Coke vs. Pepsi

Topics: PepsiCo, Rate of return, Coca-Cola Pages: 3 (555 words) Published: April 17, 2012
Case #14
Coke vs. Pepsi, 2001

Synopsis and Objectives

Set in December 2000, immediately after the merger announcement between PepsiCo, Inc., and the Quaker Oats Company, this case asks to examine the implications of the merger for the rivalry between the Coca-Cola Company and PepsiCo and for value creation by each firm. Because the merger would allow PepsiCo to control Gatorade, which held an 83% share in the sports-drink market, PepsiCo would further strengthen its already wide lead over Coca-Cola in the noncarbonated drinks segment. Would Coca-Cola’s historically stellar performance in terms of value creation be threatened by the merger?

The case asks to estimate EVA (economic value added) from 2001 to 2003, and provides income statement and balance sheet forecasts to aid in this task. We also need to determine each company’s weighted-average cost of capital (WACC) in order to estimate EVA. The primary objective of this case is to introduce the concepts and calculation of WACC and EVA.

Suggested Questions

1. What is EVA? What are the advantages and disadvantages of using EVA as a measure of company performance?

2. Please examine the historical performances of Coca-Cola and PepsiCo in terms of EVA. What trends do you observe? What are the factors behind those trends? What do you think are the key drivers of EVA?

3. What is the weighted-average cost of capital (WACC) and why is it important to estimate it? Is the cost of capital something that managers set? Who sets it?

4. Calculate the WACCs for Coca-Cola and PepsiCo. Assume a tax rate of 35%. Be prepared to explain your assumptions for the following components:

a. Kd

b. Ke

c. Rf

d. beta

e. market risk premium

f. weights of debt and equity capital

5. Interpret the results of your WACC calculations. What observations can you make?

6. Calculate EVA for 2001 to 2003 using the...
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