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Coke Versus Pepsi, 2001

Group 6 黃豪平 101355005 八木澤将志 101355071 鄭瑜 101355074 陳貞妮 102363105 施智明 102363110 王未來 102363123. Coke Versus Pepsi, 2001. Coca-Cola Company Background PepsiCo Company Background Industry Competitive Events WACC NOPAT Invested Capital EVA Conclusion. Agenda.

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Coke Versus Pepsi, 2001

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  1. Group 6 黃豪平 101355005 八木澤将志 101355071 鄭瑜 101355074 陳貞妮 102363105 施智明 102363110 王未來 102363123 Coke Versus Pepsi, 2001

  2. Coca-Cola Company Background PepsiCo Company Background Industry Competitive Events WACC NOPAT Invested Capital EVA Conclusion Agenda

  3. Coca-Cola Company Background

  4. Largest manufacturer, distributor and marketer of soft-drink concentrates Annual sales were $20.5 billion in 2000 Market value were around $110.1 billion Market noncarbonated-beverage products Coca-Cola

  5. Coca-Cola’s Strageties

  6. Douglas Daft the new head of Coca-Cola Cut down the number of staff Reduced bureaucracy Acknowledged Coca-Cola has to be the dominant player Come up with new noncarbonated products Change in Management

  7. PepsiCo Company Background

  8. A $20 billion company Provide snack food, soft drink, juice, and noncarbonated beverage Snack foods accounted for 2/3 of the sales and operating income PepsiCo

  9. PepsiCo’s Strategies

  10. Industry Competitive Events

  11. Industry Competitive Events Placed Frito-Lay chips next to Pepsi Discovered the “Life Tastes Good” ads work well Acquired Tropicana in 1998 Minute Maid had less than 20% of the chilled orange juice market

  12. Test-marketed Aquafina in 1994, it ranked the first in 2000 Entered the bottled-water market in 1999 by Dasani Lipton had a 16 point share lead over Nestea Battled the iced tea market by Nestea Gatorade held 83% of the US sports drink market Powerade held 11% of the US sports drink market In alliance with Starbucks and acquired South Beach Beverage Company Begin test-marketing frozen coffee beverage in 2000

  13. WACC

  14. About WACC WACC = (Kd(1- T)*Wd )+ (Ke*We) Where: Kd= Cost of Debt Wd= Weightof Debt Ke= Cost of Equity We= Weight of Equity

  15. Cost of Debt VS For Coke, Cost of Debt = YTM = 2* (N=17, PMT=-5.75%*1000/2, PV=915.4, FV=1000) = 0.071 For Pepsi, Cost of Debt = YTM = 2*(N=15, PMT=-5.75%*1000/2, PV=932.6, FV=1000) = 0.069

  16. Cost of Equity Cost of Equity= Using the CAPM approach CAPM= Rf+b(Rm-Rf) For Coke and Pepsi, Cost of Capital =5.73%+0.88×7.50% = 12.33%

  17. Weight of Debt Weight of Debt: Market Value of Debt= Long-term Debt× Current Bond Price For Coke, the Market Value of Debt = 681,000,000× 915.4/ 1000 = 623,387,400 For Pepsi, the Market Value of Debt = 2,106,000,000× 932.6/ 1000 = 1,964,055,600

  18. Weight of Equity Weight of Equity: Market Value of Equity= Diluted Outstanding Shares× Current Share Price For Coke, the Market Value of Equity = 2,487,000,000×$62.75 = 156,059,250,000 For Pepsi, the Market Value of Equity = 1,475,000,000×$43.81 = 64,619,750,000

  19. Tax Rate Tax Rate= Income Tax/ Pretax Income For Coke, Tax Rate = 1,682,000,000/ 5,605,000,000 = 0.30 For Pepsi, Tax Rate = 1,406,000,000/ 4,394,000,000 = 0.32

  20. WACC WACC = (Kd(1- T)*Wd )+ (Ke*We) Where: Kd= Cost of Debt Wd = Weight of Debt Ke = Cost of Equity We= Weight of Equity For Coke, WACC= 12.3% For Pepsi, WACC= 12.1%

  21. NOPAT

  22. According to Exhibit 9 Operating income + Goodwill amortization - Actual cash taxes = NOPAT Net Operating Profit after Taxes (NOPAT)

  23. Net Operating Profit after Taxes (NOPAT) (in $ millions)

  24. Invested Capital

  25. According to Exhibit 9 Loans and notes payable + Current portion of long- term debt + Long-term debt + Deferred income taxes + Accumulated other comprehensive losses + Total equity + Accumulated goodwill amortization – Marketable securities = Invested Capital Invested Capital

  26. (in $ millions) Invested Capital

  27. EVA

  28. Economic value-added, EVA is used to estimate the value created or destroyed by comparing a firm’s cash operating profits or net operating profits after tax against a capital charge. EVA= NOPAT – (Weight-average cost of capital x Invested Capital) OR EVA= (Return on invested capital - WACC) x Invested capital Economic Value-Added (EVA)

  29. Summarizing the EVA values

  30. EVA: Coke vs. Pepsi

  31. ConClusion

  32. Both Coca Cola and PepsiCo have a positive and increasing EVA value • But the EVA of Coca Cola is increasing at a faster rate than PepsiCo at an average of 140% vs 118%, • Therefore, the recommendation would be to invest in Coca Cola to generate a greater return Conclusion

  33. Thank You for listening

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