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Coke v Pepsi WACC

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Introduction

In order to find the WACC for both Coca-Cola and Pepsi, we need to first determine different costs and values. To begin, we need to find the debt and equity weights of each company. The market value of equity of a publicly traded company is simply the number of outstanding shares multiplied by the current market share price. This is shown below. Finding Market Value of Equity: The Coca-Cola Company: Share price as of December 4, 2000: $62.75 Diluted Outstanding shares: 2,487,000,000 Market Value of Equity = ($62.75) (2,487,000,000) = $156,059,250,000 PepsiCo, Inc: Share price as of December 4, 2000: $43.81 Diluted Outstanding shares: 1,475,000,000 Market Value of Equity = ($43.81) (1,475,000,000) = $64,619,750,000 Next we need to find the value of debt for each company. ...read more.

Middle

Finding Value (Market Value of Equity + Book Value of Debt) The Coca-Cola Company: Market Value of Equity = $156,059,250,000 Book Value of Debt = $4,435,000,000 Total Value = $160,494,250,000 PepsiCo, Inc: Market Value of Equity = $64,619,750,000 Book Value of Debt = $2,387,000,000 Total Value = $67,006,750,000 Now we need to find the Cost of both debt and equity for each company. The Cost of Debt is equivalent to the YTM in Bond calculations. Here we are assuming $100 face value bonds. Calculations are shown below. Finding the Cost of Debt (Kd) The Coca-Cola Company: FV: 100 PV: -91.54 N: (Matures in 2009) = 8 years paid semi-annually = 16 PMT: (.0575 x 100)/2 = 2.875 Compute YTM = 3.5785 x 2 = 7.157% PepsiCo, Inc: FV: 100 PV: -93.26 N: (Matures in 2008) ...read more.

Conclusion

Finding the Cost of Equity (Ke) Ke = Rf + ? (Rm - Rf) The Coca-Cola Company: Rf = 5.73% ? = 0.88 (Rm - Rf) = 5.90% Ke = 10.922% PepsiCo, Inc: Rf = 5.73% ? = 0.88 (Rm - Rf) = 5.90% Ke = 10.922% In this case the cost of equity for both companies is the same because they both have an average beta of 0.88. Now we have enough information to compute the WACC for both Coca-Cola Company and Pepsi Inc. (Assuming an effective marginal tax rate of 35%). The calculation for WACC is shown below. Calculating WACC WACC = (E/V) x Ke + (D/V) x Kd (1 - T) The Coca-Cola Company: (156,059,250,000 / 160,494,250,000) x 10.922% + (4,435,000,000 / 160,494,250,000) x 7.157% (1 - 35%) = 10.748% PepsiCo, Inc: (64,619,750,000 / 67,006,750,000) x 10.922% + (2,387,000,000 / 67,006,750,000) x 6.984% (1 - 35%) = 10.694% ...read more.

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