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Current Price: $86.86 Target Price: $94.44

ANALYSTS Zach Digmann Jun Ho Kang zachary-digmann@uiowa.edu junho-kang@uiowa.edu Paul Landherr Maddison Wignall paul-landherr@uiowa.edu maddison-wignall@uiowa.edu COMPANY OVERVIEW Dr Pepper Snapple Group, Inc. (DPS) is a long time leading brand owner, manufacturer, and distributor of non-alcoholic beverages within the beverage industry. Dr Pepper Snapple Group's product lines are divided in to two main categories: flavored carbonated soft drinks (“CSDs”) and non-carbonated beverages (“NCBs”). DPS operates in three primary business segments: Beverage concentrates, Packaged Beverages and Latin America Beverages. For the fiscal year ended 12/31/14, total revenues rose 2.07% to $6,121 million. STOCK PERFORMANCE HIGHLIGHTS 52 Week High: $90.95 52 Week Low: $69.39 Avg. 5-Year Weekly Beta: 0.704 Avg. Daily Volume: 1,268,190 SHARE HIGHLIGHTS Market Capitalization: $16.41 b Shares Outstanding: 192.96 m Book Value/Share: $11.62 EPS: $3.77 1-Year Forward P/E: 20.33 Yield: 2.6% Payout Ratio: 50.9% COMPANY PERFORMANCE HIGHLIGHTS ROA: 8.53% ROE: 30.76% Sales: $6,121 m

Cash Returns Focus for Declining Beverage Market

• DPS has committed to returning cash to investors by increasing dividends and continuing to repurchase stock. We estimate that DPS will continue to repurchase $400M worth of stock per year.

• DPS operates in the beverage industry which is in a mature declining state. To combat declining US sales DPS has invested in Latin America to pursue new growth opportunities.

• The industry DPS operates in is going through changes due to consumer preference shifting towards healthier alternatives as well as new regulation for unhealthy food and drink.

• DPS operates only in the US, Canada and Latin America making their operations localized only in North America. This represents a geographic risk and doesn’t allow worldwide risk diversification opportunities.

YEAR STOCK PERFORMANCE

Source: MSN Money

Krause Fund Research | Fall 2015 Consumer Staples

DR. PEPPER SNAPPLE GROUP, Inc. (NYSE: DPS)

Recommendation: HOLD November 13, 2015

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We believe there are five main macroeconomic forces that affect the consumer staples sector. These drivers are gross domestic product, unemployment, inflation, consumer sentiment, and demographic shifts. Gross Domestic Product: Gross domestic product (GDP) is an indicator of the overall health of the economy. In the third quarter, as a percent change from the second quarter, U.S. GDP grew at a seasonally adjusted 1.5%.[1] The consumer staples sector is non-cyclical by definition. However, we contend that the more robust the economy is, the more consumers are willing to purchase name brand products over private label competitors. Since the end of 2009 to the end of 2012, the number of people purchasing private label products fell more than 10%.[2] This fact is particularly important as we are analyzing DPS which is a name brand in the beverage industry. After the economy recovered from the recession, GDP has remained relatively strong in the past five years with minor contractions in the first quarters of 2011 and 2014, as shown in the graph below. As consumers drive around two-thirds of the economy,[3] we expect the economy to get a slight boost at the close of the year with increased production for the holiday season. However, with the recent slowdown in Chinese growth, in six months we see GDP growing at 2.5%. In 2-3 years, we believe the U.S. economy will be on solid footing with steady employment and stronger oil prices giving rise to 3.3% long-term growth.

Source: Bloomberg

Unemployment: Unemployment has an impact similar to that of GDP on the consumer staples sector. While it may not have a direct impact, the consequences of unemployment can affect what products are purchased. As evidenced previously, it appears that when more people are laid off and without work as during the recession, consumers shift to private label brands as a way to conserve money. As the economy improved, less private label goods were purchased. Unemployment is currently at 5.0%.[4] The previous month also had dramatically higher job creation than predicted at 271,000 jobs.[4] As shown in the graph below, unemployment has steadily been decreasing since 2010. A positive side effect of this decline is that it can put upward pressure on wages. Average hourly earnings increased 0.4% over the previous month as more became employed.[4] This association provides an explanation for the reason as to why name brand goods are purchased more often in a solid economy with strong employment. Higher wages allow consumers to feel as though they are in a secure financial position, giving the incentive to purchase name brand goods over the cheaper private label rivals. We expect the unemployment situation to stay the same in the near term at 5.0%. We see unemployment dropping slightly to 4.7% in 2-3 years as the economy improves more, but not more than a slight decrease to stay around the natural rate of unemployment.

