The Coca-Cola Company vs. PepsiCo, Inc
The Coca-Cola Company versus PepsiCo, Inc
In this paper I will discuss the case of the pension plan between Coca-Cola and PepsiCo Inc. I will be comparing the pension plans of both companies of what they offer as well as the funded status at the end of 2007. You will also see that I have calculated the different rates used by both companies while they are trying to compute their portion of the pension amount. I will also explain through my justification which company myself would want to invest with as a shareholder. And lastly I will justify which company I would like to work with as an employee.
1. Compare the pension plans of Coca-Cola ...view middle of the document...
In addition, PepsiCo offers medical and life insurance benefits and a retiree medical plan that are only funded on a “pay as you go” basis. These plans are not generally funded by the employer since they do not fund plans where no tax benefits are received. A specific dollar amount is assigned as a “cap” for employer payments the remaining funds are received from the retiree.
The funded status as of December 31, 2007 for pensions is 89 and 266 million respectively. Other post employment benefits are 192 million and 1,354 million respectively.
2. Calculate the relevant rates that were used by Coca-Cola and PepsiCo in computing their pension amounts.
All of the relevant rates used by Coca Cola and PepsiCo are shown in the notes of the financial statements listed in the comparative analysis. These rates are disclosed so that users of the statements can assess the reasonableness of the assumptions made when calculating pension expenses and liabilities. The discount rate, expected rate of return on plan assets, and rate of compensation are the relevant rates needed to make the necessary assumptions. The rates below have been taken from the Wiley Companion Website.
The discount rate influences pension expense. Coca Cola’s discount rate used to compute pension information for December 31, 2007 is 5.5% for pension benefits and 6% for other benefits. PepsiCo’s discount rate used to compute pension information for December 31, 2007 is 5.8% for U.S. pensions, 5.2% for international pensions, and 5.8% for other benefits.
The expected rate of return on plan assets determines how much funding the plan assets will earn for the plan. This information is crucial for the company because it indicates how much additional funding will have to be provided to the plan above earnings to meet obligations. Coca Cola’s expected rate of return used to compute pension information for December 31, 2007 is 7.75%. PepsiCo’s expected rate of return used to compute pension information for December 31, 2007 is 7.8%.
Pension benefits are determined by considering the employees compensation level at retirement. Therefore, the rate of compensation or expected increase percentage is necessary to determine future compensation levels. Coca Cola’s rate of compensation or “rate of increase in compensation levels” percentage used to compute pension information for December 21, 2007 is 4.25%. PepsiCo’s rate of compensation or “rate of increase in compensation levels” percentage used to compute pension information for December 21, 2007 is 4.7%.
3. Determine which company you would rather invest in if you were a potential shareholder. Justify your answer.
4. Coca Cola is a large company that has been...