Coke vs. Pepsi Essay

So in order for the company to make a smart decision, they would have to use the WACC (weighted average cost of capital) in order to determine which way they would go about raising that additional capital, whether it be equity (shares of stocks) or debt (a bond issue).

G. Weighted average cost of capital is the average rate of return required by all of the company’s investors.

WACC= (%of debt) (after-tax cost of debt) + (% of preferred stock)(Cost of preferred stock) + (% of common equity) (Cost of common equity)

1. Determine the Weighted Average Cost of Capital (WACC) based on using retained earnings in the capital structure.

WACC is used to value the entire firm, it used as a starting point to determine the discount rate for project investments. In addition, the WACC is the appropriate rate to use when evaluating the firm performance to determine if the firm has created value for its shareholders.

Then we can use the following formula to calculate the WACC. The cost of debt is taken to be on an after tax basis to further to account for the depreciation tax shield.

1. What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not?

Marriott uses the Weighted Average Cost of Capital (WACC) to measure the opportunity cost for investments. WACC is calculated using the 1987 financial data provided in the Marriot Corporation: The Cost of Capital (Abridged) case study and estimators.

WACC is the weighted average cost of capital and provides firms with the idea of the proportion of debt

WACC (Weighted Average Cost of Capital) is a market weighted average, at target leverage, of the cost of after tax debt and equity.

The purpose of this paper is to analysis companies Coke and Pepsi and determinate (a) which company is better able to pay current liabilities (debt), (b) explain what profitability ratios can tell about a company’s performance and how that information would influence investing decisions, (c) discuss which financial ratios to utilized while examining the company’s most satisfied stockholders, (d) create a list of financial-based guidelines that individuals should follow when selecting to invest and (e) evaluate the single piece of non-financial data most important when deciding to invest or not in a company.

WACC is the cost the company would incur to raise each new, or marginal, dollar of capital the percentage of which, called weights, should be based on management’s target capital structure and market values as opposed to book values (Brigham & Ehrhardt, 2015). Estimating the cost of debt to be used in the WACC calculation requires assessing the Yield to Maturity (YTM) and Yield to Call (YTC) of bond A and B. YTM is the rate earned on a bond if it is held to maturity and YTC is the rate of interest earned on a bond if it is called (Brigham & Ehrhardt, 2015). Bond A resulted in a YTM of 7.78% and YTC of 10.63% while bond B produced a YTM of 7.87% and YTC of 7.26% (Table 1).

WACC or weighted average cost of capital is the firm’s cost of capital with each category of capital weighted proportionately. The more debt that company uses, the higher the WACC. The higher the WACC, the higher the company’s risk. When using debt, the WACC begins to fall, but eventually, the costs of debt and equity will cause WACC to increase which will in turn cause the value of the company to drop. This brings us back to the optimal or target capital structure, where the debt to equity ratio maximizes the firm’s value.

While this was consistent for the soft drinks industry during that period, Coke’s sales declined significantly more than Pepsi’s.

Different securities are expected to generate different returns. WACC is calculated taking into account the relative weights of each component of the capital structure. Broadly speaking, the assets of a company are financed by either debt or equity. WACC is the average of the cost of each of these sources of financing weighted by their respective usage in the given situation. By taking a weighted average, we can see how much interest the company has to pay for every dollar it borrows. A firm 's WACC is the overall required return on the firm as a whole. It is the appropriate discount rate to use for cash flows similar in risk to the overall firm.