What is the weighted-average cost of capital and why is it important to estimate it?

Case key points

COKE VERSUS PEPSI,

• Company Background: The Coca-Cola Company
• Company Background: PepsiCo, Inc.

Estimating Cost of Capital and EVA for Competitors

Case 5: “Coke vs Pepsi, ”

Supplemental Spreadsheet Available

Advance Assignment:

1. What is EVA? What are the advantages and disadvantages of using EVA as a measure of company performance?
2. Please 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?