PepsiCo, Inc. (PEP), is a global snack and beverage company operating in nearly 200 coun- tries. It is 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 com- petes 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 fore- casting $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 per- cent for PepsiCo and 8 percent for Cake. 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. Real World Connection See Minicase M5.2 in Chapter 5 for a parallel investigation using P/B ratios. Also see Minicase M4.1 in Chapter 4 for an application of discounted cash flow analysis to Coca- Cola. Exercises E4.5, E4.6, E4.7, E11.7, E12.7, E14.9, E15.12, E16.7, and E19.4 also deal with Coca-Cola, and Exercises E4.12 and E9.8 deal with PepsiCo.