Coke vs. Pepsi Essay

1006 Words Dec 14th, 2015 5 Pages
PepsiCo – CocaCola
Case Write-Up
11/09/15
Danny Blanks
Ben Crook
Will Dauterive
Alberto Fernandez
Zijian “Justus” Jia

Case Questions Coke vs Pepsi

1) What is EVA? What are the advantages and disadvantages of using EVA as a measure of company performance?
EVA stands for economic value added. EVA is a value based financial performance measure based on Net Operating Profit after Taxes, the invested capital required to generate that income, and the WACC.
The primary advantage of EVA is that it provides a measure of wealth creation that aligns the goals of divisional or plant managers with the goals of the entire company. A primary disadvantage with EVA is that it
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We believe that the key drivers for EVA are the WACC and NOPAT. NOPAT was shown to have dropped at the same time that Coke’s EVA declined, and conversely PepsiCo’s NOPAT increased as their
EVA increased.

3) What is the weighted average cost of capital and why is it important to estimate it? Is the cost of capital something that managers set? Who sets it?
WACC is the Weighted Average Cost of Capital, which provides an average return for all of a company’s securities, both debt and equity. The WACC is important to calculate because it is a necessary input for decision making at the corporate level, management can use the WACC to value projects being evaluated by the firm. Management is in charge of capital structure for a firm, therefor the decisions they make in regards to debt or equity financing will have an impact on the WACC that is calculated. While managers may not directly set the cost of capital, they play a large role in determining the capital structure of a firm; therefore their decisions play a large role in the cost of capital calculation.
4) Calculate the WACCs for Coca-Cola and PepsiCo. Assume a tax rate of 35%. Be clear regarding the different assumptions you make for the different components of WACC.
The WACC’s for Coca-Cola that we calculated are as follows: 2001; 9.30%, 2002; 9.50%, 2003;
9.67%. For our calculations, we used a beta of .88, which was the

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