Case Study: Estimating the Cost of Capital – Coke Versus Pepsi 2001

In: Business and Management

Submitted By jasonjackmeier
Words 464
Pages 2
The purpose of this paper, prepared by Jessica Chan under the supervision of Robert F. Bruner is about analyzing the companies Coca Cola and Pepsi after Pepsi has announced a merger with Quaker Oats Company with a deal at around $14 billion. With this deal Pepsi would have access to 83.6% of the sport drink market and around 33% of the U.S. noncarbonated-beverage market, followed by Coke with 21%. The paper wants to answer the questions how the latest announcement of Pepsi has an effect on the two companies´ prospects for value creation by showing the company background of both companies, giving a briefly industry overview of the beverage market and competitive events and establishing a financial comparison, especially with ratio and economic profit analysis.
In the world Coca Cola and Pepsi have towered as the two leading brands of beverages. In the year 2000, Coca Cola was the largest manufacturer, distributor, marketer of soft-drink concentrates and syrups in the world and its market value reached $110.01 billion. On the other side Pepsi was a $20 billion worth company in 2000, acting in the snack food, soft drink and noncarbonated beverage market. Both companies have reached worldwide expansion of their markets, which include a large product range of beverages, apparel and paraphernalia with their respective logos. Both have grown into longstanding global and social industry leaders. Coca Cola´s annual sales were $20.5 billion which were earned also through a variety of noncarbonated-beverage products, including products like Minute Maid orange juice, Fruitopia, Dasani bottled water and Nestea, among others. With selling and distributing salty and sweet snacks under the Frito –Lay trademark and manufacturing concentrates of Pepsi, Mountain Dew and other brands the Pepsi Company earned annual sales of $20.4 billion.
The deal of Pepsi was important for both…...

Similar Documents

Coke Versus Pepsi

...| Coca-Cola Versus Pepsi | The Coke Wars Financial Analysis | | Accounting 557: Financial Accounting Sumadi, Mohammad | | 12/15/2012 | | Possibly one of the biggest rivals in Corporate America today, the battle between Coca-Cola (KO) and PepsiCo (PEP) continues to baffle not only consumers but investors as well in determining which product is a better buy. While both companies have had recent problems in emerging nations such as India by having their products be condemned for improper ingredients, a shakeup like this might be necessary to promote future growth for possibly undersold equities. Coca-Cola Company is the world's leading manufacturer, marketer, and distributor of nonalcoholic beverage concentrates and syrups, with world headquarters in Atlanta, Georgia. In May, 1886, Coca Cola was invented by Doctor John Pemberton a pharmacist from Atlanta, Georgia. John Pemberton concocted the Coca Cola formula in a three legged brass kettle in his backyard. The soft drink was first sold to the public at the soda fountain in Jacob's Pharmacy in Atlanta on May 8, 1886.About nine servings of the soft drink were sold each day. Sales for that first year added up to a total of about $50. The funny thing was that it cost John Pemberton over $70 in expanses, so the first year of sales were a......

Words: 2555 - Pages: 11

Coke and Pepsi Case

...advantages Blades could gain from importing from and/or exporting to a foreign country such as Thailand? Blades would have several advantages if they started to import and or export from Thailand. Since rubber and plastic are cheaper when imported from a foreign country such as Thailand, this would increase Blades’ net income and reduce their cost of goods sold. Since several of Blades competitors are already importing components from Thailand, importing would increase Blades’ competitiveness in the United States. If Blades is considering longer range plans in Thailand, importing from and exporting to Thailand may present it with an opportunity to establish initial relationships with some Thai suppliers. Also if they expand to Thailand, Blades, Inc. could be one of the first firms to sell roller blades there and this would give them a competitive advantage. 2/ What are some of the disadvantages Blades could face as a result of foreign trade in the short run? In the long run? There are several disadvantages to foreign trade. The currency fluctuations in Thailand dollar would affect Blades. For instance the dollar cost of imported inputs may become more expensive over time. Blades would also be exposed to the economic conditions in Thailand. For example, if there is a recession, Blades would suffer from decreased sales in Thailand. In the long run, Blades should be aware of any regulatory and environmental constraints the Thai government may impose on......