Source: Bloomberg Inflation: The Consumer Price Index (CPI) is a measure of the change in the average price level of a fixed basket of goods and services purchased by consumers.[5] This

ECONOMIC OUTLOOK

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key gauge of inflation has been persistently low in recent months due to low energy costs and low costs of imports, driven by the strength of the dollar. The last reported monthly change was -0.2%.[5] If the Core CPI is used (meaning food and energy prices are excluded), there was a 0.2% increase month-over-month.[5] In six months, we see a monthly change in the CPI of 0.2%. In 2-3 years when oil prices recover and with lower unemployment, we predict an annual inflation rate of 2.7%. The CPI matters to consumers because if prices are increasing at a rate faster than wages are increasing, shifts in product purchasing may be needed. Additionally, to look at the effect of inflation on the consumer staples sector, it is interesting to compare the CPI to the Producer Price Index (PPI). By comparing the graphs below, it is possible to see cost increases that firms are absorbing that cannot be passed along to consumers. With the exception of the most recent year, the CPI appears to be much more volatile than the PPI. Furthermore, it appears that producers are able to pass price increases along reasonably well. When the PPI is increasing, so is the CPI by an equal amount. This relationship would suggest that producers are able to shift price changes along to consumers more often than not, allowing them to avoid cost absorption.

Source: Bloomberg Consumer Sentiment: The University of Michigan’s Consumer Survey Center questions 500 households each month on their financial conditions and attitudes about the economy.[6] For November, consumer sentiment is sitting at 93.1.[6] January 1996 is the base period where consumer sentiment is 100. Thus, we believe this is a strong reading for the current consumer outlook driven by strength in the job market and stock market returns. Since the recession, as shown in the graph below, consumer sentiment has risen from poor readings in the 50s level.[7] As discussed previously, consumers drive a majority of GDP growth and consumer sentiment is directly related to the strength of consumer spending. Therefore, we see this strong consumer sentiment number as a good sign for the future economy. In the near term, we believe consumer sentiment will be at 94.5 based on rising wages. In 2-3 years, after GDP expands at a faster rate and inflation remains relatively normal, we believe consumer sentiment will measure 98.

Source: Bloomberg

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Demographics: Demographic shifts in the U.S. population will drive the types of products purchased in the consumer staples sector in the future. The U.S. population is aging, as evidenced by U.S. Census data. In 2002, the percent of the population between 20 and 44 years old was 36.3%.[8] By 2012, this percent of the population had decreased to 33.4%.[9] This information shows that the United States population is currently aging, as Baby Boomers enter the postretirement stage. Soon, as this part of the population phases out, what will remain is a large, younger population. This change will drive consumer demands in the coming future. In the beverage products industry of the consumer staples sector specifically, you see this showing up in demands for healthier drinks. This suggests that in order to satisfy consumer demands, companies will need to begin to shift their product lines to meet expectations. Costs could increase as a result, but by getting ahead early and developing innovative products, companies could establish a competitive advantage in new products.

Industry Description: The beverages industry consists of numerous products which could be categorized into carbonated drinks, noncarbonated drinks, and alcoholic beverages.[10] Among the three sub-industries, the carbonated soft drinks sub-industry has the largest representation. We focused our research on nonalcoholic beverage industry. The non-alcoholic industry is dominated by two corporations: Coca-Cola and PepsiCo. The non-alcoholic industry is split into primarily syrup manufacturers, which focus on the manufacturing of flavoring for soda and bottlers that use manufactured syrup and package product for retail sale. The alcoholic beverages are split into brewers, distillers and vintners. The nonalcoholic beverage industry’s major products include carbonated soft drinks, functional beverages, fruit beverages, sports drinks, energy drinks, and bottled waters. While some companies in the industry, such as Coca-Cola, are nearly

exclusively in the beverage retail business, some companies, such as Pepsi, also have more diverse holdings and include some food product lines. The industry has faced push backs over recent years due to people’s desire to be healthier. A common place for consumers to begin improving their health has been eliminating high calorie drinks from their diets. As revenue declines, businesses will have to start relying on higher margins and diversification to remain profitable. In recent years, the decline in oil and energy prices have allowed margins to increase from decrease in transportation costs. Corn prices are also a large input cost of sodas in the industry due to the use of corn syrup as the primary sweetener.

