In this chapter, we evaluated shares of common equity in PepsiCo using the value-to-book approach, market multiples, price differentials, and reverse engineering. The Coca-Cola Company competes directly with PepsiCo. The data in Chapter 12 Exhibits 12.14-12.16 include the actual amounts for 2012 and projected amounts for Year þ1 to Year þ6 for the income statements, balance sheets, and statements of cash flows for Coca-Cola. In Problem 14.22, you evaluated shares of common equity in Coca-Cola using the value-to-book approach, market multiples, price differentials, and reverse engineering.
REQUIRED
a. Prepare an exhibit using the data and analyses for PepsiCo from this chapter and the data and analyses for Coca-Cola from the previous problem that will allow you to compare these two competitors on the following dimensions:
(1) Cost of equity capital (RE)
(2) ROCE for 2012
(3) Projected ROCE for Year þ1
(4) Book value of common shareholders' equity
(5) Market value of common shareholders' equity
(6) Intrinsic value of common shareholders' equity
(7) Value-to-book ratio
(8) Market-to-book ratio
(9) Value-earnings ratio (using Year þ1 projected comprehensive income)
(10) Price-earnings ratio (using Year þ1 projected comprehensive income)
(11) Value-earnings ratio (using 2012 reported earnings per share)
(12) Price-earnings ratio (using 2012 reported earnings per share)
(13) Price differential (on a per-share basis; assume 1% long-run growth for both firms
for this part of the problem)
(14) Price differential as a percentage of risk-neutral value (assume 1% long-run growth
for both firms for this part of the problem)
(15) Reverse engineer share price to solve for implied expected rate of return (assuming
3% long-run growth)
(16) Reverse engineer share price to solve for implied long-run growth (assuming the cost of equity capital as the discount rate)
b. What inferences can you draw from these comparisons about the valuation of PepsiCo versus Coca-Cola? In the chapter, we concluded that PepsiCo shares were underpriced by roughly 25% in the market at the end of 2012. In the previous problem, you determined whether Coca-Cola was under- or overpriced. Are the comparisons here consistent with your previous conclusions regarding both PepsiCo and Coca-Cola shares at the end of 2012? Explain.