Words: 285 - Pages: 2

Case Study Coke vs Pepsi

...Managerial Economics Coke vs. Pepsi: An Economic Analysis Rebecca Simmons Managerial Economics Dr Sol Drescher December 4, 2012 Executive Summary In this case study we will do an economic analysis of two major competitors; Coke® and Pepsi®. We will look at the history of these to competitive giants and discuss how they have evolved over the years to become rivals in the 21st Century. In this case study we will also look at the supply and demand of each company’s products. Coke and Pepsi are not only in the beverage business they have branched out into other arenas to continue being the leaders in their market. Both companies do business all over the world; we will also look at how they size up internationally as well as nationally. We will look at production and cost in the short run and long run by analyzing each company economically. Each company has foreta where they will be financially in the 21st Century and in this analysis we will calculate if they have forecasted close to where they are today. Management is a big part of the success of large firms such as Coke and Pepsi so we will look at the management styles of each one. By looking at management will analyze the strategic decision making of each firm and note any issues they have had in the past or present with upper management. Finally strategic decisions in oligopoly markets with regards to profit maximization is vital to......

Words: 1317 - Pages: 6

Coke Zero Case Study

...Chapter Eight Case Study - Coke Zero Coke Zero Coca Cola has been the leader in the soft drink market for decades, consistently besting their nearest competitor, Pepsi. The struggle for the top spot has been on-going for over one hundred years, and at times has been fairly interesting. Both companies have been trying new strategies, flavors; can designs and even recipe changes in order to gain market share, niche competitive advantage as well as a sustainable competitive advantage. (Lamb, Hair Jr., & McDaniel, 2013, p. 26) Both companies constantly change their products and their marketing techniques in order to secure an advantage over one another. Coca Cola over the years has used common good business practices in order to evaluate their business, so they would know which direction to take it, next. Sometimes their choices were effective, other times they were not. A Coca-Cola marketing situation comes to mind going back to 1985, when seemingly out of the blue, Coke changed their formula. The onslaught of public outcry then began, forcing Coca Cola to re-think their strategy and into damage control mode. It was either a brilliant strategy designed to be a publicity stunt, or one of the worse blunders ever in corporate America. The answer is still not clear to this day, however the results were interesting and have been fodder for Marketing classes ever since. News about the “New Coke” dominated the airwaves for weeks on end, and people rushed out to try it. Most......

Words: 1450 - Pages: 6

Case Study Cost of Capital

...Case 8 Cost of Capital Nur Aishah Abdul Aziz and Supornthip Nutim @ Salmah Abdullah SYNOPSIS This case is about Maju Group Berhad (Inter-Pacific Industrial Group Berhad) which is also the owner of Maju Coffee Valley Company Sdn Bhd. The company plans to expand its retail outlet from 80 in 2011 to 88 outlets in the year 2013. According to the company’s year plan, Coffee Valley plans to open two outlets in Perak as a new potential area for the business expansion. To achieve this goal, the company needs to raise their cost of capital via long term investment to ensure their company has sufficient capital to set up the new upcoming outlets next year. INTRODUCTION Maju Coffee Valley Company Sdn Bhd recorded 30 percent increase in revenue generally attributed to the company’s aggressive marketing and expansion program as well as introduction of new and innovative products. Therefore the company wants to look into the area that might give them opportunity to expand their business. In order to expand its retail outlet, the top management held meetings to discuss important things that needed to be considered in making a decision. In the meeting, they selected the new rapid development area located in Manjung and Taiping, Perak for the next upcoming outlets to be opened this year. COMPANY BACKGROUND Coffee Valley has a simple and clear mission statement which is to establish Coffee Valley as the best coffees for drinking all the time. The following four Guiding Principles......

