Case Study: Coke Versus Pepsi, 2001

1. What is EVA? What are the advantages and disadvantages of EVA as a measure of company performance?
2. 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?
3. What is the weighted-average cost of capital and why is it important to estimate it? Is the cost of capital something that managers set? Who sets it?
4. Calculate the WACCs for Coca Cola and PepsiCo. Assume a tax rate of 35%. Be prepared to explain your assumptions for the following components:
   1. Beta
   2. Market risk premium
   3. Weights of debt and equity capital
5. Interpret the results of your WACC calculations. What observations can you make?
6. Calculate EVA for 2001 to 2003 using the forecast given in the case and the WACCs you have estimated.
7. Interpret the results of your EVA calculations. If you had to choose between Coca-Cola and PepsiCo, which one would you choose? Why?