Coke vs Pepsi Case Final

Coke vs Pepsi Case Final - FBE-421 Team Project #2 Coke...

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FBE-421 Team Project #2 Coke versus Pepsi, 2001 Jack Balabanian Andrija Lisicar Erick Lugito Manya Chen Matthew Lavelle Michael Thompson Matthew Richards Kyung Moo Min
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Question 1 . What are the advantages and disadvantages of using EVA as a measure of company performance? Using EVA as a measure of company performance has many advantages. The first major advantage is that EVA directly takes into account the cost of capital. Other measures of company performance don’t include the cost of capital (WACC), and as a result they lack the means to actually determine whether or not a company is creating value for its shareholders or not. By deducting the cost of capital from the net income, EVA ensures that the net income is not overstated and helps to give a more accurate evaluation of a firm’s operational and financial gain. In addition, EVA is a good measure of company performance because it allows firms to capitalize expenses that have multi-period gains. This is important because it allows a company to properly show what will generate future revenues and what will only generate revenues in the present. This allows companies to better account for their profits from year to year because it properly distributes multi-period benefits over their entire useful lives rather than expensing it all at once. Another advantage of EVA is that it allows projects performances to be viewed separately. Because EVA includes the cost of capital in its computation of company performance, individual projects within a firm can also be evaluated on a separate basis in order to evaluate the performance of independent projects within a firm. Lastly, EVA is a good measure of company performance because it provides investors performance evaluations other than simply looking at stock prices and a company’s dividends. EVA measures the operating profits of a company above the cost of capital, and thus investors can see the maximum amount of capital that a company is capable of paying to its shareholders if it wished to remain in the
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same position as it was at the beginning of the period being evaluated. This in turn also helps investors evaluate whether or not the stock price of a company is over or undervalued. While EVA may have many advantages as a measure of company performance, it also has some disadvantages. One of the major disadvantages of EVA is that it is hard to calculate. NOPAT, one of the components of EVA, is extremely hard to calculate because of the countless numbers of adjustments that must be made before it can accurately portray a company’s true accounting profits. Items such as depreciation, amortization, inventory, and research and development are just a few of the things that have to be excluded when adjusting NOPAT. It is also extremely hard to accurately calculate WACC, another component of the EVA equation. It is almost impossible to find the true market beta and market risk premium. These numbers are very sensitive, and even a slight increase or decrease in the market beta can create significant changes
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This note was uploaded on 11/03/2008 for the course FBE 421 taught by Professor Plotts during the Fall '07 term at USC.

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Coke vs Pepsi Case Final - FBE-421 Team Project #2 Coke...

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