Words: 1564 - Pages: 7

Pepsi Coke Case

...designate the economic sector, the third digit designates the subsector, the fourth digit designates the industry group, the fifth digit designates the NAICS industry, and the sixth digit designates the national industry. Section II—Game Theory and Hypothesis 2a In the set-up to Hypothesis 2a, the authors discuss the notion that players learn from past experiences and have a perfect memory. They discuss a “tit-for-tat” strategy that should over time result in an attenuation of the competitive moves between players. This interaction over time should make it easier for a firm to predict the direction and nature of their rival’s next (competitive) move. The authors suggest in Hypothesis 2a that the volatility of the relationship between Coke and Pepsi’s competitive moves would attenuate over time. However, they also discuss how it can be argued that firms will engage in more radical shifts in strategies in order to gain competitive advantage. In addition, they discuss that is can be difficult for a firm to observe if an action has occurred. This could cause a player to act preemptively and may also make it difficult for rivals to respond proportionately. This can interfere with the tit-for- sequence and could cause breakdowns in the dynamic equilibrium. Testing of hypothesis 2a yielded mixed support – only two price and one in the strategy series showed a reduction in volatility while the other three variables showed an increase. Section III— Stackelberg Leader......

Words: 1266 - Pages: 6

Pepsi Versus Coke

...entrees in addition to time with their friends and associates before going home. It will be an affordable venture for patrons, one that will encourage them to return on many occasions. The menu will feature mama’s favorite as the special of the day with a dessert of choice. A ten percent discount will be given to the patron that invites a friend to dine with us. Key components of supply chain management The café’s the supply chain is virtually imported from local suppliers and distributors. The structures is refurbish store with rustic charm and appeal. The café’s working capital is a combine effort of the owners, local investors, and small business loans. In the majority of the cases, however, small growers join associations in order to integrate the growing and packing processes; products are then sold to either a distributor or to an exporter. Small growers lack sufficient working capital and technology to fully optimize our production. Fruit and vegetable distribution comes from the local farmers for great taste and pride from the small town. The Café culture, is a company, sells coffee, other beverages, cakes, and deli sandwiches, and special of the day, in its 1,700 square feet facility in the heart of Whaleyville, which is in Suffolk, Virginia. Nora’s Café is a privately owned and operate business in the heart of the country. The start-up loss of the company is in the amount of $25,000. Operational Issues The start-up expenses include: * Legal......

Words: 2828 - Pages: 12

Coke Versus Pepsi Financial Analysis

...Pepsi's ROE of 35% is higher than Coke's ROE of 28%. The number of shares outstanding for coke is higher than pepsi. The asset turnover for Pepsi is roughly 1.6 times that of Coke. The asset turnover of Coke is lower than pepsi resulting in a lower ROE. Coke has to increase their sales or sell assets. The impact of this is reflecting in the higher ROE. The impact of this also is reflecting in the higher ROE. The operating costs are also high in the case of Coke. In regard to the valuations of Coke and Pepsi, Pepsi is undervalued as compared to Coke as the P/E ratio is 15.6; if we consider Coke P/E ratio of 18.4 the expected market price of Pepsi should be ~$70. The acquisition of CCE requires Coke to assume more debt resulting in higher leverage for Coke and higher operating expenses from a bottling company will result in a lower EPS. It will increase interest expense and affect the ROE adversely. Estimating the rate of interest using the interest expense paid in 2009's for the long term debt on the books, the ROE is expected to reduce to 25%. The acquisition of the bottling company will require that Coke shows the consolidated figures of the bottling company in its financials. The assets of Coke will increase however, there is not enough information for us to evaluate. We believe that after the acquisition of the bottling company the comparison between Coke and Pepsi will be worse. ----------------------- [pic]...

Words: 300 - Pages: 2

Heinz: Estimating the Cost of Capital

...Company Case: Cost of Capital in Times of Uncertainty Group 10 Alan Ho 20349978 Saraniya Paramanathan 20332829 Christopher Abeleda 20335744 Nathanael Cheung 20345672 Reuban Nadesan 20346511 To: Board of Directors Committee, H.J. Heinz Company From: Group 10 Consulting Date: July 7, 2011 ------------------------------------------------- Subject: Weighted Average Cost of Capital Recommendation ------------------------------------------------- Heinz has reached an unstable point in its business cycle and must calculate an appropriate cost of capital during these uncertain times. The cost of capital is an essential measure in determining the cost of a company’s capital structure. It is the required rate of return for potential investments for the firm. Therefore, assumptions for the cost of capital components must be analyzed carefully. We have provided guidelines and calculations regarding how we derived an appropriate cost of capital. 1.0 Weighted Average Cost of Capital (WACC) Components & Recommendations The cost of capital is a crucial measure used in the capital budgeting process and determining what projects are profitable for the firm. The most common method of estimating the cost of capital in firms is the WACC, as it accounts for both debt and equity as sources of financing. This measure focuses on current financial market conditions and hence, ignores irrelevant historical costs. There are two major components to estimating......

