Coke vs. Pepsi
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 …show more content…
We used the 10 year US treasury rate for our risk free rate because in the case it said this was the rate typically used. Also, we chose the arithmetic risk premium because this risk premium provides a better estimate for the future. For the cost of debt we multiplied our semi annual coupon rate * 1000 to get a coupon payment of $28.75. With a maturity value of $1000 and 17 periods of coupon payments, we calculated a before tax cost of debt for Coke to be
7.09% using IRR. The after tax cost of debt for Coke is therefore 4.61%, which we used in calculating the WACC’s for Coke.
The WACC’S we calculated for PepsiCo were 8.25%, 8.78%, and 8.9%. All of all inputs for the
WACC of Pepsi were used for the same reasons as that of Coke, except for the cost of debt. To find
Pepsi’s cost of debt, we divided interest expense by total debt outstanding, since there were no negative cash flows we could not use the IRR method we used for Coca-Cola.
5) Interpret the results of you WACC calculations. What observations can you make?
6) Calculate EVA for 2001 to 2003 using the forecasts given in the case and the WACCs you have estimated.
7) Interpret the results of your EVA calculation. If you had to choose between Coca-Cola and
PepsiCo, which one would you choose? Why?
Invested Capital Adjusted EVA