This is a Darden case study solution. Written in December 2000 directly after the merger news between the PepsiCo Inc. and the Quaker Oats Company, requires students to assess the impact of the merger in terms of the competition between Coca-Cola Co. and PepsiCo, and for value construction by each firm. Since the merger would let PepsiCo administer Gatorade, which controlled an 83% share in the sports drink industry, PepsiCo would reinforce its currently established lead against Coca-Cola Co. even more, in the non-fizzy beverage segment. Would Coca-Cola's traditional top-notch performance relate to value generation be at risk because of the merger?
Historical EVATM Estimation and Return Comparisons
Cost of Debt
Cost of Debt for Coca Cola
Cost of Debt for Pepsi
Cost of Equity
Cost of Equity for Pepsi
Cost of Equity for Coca-Cola
EVA for Coca Cola
EVA for Pepsi
What is EVA? What are the advantages and disadvantages of using EVA as a measure of company performance?
Please examine the historical performances of Coca-Cola and PepsiCo in terms of EVA. What trends do you observe? What are the factors behind those trends? What do you think are the key drivers of EVA?
What is the weighted-average cost of capital (WACC) and why is it important to estimate it? Is the cost of capital something that managers set? Who sets it?
Calculate the WACCs for Coca-Cola and PepsiCo. Assume a tax rate of 35%. Be prepared to explain your assumptions for the following components:
market risk premium
weights of debt and equity capital
Interpret the results of your WACC calculations. What observations can you make?
Calculate EVA for 2001 to 2003 using the forecasts given in the case and the WACCs you have estimated.
Interpret the results of your EVA calculation. If you had to choose between Coca-Cola and PepsiCo, which one would you choose? Why?