Words: 2326 - Pages: 10

Best Practices - Estimating the Cost of Capital

...1/30/2014 Best Practices in Estimating Cost of Capital For financial managers as well as any major corporation, being able to calculate how much it costs to raise capital is an essential task for any investment decision. To determine if a company should take on a certain project, it needs to calculate a minimum rate of return that is acceptable to compensate for risk from the project. This is accomplished by using the firm’s separate costs in raising capital needed to fund the project. The majority of corporations utilize a Weighted Average Cost of Capital (WACC) which distinguishes rates for the three major sources of funding; issuing debt, preferred shares, and equity. WACC is a model, and like all models includes its own set of assumptions that can distort the results. Calculating the cost of debt and preferred shares is typically quite straightforward with market rates readily available. The issue lies in calculating the cost of equity, a key determinant of WACC, where there are some large discrepancies between theory and application. The cost of equity corresponds to the required return on equity in the Capital Asset Pricing Model (CAPM). Of the firms surveyed, 81% utilized CAPM to derive their cost of equity, making this a fairly standard practice. There is great discrepancy in deciding what interest rate best represents the risk free rate, which can result in differences of up to 150 basis points. One school of thought believes that 90 day T-Bill rates are......

Words: 507 - Pages: 3

Pepsi and Coke Case Study

...5) How can Pepsi and Coke confront the issues of water use in the manufacture of their products? How can they defuse further boycotts or demonstrations against their products? How effective are activist groups like the one that launched the campaign in California? Should Coke address the group directly or just let the furor subside? Pepsi and Coke should have responded faster to the concerns of the general public. The companies formed committees within India and the United States to work on legal and public relations issues. They commissioned their own laboratories to conduct tests and waited until the results came through before commenting in detail. Their approaches backfired. Their reluctance to give details fanned consumer suspicion. If the companies acted faster to the situation when it first came to light, the could have spared a lot of grief. Pepsi and Coke can defuse further boycotts by speaking directly to the cause of the boycott/demonstration or by allowing demonstrators to investigate their product themselves. The activists groups have proven to be very effective in their efforts. Fear campaigns (like the ones assembled in California) can do a great deal of damage to the brand. They are even more effective when the people targeted are not in the country being referred to as in this case (America/India). They are unable to use their own judgement to dismiss the campaign. Moreover, Coke should address the group directly in order to sort out any misunderstandings......

Words: 255 - Pages: 2

Coke vs Pepsi

...The aim of this case study - “Coke Versus Pepsi, 2001” is to analyze the trend of both companies – Coke and Pepsi, after announcement of Pepsi’s acquirement to Quaker Oats, based on the past and forecasted information and materials. This essay would use “Economic Value Added” (EVA) measure, in order to identify the expected values of both companies. Carolyn Keene, the consumer analyst at mutual fund firm SPL, believed that the value comparison of Coca-Cola and PepsiCo should be measured by EVA. So what is EVA? Economic Value Added is a popular method of value creation developed by Stern Stewart and Co of New York. It is a measure of economic profit. The EVA is the difference between the firm’s after-tax return on capital and its cost of capital. Stewart states that the earnings, earnings per share, and earnings growth are misleading measures of corporate performance, and the best practical periodic performance measure is economic value-added. The formula to measure EVA is: EVA= NOPAT – (invested Capital x WACC). EVA is a dollar amount and if that amount is positive, the company can earn more net operating profit after tax than the cost of capital used to generate the profit. There are a number of advantages that should be addressed of using EVA as a measure of company performance. The first one is the close relationship with NPV who is the most common measure of company performance. EVA is closest in spirit to corporate finance theory that argues that the value of the......

