PepsiCo, Inc. (PEP), is a global snack and beverage company operating in nearly 200 countries. His organized into four divisions: Frito-Lay North America, PepsiCo Beverage North America, PepsiCo International, and Quaker foods. Products include convenience snacks, sweet and grain-based snacks, carbonated and noncarbonated drinks, and foods. On October 1, 2004, PepsiCo traded at $49.80 per share, with a forward P/E of 21.6. Analysts were forecasting per-share earnings of $2.31 for fiscal year ending December 31, 2004, and $2.56 for 2005. The indicated dividend for 2004 was 0.98 per share. The street was using 9 percent as a required rate of return for PepsiCo's equity.

The Coca-Cola Company (KO) also operates in over 200 countries worldwide and competes intensively with PepsiCo in the market for carbonated and noncarbonated beverages. On October 1, Coke traded at $40.70 with a forward P/E of 20.5. Analysts were forecasting $1.99 in earnings per share for fiscal year ending December 31, 2004 and $2.10 for 2005. The indicated dividend per share was $1.00. The equity is considered to have the same required return as PepsiCo.

A. For both PepsiCo and Coke, calculate the earnings per share that the market was implicitly forecasting for 2006, 2007, and 2008.

B. Analysts were forecasting a five-year annual growth rate in earnings per share of 11 percent for PepsiCo and 8 percent for Coke. Compare these growth rates with those that were implied by the market prices for the firm's shares at the time.

C. If the forecast is that both firms will maintain their percentage current net profit margins (Earnings/Sales) in the future, what is the forecast of the sales growth rates for 2006, 2007, and 2008 that was implicit in the current share prices for the two firms?

D. Calculate the PEG ratio for both of the firms. What do you make of this ratio?

For your calculations, assume that the payout ratio indicated for 2004 will be maintained in the future.