Companies like Coca-Cola and PepsiCo have tried to increase revenues through sales in emerging markets, especially in Brazil, Russia, India and China. Industry Trends: Consumers typically consider three factors when choosing a particular drink: taste, comfort, and nutrition.[10] Most manufacturers of soft drinks earn money by selling their products to retailers rather than directly selling to consumers. Although the market is made up primarily by large manufactures there are opportunities for small niche categories for businesses to operate. These niche markets are becoming more profitable and indicate that large companies will start to require more flexibility within product lines and new flavors. These changes in consumer taste require companies to be more dynamic in their operations and require them to respond quickly to consumer preference changes.[10] With US consumers being more aware

INDUSTRY ANALYSIS: BEVERAGES

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of their health issues, it is evident that consumers are switching from carbonated beverages to noncarbonated beverages like ready-to-drink coffee, bottled water, energy drinks, ready-to-drink tea, and sports drinks. Despite this, in 2009 carbonated beverage sales outperformed the noncarbonated category, due to consumers trading down to cheaper alternatives including tap water and other alternatives.[10] Despite the decrease in sales of noncarbonated category in 2009, we believe the growth of the noncarbonated category will continue as economic conditions improve. Bottled water has become a fast growing business within the non-carbonated soda category. Volume of sales were up 7.3% in 2014, following gains of 5.8% in both 2012 and 2013.[10] Bottled water will likely continue to grow in the long term at a similar rate, assuming new regulation following concerns about the safety of municipal water supplies, a general interest in healthy living, and the population’s increasing affluence more than offset environmental concerns about plastic bottle usage are addressed by companies going forward.[10] To boost the source of category growth, manufacturers create new products that drive consumption. Their primary focus as an area of growth is in the flavored or enhanced water categories, including products with fruit flavors or the addition of vitamins.[10] Markets & Competition: The beverages industry is in a very competitive environment with a highly consolidated market in which two corporations make up 3/4 of the industry in terms of market capitalization. The market share of the nonalcoholic beverage industry is concentrated between three primary companies. Carbonated soft drinks, for example, reflect approximately 88% of US retail sales in the industry, and are represented by the beverage brands of three companies: Coca-Cola, PepsiCo, and Dr. Pepper Snapple Group Inc.[10] As the statistics show, the major players in the nonalcoholic beverage industry are Coca-Cola, PepsiCo, and Dr. Pepper Snapple Group Inc. Coca-Cola and PepsiCo are especially well positioned in this industry because they have a big market share with relative pricing power, brand power, international presence, and diverse products

including carbonated soft drinks, functional beverages, fruit beverages, sports drinks, energy drinks, and bottled waters. Dr. Pepper Snapple Group would be defined as one of the followers mainly because of its smaller market share and much less international presence. Given the economic and industry outlooks, we believe that Coca-Cola and PepsiCo are best positioned. Despite laggard growth in the beverage industry because it is in a mature/decline stage of the life cycle, we believe Coca-Cola and PepsiCo are more suited to not necessarily grow, but to maintain their business going forward because they have a large international presence.

Source: Bloomberg and Yahoo Finance Catalysts for Growth/Change: Consumer Preference for Healthy Products: Companies should focus on having products that meet consumer preference. Although carbonated soft drinks take up most of the sales revenue, companies should keep up with changes in consumer trends in order to grow. The US market has become more sensitive to their diet and health and are facing an obesity problem. An easy way for people to reduce calorie consumption is to avoid drinks that have a lot of sugar in them. Cost of Energy & Raw Materials: Raw materials include sugar, corn, aluminum, etc. Gross margin would increase as cost of inputs in manufacturing nonalcoholic beverages decreases. Environmental Issues: As consumers are more aware of environmental issues and make decisions based on environmental effects, companies should take environmental issues into consideration.

Metrics/Companies Coca-Cola PepsiCo Dr Pepper Snapple GroupMarket Cap 165.73B 133.97B 14.55BShare Price 38.10 91.20 76.20

Sales 45.72B 65.31B 6.20BNet Income 7.55B 6.51B 715.00M

EPS 1.71 4.33 3.67Debt Level 44.55B 31.46B 2.61B

Profit Margin 16.51% 9.98% 11.54%P/E 22.31 21.09 20.77P/S 3.63 2.06 2.35P/B 5.84 8.19 6.45

