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| 9/26/2014 | | | | | | | | | | | | Coke vs PepsiWeek 5 Case Study | | | | | | | | | | | | | | | | | | | | | | | | Artesia Stivison, Robert Higdem & Rocky Edmondson | Coke vs Pepsi Week 5 Case Study Question #1 Question #2 Question #3 Question #4 Can you make poor investment decisions and be profitable? What evidence do you see from the companies’ results that indicate how well they made investment decisions (capital budgeting). A company can make poor investment decisions and still remain profitable, but only for a time. A company cannot continually make poor investment decisions and remain profitable forever. When looking at the Coke vs Pepsi case…show more content…
While this was consistent for the soft drinks industry during that period, Coke’s sales declined significantly more than Pepsi’s. Pepsi sold off its fast food investments in 1997, and displayed an increase in WACC from 10.5% to 11.6%, and a debt to equity ratio decrease from 1.97 to 0.71. Therefore, the factors that effected the change in WACC for 1997 could be attributed to a decrease in the amount of debt due the sale of the fast food investments. While, each company had a minor increase in the cost of capital at one point during the period, overall they both had a decline in WACC. This could be attributed to an overall decrease in interest rates during that period, as interest rates were trending down and continued to decline. Question #6 How do the changes in WACC affect the firm over time? What is the result of a declining WACC over the last several years (1997-2000)? Changes in WACC have a direct impact on the cost that companies pay to acquire capital to grow their businesses. Any increase in the WACC will increase what a firm pays to acquire capital. By increasing the costs to acquire capital firms must search for projects/investments that exceed the cost of capital, in order to meet the investors expected rate of return. Therefore, increases in the cost of capital can affect a firm’s ability to undertake new projects and grow. If the

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