Pepsi vs. Coke
...ke’s EVA for the period of 1994-2000 was showing downward trend. In 1994 the company had EVA of $1,602M and was experiencing fluctuations that led to 2002 EVA of $1,016M. An illustration of these fluctuations is presented in Table 1. Table 1. Past EVA for Coca-Cola Company1 The downward trend resulted from the global environment, such like Asian financial crisis, South American difficulties, and Russia’s monetary devaluation. Another factor that contributed to the diminishing of EVA was the unsuccessful reign of the CEO, Doug Ivester. PepsiCo, on the other hand, had an upward EVA trend. In 1994 the company was experiencing negative EVA of $464M and in 2000 the company reached $1,201M. Following Table 2 presents the historical data on Pepsi’s EVA. Table. 2 Past EVA for PepsiCo, Inc.2 1994 1995 1996 1997 1998 1999 2000 PepsiEVA ($464) ($760) ($916) $24 $428 $522 $1,201 The positive trend can be explained by the successful business strategy of selling off the business aspects not associated with company’s core competencies like Taco Bell, Pizza Hut, and KFC. Further, Pepsi’s strategic acquisitions of the key players in the industry for the same period resulted in the positive EVA as well. Following Figure 1 represents a graphical expression of both companies’ EVA for the period 1994-2000. Figure 1. Past EVA for PepsiCo and Coca-Cola. Historically, Coke had trounced Pepsi as shown in the graph above. However, the late 2000 announcement of a merger between Pepsi and Quaker Oats Company may change the trend. To be able to predict that, Ms. Keene should consider performing future EVA projections for both Coke and Pepsi. IV. Projections In order to determine future EVA, Ms. Keene should incorporate the following set of formulae3: EVA = NOPAT - (Weighted Average Cost of Capital x Invested Capital) NOPAT = Operating Income - Cash Taxes + Amortization WACC = [Kd(1-t)*D/(D+E)] + Ke*E/(D+E) Invested Capital = Total Capital +Cumulative Loss + Loss + Accumulated goodwill + Deferred Income Tax – Marketable Securities where Kd = Cost of debt = annual rate consistent with firms’ bond ratings; Coke’s Kd=7.3%; Pepsi’s Kd=7.11%; t = Effective marginal tax rate; here considered 35%; Ke = Cost of Equity; using CAPM model, Ke = Rf + B(Rm - Rf); thus Pepsi’s Ke= 5.82%+0.42*5.9% = 8.2%; that of Coke = 5.82%+0.44*5.9% = 8.3%; D = Total debt = Short-term borrowings + Current portion of the long-term debt + Long-term debt; E = Total equity = Price per share*number of basic shares outstanding; Rf = Risk-free rate = 5.82%, a 20-year US Treasury Bond yield; B = Beta; Ms. Keene should use the most current beta, that of 2000 in her calculation. For PepsiCo, beta is 0.42 and that of Coke is 0.44; and Rm - Rf = Market-risk premium = 5.9%, which is a compound (geometric average) of market returns over Treasury Bonds from 1926 to 1998. In her estimations of a Weighted Average Cost of Capital, Ms. Keene should reach the following figures as presented in Table 3. Table 3. Weighted Average Cost of Capital (WACC) for Pepsi and Coke Ms. Keene’s next step is to calculate EVA for both Pepsi and Coke for the 200...