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Emerging Markets: As sales especially of carbonated soft drinks in North America decline, the demand from emerging markets would become more and more important in determining sales revenues. The issue of raising U.S. federal funds rate should be watched carefully for the short-term since it is expected to have a huge impact on emerging markets if the U.S. fed finally decides to raise rates after keeping rates near to 0% since 2008. The most significant catalyst for growth is an emerging global middle class and the ability for corporations to penetrate these markets (IBISWorld). Investment Positives/Negatives: Positives: Operations on a global scale help diversify market exposure and create opportunities for growth as long as management is able to perform market research in each area and grow foreign market exposures. The industry is less affected by volatile markets due to the continuous desire for beverages and some daily caffeine necessities. Global middle class growth projections indicate the possibility for the sale of more expensive items as opposed to the relatively inexpensive items preferred by poorer nations. A company’s ability to adapt to changing consumer tastes is determined by analyzing trends in individual product sales around the world and make changes to products to meet this demand. Companies add value when they can adapt to these changes without the need for new infrastructure in its place of operation. Multiple product lines provided by companies allow the consumer to make choices along the spectrum of flavors and enables companies to sell/compete with each other, create brand loyalty and establish name recognition allowing new products to be introduced with a name and badge of quality already attached to other items which will set expectations. Negatives: Changing consumer preference requires constant spending on R&D as well as market analysis which can be expensive and inefficient. Water quality and quantity available to bottlers affects the product quality and quantity that can be produced - Water makes up a huge portion of all products in this industry. Government taxes on sugary drinks are starting to become more common hurting sales and margins within those markets. Each product that falls under these regulations are affected negatively due to the product becoming more expensive for consumers.

Changes of commodity prices used in most products such as corn for corn syrup sweeteners and oil used for transportation costs are at historically low prices. In the case of corn, reliance on the weather makes production out of the control of farmers and opportunity for cheap oil may result in increased reliance by other sectors or areas of the world that could cause overcompensation within a region that is growing or modernizing at an unsustainable rate. OPEC countries may also cut production to artificially raise prices again, similarly to what they did in the 1970s. Global exchange rates and a strong dollar can also harm foreign sales and due to the historical strength of US markets in times of volatility the dollar could become stronger at the same time that international products are weakening. Porter’s Five Forces: Industry Competition: HIGH; the beverage industry is highly consolidated with big major companies competing for market share. Threat of New Entrants: LOW; brand identity present in the beverage industry makes the threat of new entrants relatively low. High initial starting cost for new entrants and low margins make it unattractive for new entrants. Threat of Substitutes: LOW; high cost, low margin of new products, and the domination of three largest companies within the industry make the introduction of substitute products unattractive. Some companies who have started operating in the beverage industry tend to stay small and local. Bargaining Power of Suppliers: LOW; companies are very large and have more power than bottlers they have contracts with. They have more power over the supply chain than the smaller companies that they work with have. Bargaining Power of Consumers: HIGH; Buyers vote with every dollar they spend so each time one company changes price the other will follow suit.

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Executive Summary: We rate Dr. Pepper Snapple Group, Inc. a HOLD. There are several positive and negative aspects affecting this conclusion. Although there are growth opportunities and generous return of cash through dividends and stock repurchases the downside risk does not make this a viable purchase. They have policies in place for returning cash to shareholders through share buybacks and dividends and have remain committed to it over the past few years. They have also experienced continuous growth of revenue through times when the market for soda and other beverages has been in decline. With a beta lower than 1, it makes DPS more attractive in volatile markets. Regulation in foreign markets, reliance on retailers for a large portion of sales and minimal exposure to broader foreign markets such as Europe and Asia make the company more risky. Consumers are also starting to become more health conscious and one of the first places they look to cut calories is through beverages. Company-Specific Analysis: General information: Dr. Pepper Snapple Group, Inc. (DPS) is an owner of several brands, manufacturer and distributer both beverage concentrates and products ready for consumer sale. They have products in two main categories: carbonated and non-carbonated beverages. Their primary brands include:

DPS bottles their own products and outsource some of their bottling to keep up with demand. DPS operates in three primary business segments: Beverage concentrates, Packaged Beverages and Latin America Beverages. They develop new products to meet changing demand and have also

made strides through acquisitions of other brands in the past. The strategy DPS uses relies on a focus of building brands through market research, pursuing

high margin channels of market contact, improving logistics and continuing to grow their infrastructure network. Source: 2014 DPS 10-k Statement Products and markets: DPS product lines are divided into two main categories: flavored carbonated soft drinks (“CSDs”) and non-carbonated beverages (“NCBs”). Carbonated soft drinks include non-cola flavors which mainly include Dr Pepper, Canada Dry, 7UP, A&W, and Sunkist. Non-carbonated beverages include ready-to-drink teas, juices, juice drinks, water and mixers with brand names of Snapple, Hawaiian Punch, Mott’s, Clamato, and etc. Similar to other beverage companies like Coca-Cola and PepsiCo, DPS produces packaged products and manufactures beverage concentrates and syrups. According to its 2014 annual report, DPS a leading beverage company in the beverage markets of U.S., Canada, and Mexico. It not only serves national market, but also serves regional and niche markets within countries with regional products. DPS utilizes the mass media with social media for advertising and uses product changes in terms of package design and ingredient to promote sales. As with other beverage companies, DPS’s main customers include bottlers, distributors and merchandising companies. Analysis of recent earnings releases and managerial guidance: The most recent earnings releases of DPS for the third quarter of 2015 show increase in EPS, core EPS, and net sales by 9%, 10% and 3%

