Coke vs. Pepsi
We researched Coke and Pepsi as was requested to see which one would be a better investment over the other. One of the ways to see how a company is doing is to look at how much (EVA) Economic Value Added that company is producing. EVA is a way of measuring an operation’s real profitability. EVA is better than conventional ways because it takes into account the total cost of the operating capital. EVA is simply the after-tax operating profit minus the total annual cost of capital. Using EVA has advantages as well as disadvantages.
Advantages
· EVA sends the message than managers should invest only if the increase in earnings is enough to cover cost of capital
· EVA allows a good way for companies to set a reward system that is not overly expensive to implement because is not too difficult for top management to monitor.
· EVA makes the cost of capital visible to operating managers
· Stock prices track EVA more closely than they track other popular measures.
· Ways to improve EVA o Increase earnings o Reduce capital employed o Invest capital in high-return projects
Disadvantages
· EVA does not involve forecasts of future cash flows and does not measure present value.
· EVA therefore rewards managers who take on projects with quick paybacks and penalize those who invest in projects with long gestation period.
· Need to make changes in income statements and the balance sheet to measure economic value.
Looking at the historical trends of Coke and Pepsi in terms of EVA we find Coca-Cola's
EVA has been slowly decreasing while PepsiCo's EVA has been increasing (see Exhibit
1.1). Coca-Cola's NOPAT has decreased in recent years as a result of slowing sales growth and worsening profit margins. If it were not for Coca-Cola's decreasing WACC, its EVA would decrease more rapidly. If Coca-Cola used a WACC of 12%, about the average of the past seven years, its EVA would have been $445,000,000 in 2000.
PepsiCo was able to more than double their EVA in
Advantages
· EVA sends the message than managers should invest only if the increase in earnings is enough to cover cost of capital
· EVA allows a good way for companies to set a reward system that is not overly expensive to implement because is not too difficult for top management to monitor.
· EVA makes the cost of capital visible to operating managers
· Stock prices track EVA more closely than they track other popular measures.
· Ways to improve EVA o Increase earnings o Reduce capital employed o Invest capital in high-return projects
Disadvantages
· EVA does not involve forecasts of future cash flows and does not measure present value.
· EVA therefore rewards managers who take on projects with quick paybacks and penalize those who invest in projects with long gestation period.
· Need to make changes in income statements and the balance sheet to measure economic value.
Looking at the historical trends of Coke and Pepsi in terms of EVA we find Coca-Cola's
EVA has been slowly decreasing while PepsiCo's EVA has been increasing (see Exhibit
1.1). Coca-Cola's NOPAT has decreased in recent years as a result of slowing sales growth and worsening profit margins. If it were not for Coca-Cola's decreasing WACC, its EVA would decrease more rapidly. If Coca-Cola used a WACC of 12%, about the average of the past seven years, its EVA would have been $445,000,000 in 2000.
PepsiCo was able to more than double their EVA in