ANALYSIS OF COMPARABLE COMPANIES USING MARKET MULTIPLES. 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 (assum- ing 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.
Text Book: Financial Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective By James Wahlen, Stephen Baginski, Mark Bradshaw.