COMPANY ANALYSIS

Beverage Concentrates

20%

Packaged Beverages

67%

Latin America Beverages

13%

DPS REVENUE BY BUSINESS SEGMENT

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respectively compared to the prior year period. “For the quarter, BCS volume increased 2% with carbonated soft drinks (CSDs) increasing 2% and non-carbonated beverages (NCBs) increasing 4%.”[11] This reported data is consistent with the fact that 1) CSD market is in the mature stage and 2) consumers are more selective in choosing what to drink with the awareness of their health issues. The main drivers of the increase in gross profit were lower commodity costs and improvements in productivity. The decrease in interest expense was due to fair value hedges and the repayment of senior unsecured notes. These factors caused the increase in net income from 2013 to 2014.

Source: 2014 DPS 10-k statement Production and distribution: With a limited amount of packaging from a third party manufacturer, DPS manufactures and packages about 90% of its product volumes. Its “warehouses are generally located at or near bottling plants and are geographically dispersed to ensure product is available to meet consumer demand.”[12] Principal raw materials utilized include materials used for packaging such as aluminum cans, glass bottles, PET bottles and caps, and paper products. These products are generally bought from suppliers at varying costs. In addition, raw materials include sweeteners, juice, fruit, water and other ingredients which are used for the production of beverages. DPS uses forward contracts and supplier pricing agreements in order to mitigate the problem of price fluctuation of raw materials.

Source: Yahoo! Finance[17,18,19] and company 10-k statements [12,15,16]

Competitive Environment: Dr. Pepper Snapple Group makes up 8.7% of the refreshment beverage market making it the 3rd largest company in this category behind only PepsiCo and Coca Cola. The flavored carbonated soda drinks, drinks that are not Cola flavored, is a growing portion of the beverage industry that has been eroding the Cola portion of the market. The highly competitive market has faced declining domestic sales revenue over recent years, however, there are opportunities for growth through capturing market share and expansion to new global markets.

Source: 2014 PepsiCo 10-k annual report Comparison to Industry Leaders: In comparison to PepsiCo and Coca Cola, DPS is a small company. The focus of the company is more similar to Coca Cola than PepsiCo because of the reliance on manufacturing and distribution networks as well as brand loyalty within the beverage market. PepsiCo also has food segments such as Frito Lay and Quaker that DPS does not have. DPS, by market cap, is about a 10th of the size of PepsiCo and Coca Cola. As a result, they must focus on market analysis and catering products to demand. A company like Coca Cola, with more than 500 products available, takes the approach of making everything and seeing what people like which can result in wasted resources and

DPS KO PEPGross Profit* 59.3% 61.1% 53.7%Income Before Tax* 17.5% 20.3% 13.1%Net Income* 11.5% 15.5% 9.8%R&D Expense* 0.3% 5.2% 1.1%Advertising Expense* 7.7% 7.6% 5.8%Transport & Storage Expense* 13.1% 5.9% 14.5%Trailing P/E 21.1 22.6 21.33Dividend Yield 2.49% 3.39% 3.02%* = % of sales

Percentage of Sales 2014 2013Net Sales 100% 100%Cost of Sales 40.70% 41.70%Gross Profit 59.30% 58.30%SG&A Expenses 38.10% 37.90%Income from Operations 19.30% 17.40%Interest Expense 1.80% 2.00%Net Income 11.50% 10.40%

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R&D spending. Being a smaller company also requires them to be more careful spending their more restricted resources. PepsiCo is a very diverse corporation. They operate in both the beverage industry as well as snack food industries which could be an advantage for them. As markets change they are able to take advantage of a wide array of changing tastes rather than changes within just the beverage industry. Less diversification among products exposes DPS to more risk within the beverage industry but also allows management to focus more on their core business rather than trying to manage diverse product lines. Unlike Coca Cola and PepsiCo, which has the financial strength to spend much larger amounts of money on transportation, distribution and R&D even if the expenses as a percentage of sales are similar. Being more restricted can have benefits for DPS. They must conduct more research to utilize their facilities to their full potential and be more aware of costs and market trends. Foreign Sales: From 2013 to 2014 sales in global markets rose lead by Latin America. In their primary foreign market, Latin America, net sales rose 15% indicating strength and further growth opportunities within the area. They have focused on this region primarily because of the growth it generates, but sales within the area look good on paper because they had a much lower sales from the start. Domestic sales increased 55 million dollars resulting in a 1.3% increase while an increase of 70 million dollars resulted in a 15% increase in Latin America. Instead of entering new markets DPS has committed themselves to North America and improving their distribution networks and bottling sites within the region. DPS has not pursued operations outside of North and Latin America and have not indicated an intention to expand into other foreign markets in the near future. This, however, leaves opportunities for future growth after they are comfortable with their infrastructure and distribution networks within their primary market of North America. After acceptable levels are attained, investment in other foreign markets such as Asia and South America would become more probable. In 2014 the Asia Pacific segment of Coca Cola made up 11.4% of sales and the Europe portion made up 10.5% of sales

