Coke Vs. Pepsi Essay

951 words - 4 pages

Carolyn Keene, a consumer analyst at the mutual fund firm Siegel, Parker, and Lauck (SPL), wanted to perform an EVA Analysis for Coca-Cola and PepsiCo for 2001 to 2003. She wanted to know which of the two companies would be the more attractive investment over the next few years. The following report from UBS Warburg: "Given PEP?s (PepsiCo?s) number 1 rank in the faster-growth segment and its improving competitive position in carbonated soft drinks, we believe PEP could, over the long term, threaten Coca-Cola?s lead in the domestic beverage category in all channels except fountain." made Carolyn wonder how this announcement would affect the two companies prospects for value creation as measured by EVA. Historically, Coca-Cola had trounced PepsiCo in terms of value created.With Pepsi?s acquisition of the Quaker Oats Company, PepsiCo would now have control of another non-carbonated beverage segment; 83.6 percent of the Sports Drink market with Gatorade. PepsiCo has control of the orange juice market with Tropicana; the bottled water market with Aquafina; the iced tea market with Lipton; and specialty drink market with Starbucks Frappucino and SoBe teas and fruit juices.Over the last five years, Pepsi had launched aggressive and exciting marketing campaigns that helped boost volumes and visibility. In response to Pepsi?s success with the new marketing campaigns, Coca-Cola veered away from its traditional ?feel good? ads. In the summer of 2000, they launched trendier ads which were highly unpopular and elicited negative reactions from customers and bottlers.Carolyn gathered information and data on both Coca-Cola and Pepsi. She then created EVA and ratio analyses. She acquired pro forma projections that were prepared by analysts at Credit Suisse First Boston for both Coca-Cola and Pepsi. In addition, she retrieved information on the current capital-market conditions. Market share of gallons of soft-drinks is also included in the analysis.From Carolyn?s analysis, I verified her calculations ROIC, Capital Cost, ROIC-WACC Spread, and EVA. Since financial statements were not available, I was not able to verify her ratio analysis. I also verified that percentages in the Market Share analysis. I found some numbers to be different from what was given in the book. For consistency sake in the numbers, I used my calculations in my analysis.To start my analysis of future EVA, I looked at the EVA tables. They are enclosed as Exhibits 1 and 2. I used the calculation of Weighted Average Cost of Capital (WACC) as the basis for my main analysis. From the EVA table, I used ROIC (Return On Invested Capital) as the Cost of Equity (ke). Weighted Average Cost of Capital (WACC) is given. I calculated Weight of Equity (e) by dividing ROA by ROE (Exhibits 3 and 4).Once I got my Weight of Equity (e), I subtracted e from one(1) to get Weight of Debt (d). I set the Corporate Tax Rate (T) at 40.0%....

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