In this chapter, we evaluated shares of common equity in PepsiCo using the value-to-book approach, market multiples, price differentials, and reverse engineering. The Coca-Cola Company is a direct competitor with PepsiCo. The data in Chapter 12’s Exhibits 12.13–12.15 include the actual amounts for 2008 and projected amounts for Year +1 to Year +6 for the income statements, balance sheets, and statements of cash flows for Coca-Cola (in millions). In Problem 14.21, we evaluated shares of common equity in Coca-Cola using the value-to-book approach, market multiples, price differentials, and reverse engineering.

Required

a. Prepare an exhibit using the data and analyses for PepsiCo from this chapter and the data and analyses for Coca-Cola from the previous problem that will allow you to compare these two competitors on the following dimensions:

1. Cost of equity capital (RE)

2. ROCE for 2008

3. Projected ROCE for Year +1

4. Book value of common shareholders’ equity

5. Market value of common shareholders’ equity

6. Intrinsic value of common shareholders’ equity

7. Value-to-book ratio

8. Market-to-book ratio

9. Value-earnings ratio (using Year +1 projected comprehensive income)

10. Price-earnings ratio (using Year +1 projected comprehensive income)

11. Value-earnings ratio (using 2008 reported earnings per share)

12. Price-earnings ratio (using 2008 reported earnings per share)

13. Price differential (on a per-share basis)

14. Price as a percentage of risk-neutral value

15. Reverse engineer share price to solve for implied expected rate of return (assuming 3 percent long-run growth)

16. Reverse engineer share price to solve for implied long-run growth (assuming the cost of equity capital as the discount rate)

b. What inferences can you draw from these comparisons about the valuation of PepsiCo versus Coca-Cola? In the chapter, we concluded that PepsiCo shares were underpriced by roughly 52 percent in the market at the end of 2008. In the previous problem, we concluded that Coca-Cola shares also were underpriced in the market at the end of 2008, by roughly 47 percent. Are these comparisons consistent with the conclusion that both PepsiCo and Coca-Cola shares could be underpriced at the end of 2008? Explain.