indicating future growth can be derived from these new areas of business. Regulation: Food and beverage industries as a whole are subject to many regulatory matters with regard to ingredients and the effects they have on people. On January 1, 2014, Mexico introduced a one peso (about 7 cents, or 10% of cost) tax[13] on beverages high in sugar content which could be damaging to future growth in the country. This new regulation is harmful to growth efforts in Latin America due to higher pricing. This price increase drove consumption down an estimated 6% in 2014 and by December, they were down 12%.[13] A tax in Mexico may start a trend within the region if other countries start to become unhealthy. However, the growth in the region was driven primarily by Penafiel’s growth of 21% in Latin America. This drink is unaffected by the tax because it is a mineral water allowing continued growth of this category despite the new tax. Part of the reason for this increase is the tax that has led to more Mexican people drinking waters. Only two cities within the US have had success with such a tax: Berkeley California and the Navajo Indian Nation. Another 30 have tried and failed.[14] These mixed signs over time have caused doubt about the effectiveness of new taxes and regulation on the industry although they appear to be working in more recent years. Payout Policy:

Data from 2014 DPS 10-k statement The dividend payout of DPS is relatively low compared to industry leaders. The dividend yield on DPS stock last year was 2.49%, lower than the 3.02% for PepsiCo and 3.39% by Coca Cola. The main reason for this difference is over the past year DPS has risen 22.77% in price while PepsiCo and Coke

248.97%

128.49%107.98% 112.33% 101.91%

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

300.00%

2010 2011 2012 2013 2014

% of

Net

Inco

me

Year

DPS Total Payout Ratio as a Percent of Net Income

10

have both declined in price by .39% and 3.59% respectively.[20, 21, 22] Over the past three years DPS has returned $1.2B ($400M per year) through stock repurchases. As part of the repurchase program, DPS had a balance in their share repurchase account of $172M and were approved for and additional $1B repurchase in February of 2015. Along with these repurchases, the dividend has also been growing yearly and rose 7.7% from 2013-2014. These growing returns and share repurchases indicate that DPS sees strength in their operations and believes that their stock is undervalued. It also shows their commitment to return cash to investors. Catalysts for Growth/Change: One of the key factors for growth would be the responsiveness and success in terms of meeting consumer preferences, trends, and health concerns. For instance, the inclusion of non-carbonated beverages in the company’s product portfolio helps the company to survive from decreasing demand for carbonated soft drinks as consumers become more aware of their health. Hence, the company have room for growth if it adheres to consumer demand and preferences. Cost of raw materials also plays an important role in determining the profitability of the company. With the current energy prices low, we believe DPS has potential for growth in terms of profitability since it is “significantly impacted by changes in fuel costs due to the large truck fleet we operate in our distribution businesses and our use of third party carriers. Additionally, conversion of raw materials into our products for sale uses electricity and natural gas.”[14] DPS states that their transportation and warehousing costs in 2014 were $802M and were primarily related to shipping and handling. Since DPS primarily focuses in U.S., Canada, and Mexico markets, it could grow by expanding its markets throughout the world. One concern is that according to the 2014 Form 10-K, 88% of net sales come from the U.S. market. Moreover, it could use the growth in Hispanic community within the U.S. to leverage its market coverage by finding ways to attract the Hispanic consumers. Key Investment Positives/Negatives (or S.W.O.T Analysis):

Key Positives: Focus of management to pursue higher margin methods of sale. Focused on matching consumer preferences to desirable products. Returns of cash to shareholders.

Key Negatives:

Regulation in Mexico, a key area of growth. Reliance on few retailers for bulk of sales. Minimal exposure outside North America.

After careful analysis of DPS, we came to the conclusion to issue a HOLD recommendation under the belief that the current stock price and the target stock price are relatively close. In valuing DPS, we used the discounted cash flow (DCF) model, economic profit (EP) model, dividend discount model (DDM), relative valuation P/E ratio, and the P/E growth ratio. Our model estimates DPS’s stock price as of November 13, 2015.

