number of ordinary portions
Phosphoruss: Market monetary value per portion
N ( P ) : Market value of equity portions.
Appendix 1 ( Millions )
Firm Annual EBIT Annual rental expense Annual Interest Cash & A ; marketable securities Mkt value of long-run debt Mkt value of entire debt Annual hard currency flow Number of portion ( 1000000s ) Year end portion monetary value PepsiCo $ 3314 $ 479 $ 682 $ 1498 $ 8747 $ 9453 $ 3742 788.00 $ 55.875
Cadbury Schweppes $ 661 $ 25 $ 135 $ 129 $ 864 $ 1490 $ 490 247.75 $ 35.125
Coca-cola $ 4600 – $ 272 $ 1315 $ 1141 $ 1693 $ 3115 2504.60 $ 40.250
Coca-Cola Ent $ 471 $ 31 $ 326 $ 8 $ $ 4138 $ 4201 $ 644 385.65 $ 10.00
McDonalds $ 2509 $ 498 $ 340 $ 335 $ 4258 $ 4836 $ 2296 699.70 $ 48.00
Appendix 2
Calculation of market value of equity portions
This is computed as N* P
Firm No of equity portions ( $ Millions ) Share monetary value ( $ ) Market value of equity ( $ Millions ) PepsiCo 788 55.875 44029.5
Cadbury Schweppes 247.75 35.125 8702.2
Coca-cola 2504.60 40.250 100810.2
Coca-Cola Ent 385.65 10 3856.5
McDonalds 699.70 48 33585.6
Appendix 3
Calculation of PVOL for PepsiCo
PVOL is five times the one-year lease disbursals
PVOL = Annual rental exp * 5
Year Latest year ( $ Millions ) One year ago ( $ Millions ) 2 year ago ( $ Millions ) Annual rental exp 479 465 420
PVOL 2395 2325 2100
Appendix 4
Calculation of CMS for PepsiCo
The value of CMS will be reduced by 25 % this is owing to the dealing & A ; revenue enhancement cost incurred in remitting the CMS to United States. Tax and dealing cost = 25 %
CMS = 1498 ‘ ( 25 % *1498 )
= $ 1123.5m
Appendix 5
Calculation of net debt ratio for PepsiCo
Net debt= D+PVOL ‘ CMS/N ( P ) +D+ PVOL-CMS
= 10724.5
= 19.58 % . PepsiCo net debt ratio utilizing what it believes is the most appropriate step.
Appendix 6
Calculation of per centum debt addition if PepsiCo increases Net debt ratio to 20 ‘ 25 % X is stand foring entire debt @ 20 % net debt aim
Adapting the net debt expression
x+2395-1123.5 = 20 %
Cross generation and aggregation of like footings
0.2 ( x+45301 ) = ten +1271.5
0.2x+ 9060.2 = ten +1271.5
0.2x – ten = 9060.2 – 1271.5
0.8x = 7787.7
X = 9735.875
Entire debt at 20 % net debt ratio is $ 9735.875m
% addition in debt as a consequence of 20 % net debt aim
$ 9735.875m ‘ 9453 * 100 = 2.99 %
The above calculation shows that for PepsiCo to increase net debt to 20 % , entire debt will besides be increased by 3 %
Ten is stand foring entire debt @ 23 % net debt aim presuming that PVOL & A ; CMS remain changeless. Adapting the net debt expression
x+2395-1123.5 = 23 %
Cross generation and aggregation of like footings
0.23 ( x+45301 ) = ten +1271.5
0.23x+ 10419.23 = ten +1271.5
0.23x – ten = 10419.23 – 1271.5
0.77x = 9147.73
X = 11880.17
Entire debt at 23 % net debt ratio is $ 11880.17m
% addition in debt as a consequence of 23 % net debt aim
11880.17m ‘ 9453 * 100 = 25.6 %
The above calculation shows that for PepsiCo to increase net debt to 23 % , entire debt will besides be increased by 25.6 % This means that to accomplish a mark of 25 % PepsiCo needs to shoot more of debt to about 40 % addition.
Appendix 8
Interest coverage = EBIT/Interest payable.
Firm PepsiCo ( 1000000s ) Cadbury
( 1000000s ) Coca-cola ( 1000000s ) Coca-cola Ent. ( 1000000s ) McDonald ‘s ( 1000000s )
EBIT $ 3114 $ 661 $ 4600 $ 471 $ 2509
Interest PAYABLE $ 682 $ 135 $ 272 $ 326 $ 340
Interest COVERAGE RATIO 4.56 times 4.89 times 16.91 times 1.44 times `7.38 times
Appendix 7.1 Trend analysis for PepsiCo involvement coverage
Interest coverage = EBIT/Interest collectible
EBIT = Operating Profit + Other Income
Year Two old ages ago ( $ 1000000s ) One twelvemonth ago ( $ 1000000s ) Latest twelvemonth ( $ 1000000s ) Operating net income 2907 3201 2987
Other income disbursal 89 108 127
Entire ( EBIT ) 2996 3309 3114
Interest PAYABLE 573 645 682
Interest coverage ratio 5.23 times 5.13 times 4.56 times

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