Words: 1953 - Pages: 8

Coke and Pepsi Case Study

...successful, especially Coke and Pepsi. Coke started as a “potion for mental and physical disorders,” sold by a pharmacist named John Pemberton. The Coke business evolved quickly and reached franchises by 1910. The concentrate business and the bottling business, though closely related have very different economic dynamics. The profitability of concentrate producers was much more successful than bottler’s. Even though the profitability of concentrate producers is higher than bottler’s they are still inter-reliant; they share cost in things such as marketing and production. There are many reasons why concentrate was financially successful; using Porter’s five forces we can noticeably see how each force plays an intrical role in profitability. Bottlers and concentrate businesses deal with the same buyers and suppliers. There were many suppliers that could provide raw material to concentrate business owners; therefore suppliers could not ask a premium and their power was low. Bottling businesses, much like suppliers were dependent on concentrate businesses. In reference to the five forces model, concentrate producers supplied bottlers with raw material necessary to make soft drinks. Concentrate businesses took management roles in product development and even negotiated with bottlers. Therefore, it is evident that concentrate business had control in the industry. In addition, there was a high volume of suppliers so that made negotiations impossible. Both Coke and Pepsi made......

Words: 688 - Pages: 3

Coke and Pepsi

...Case Study, Coke & Pepsi Shuang Li Integrated Marketing, Section 008 September 12th, 2015 1. Why, historically, has the soft drink industry been so profitable? Customer High consumption need in the market. Since 1970 consumption of CSDs grew by an average of 3% per year for 30 years. Compare to other beverage, Americans drank more soda. Market Environment The soft drink industry just likes an oligopoly market, and Coke and Pepsi have too big market share to affect the industry. Therefore, other companies are very difficult to entry this industry Little capital investment and material cost The soft drink producers do not need much investment in machinery, labor, and overheads, so they can save their capital investment. Substitutes Although there are lots of substitutes, like beer, milk, coffee, but they do not have huge marketing. However Coke and Pepsi spend a lot on advertising and brand building, so they got brand loyalty. 2. Compare the economics of the concentrate business to that of the bottling business: Why is the profitability so different? Bottlers need huge capital to invest in their manufacturing processes, while concentrate companies do not need that much costs. 3.How has the competition between Coke and Pepsi affected the industry’s profits? The competition between the Coke and Pepsi often led to price war, which are companies offering products at discounted prices. This activity always makes lower price, and it weaken the......

Words: 327 - Pages: 2

Coke 2001

...Coke Vs Pepsi 092506 1. Coke vs. Pepsi By: Brad Pearce, Les Pierce, Mike Puleo, Aaron Martinez, Lee Ann Whaley 2. 2000 Annual Sales 20.5 Billion 2005 Annual Sales 23.1 Billion Mistakes Made by Management Former CEO Doug Investor Raised price of syrup by 7.7% Upset bottlers who in turn raised the price of Coke First time in years Decreased overall volume and net income by 41% in two years Pushed heavily on carbonated drinks instead of sports drinks Case Background: Coke 3. Case Background: Coke New CEO Douglas Daft, replaced Investor in 2000 Non-carbonated drinks new focus Analysts believed the change in management would improve distributor relations Bring back Coke to former glory 4. Case Background: Coke Profitability Ratios Growth Ratios 5. Company Background: PEPSICO, INC. $20 billion company in 2000 Snack-food, Frito-Lay trademark 2/3 of Sales & Operating Income from snacks Soft-drink, manufactured concentrates Noncarbonated beverages, Juices 1/3 of Sales & Operating Income from beverages 6. Company Background: CEO Roger Enrico, CEO from 1996 to 2000 1997 - Instituted a massive overhaul at PepsiCo Sold KFC, Taco Bell, and Pizza Hut ( ridding PepsiCo of poor return performing divisions) 1999 – Spun off bottling operations To an independent public company . 7. Company Background: The New PepsiCo PepsiCo left with higher-margin business of selling concentrate to bottlers Bottlers can now raise their own capital Freeing up cash within the parent company Enrico......

Words: 804 - Pages: 4