Key Assumptions: Revenue Decomposition: We decomposed revenue of DPS mainly by looking at individual segment results and forecasted the growth of each segment. DPS’s operations are divided into three segments which include beverage concentrates, packaged beverages, and Latin America beverages. Our forecasts are based on management’s discussion and analysis, other analyst reports and our economic outlook. In forecasting future sales of each segment, we applied population growth rate of only the United States and Mexico. According to the 2014 annual report of DPS, the $6.1 billion of net sales in 2014 comprised of sales in the United States (88%), Canada (4%) and Latin America (8%).[12] The beverage concentrates segment and packaged beverages segment both operate within the U.S. and Canada while Latin America beverages segment operates in Mexico and the Caribbean. In the Latin

VALUATION DISCUSSION

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America segment, Sales in Mexico make up approximately 91% of the net sales of this segment. Due to the minimal effects of the growth in population in Canada and the Caribbean we found that the numbers were so small they were insignificant to forecasted sales. Population growth is important for DPS, especially in the US where 88% of revenue is generated, due to the market saturation and limited growth in the area. Along with the population growth rate, we incorporated our forecasts based on our economic outlook and historical growth rates. For instance, the Latin America Beverages segment yielded growth rates of 11% and 15% in 2013 and 2014 respectively. Hence, we forecasted relatively higher growth rates for Latin America Beverages compared to the other two segments in the near future and had them decrease to a sustainable growth rate for our continuing value assumption. Cost of goods sold: We forecasted cost of goods sold as a percentage of sales. We used the average historical percentage as the factor in forecasting COGS. Selling, general and administrative expenses: We also forecasted SG&A as a percentage of sales by using average historical percentage as a factor. Capital expenditure: As with many other accounts, we also forecasted capital expenditure as a percentage of sales. We used 3% of net sales because it was provided by DPS under the management’s discussion and analysis section of the annual report. Weighted Average Cost of Capital (WACC): WACC is calculated by assuming a capital structure of 85.7% equity and 14.3% debt. Our calculation resulted in a WACC of 5.68%. Cost of equity: In deriving the return on equity, we utilized the Capital Asset Pricing Model (CAPM). Since our investment horizon is 30 years, we used the 30-year US Treasury Bond rate of 2.87% as our risk-free rate. We got the historical risk premium of 4.62% from Professor Damodaran’s estimate.[23] The beta we used in finding cost of equity was 0.704 which was an average of 1-5 year weekly raw beta from

Bloomberg. The CAPM produced a cost of equity of 6.18%. Cost of debt: For return on debt, we used the yield to maturity of the 4.50% bonds due at year 2045 which was retrieved from Bloomberg. This issue was a 30-year bond to match the thirty horizon of the risk-free rate. The pre-tax cost of debt is 4.62%. Assuming a marginal tax rate of 34.8% consistent with 2014, the after-tax cost of debt is 3.01%. Discounted Cash Flow & Economic Profit Models: The DCF and EP models utilize the core value drivers of net operating profit less adjusted taxes (NOPLAT) and invested capital (IC). After completing a DCF and EP analysis, we predict an intrinsic stock price of around $94.50. This result suggests that DPS’s stock is undervalued by approximately 9% from its current price of $86.86 as of November 13, 2015. The valuation takes in our positive outlook of DPS in growing its business in the Latin America beverages segment and Mexico in particular. We use a higher CV growth of NOPLAT than the implied rate because of our belief that during the continuing value period DPS will have an opportunity to enter another new market similarly to what it has done with Mexico. The strategic growth to new areas will allow DPS to maintain a higher growth rate than what is implied by the calculated amount. Dividend Discount Model: The DDM produced an intrinsic stock price of $51.23, suggesting the stock is currently overvalued by approximately 69%. Since the DDM is heavily dependent on future dividends paid, we believe that the intrinsic stock price produced does not accurately portray the intrinsic value of DPS’s stock. According to the annual reports of DPS, DPS’s dividend payout ratio has been over 40% since year 2010. In addition to paying dividends, DPS has been repurchasing its common stock to return cash to investors and use its excess cash flow. This explains why the DDM valuation is weak since companies return values to customers not just through dividends and also that DPS could use its excess cash for internal investment.

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Relative P/E and PEG Valuation: The relative P/E valuation yield stock prices of $83.97 and $81.32 based on the P/E ratios of 2015 and 2016 respectively while PEG valuation yield prices of $73.11 and $71.97 based on the P/E growth ratios of 2015 and 2016. Both the average P/E multiple of comparable companies and the average P/E growth ratios declined and thus yielded lower valuation for 2016. Thus, the decline offset the increase of DPS’s estimated EPS from $3.76 to $3.88 in 2015 and 2016 respectively. We expect DPS’s EPS to growth from 2015 to 2016 as net income increases while the shares outstanding decreases. Sensitivity Analysis: Beta & Risk-Free Rate: The risk free rate we used and the beta associated with DPS are factors significant in our WACC calculation. The WACC is used to discount cash flows for the EP and DCF calculations and gives our estimated prices. Since price calculations rely on dividing by a small number a small change in the WACC makes the price volatile when changes to these assumptions occur. Beta and Risk Free Rates are used to calculate the required return on equity demanded by the investors. Since DPS is funded by 85.7% equity WACC is particularly sensitive to changes that effect required return on equity. Pre-Tax Cost of Debt & Equity Risk Premium: Pretax cost of debt and the equity risk premium are also assumptions that can change the estimated price while in calculating the WACC for DPS. Our pretax cost of debt can be affected going forward through a changing interest rate environment. DPS has issued debt in a time when rates have been historically low. These rates in the future may be higher and could result in a higher WACC making the estimated future price lower. CV Growth of NOPLAT & CV Growth of ROIC: Continuing value growth rate assumptions can drastically change the estimated price of DPS. The continuing value assumptions we made reflect our beliefs for future performance of DPS. A small change in either continuing value assumption changes the price of DPS because the CV is the largest discounted value within the EP and DCF model. The number is larger than others because in our model we forecast six years into the future and

the continuing value predicts from year seven to the end of time. The sensitivity shown in the table reflects these probable ranges. COGS/Sales & SG&A/Sales: Selling, general and administrative expenses and Cost of Goods sold are the two largest expense items on the income statement. Since we calculated these using a percentage of sales method it is important for us to realize the effects of small changes in each expense account. Seen above is the effects of using slightly higher and lower percentage of sales figures can have a significant impact on the price of DPS. CapEx % of Sales & Normal Cash: Capital expenditures and normal cash are less significant to our model because they reflect small amounts used within the broader approximation of price. Although these are critical to the health of the business and can create opportunities in the future they have less of an impact on the current valuation.

This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

Important Disclaimer

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[1] Federal Reserve Economic Data, St. Louis Federal Reserve Bank. <https://research.stlouisfed.org/fred2/series/A191RL1Q225SBEA> [2] Statista, Any Store Brand or Private Label Food Use. <http://www.statista.com/statistics/228419/people-in-household-that-consumed-any-store-brand-or-private-label-food-within-the-last-30-days-usa/> [3] Federal Reserve Bank of St. Louis, Personal Consumption Expenditures as Share of GDP. <https://www.stlouisfed.org/publications/regional-economist/january-2012/dont-expect-consumer-spending-to-be-the-engine-of-economic-growth-it-once-was> [4] Bloomberg Business, Employment Situation Economic Calendar. <http://www.bloomberg.com/markets/economic-calendar> [5] Bloomberg Business, Consumer Price Index Economic Calendar. <http://www.bloomberg.com/markets/economic-calendar> [6] Bloomberg Business, Consumer Sentiment Economic Calendar. <http://www.bloomberg.com/markets/economic-calendar> [7] Federal Reserve Economic Data, St. Louis Federal Reserve Bank. <https://research.stlouisfed.org/fred2/series/UMCSENT/> [8] United States Census Bureau, The Older Population in the United States: March 2002. <http://www.census.gov/population/age/data/2002.html>

[9] United States Census Bureau, Age and Sex Composition in the United States: 2012. <https://www.census.gov/population/age/data/2012comp.html> [10] S&P Capital IQ, Industry Surveys: Beverages <http://www.netadvantage.standardandpoors.com/NASApp/NetAdvantage/showIndustrySurvey.do?code=abt> [11] DPS’s 2015 Third Quarter Results < http://investor.drpeppersnapplegroup.com/2015-10-22-Dr-Pepper-Snapple-Group-Reports-Third-Quarter-2015-Results > [12] Dr. Pepper Snapple Group, Inc. (2014). Form 10-K 2014. <http://www.sec.gov/edgar.shtml> [13] “Mexico’s Sugary Drink Tax Makes a Dent In Consumption, Study Claims” <http://www.npr.org/sections/thesalt/2015/06/19/415741354/mexicos-sugary-drink-tax-makes-a-dent-in-consumption-study-claims> [14] “Navajos Fight Their Food Desert With Junk Food And Soda Taxes” <http://www.npr.org/sections/thesalt/2015/04/01/396607690/navajos-fight-their-food-desert-with-junk-food-and-soda-taxes> [15] The Coca-Cola Company (2014). Form 10-K 2014. <http://www.sec.gov/edgar.shtml> [16] PepsiCo, Inc. (2014). Form 10-K 2014. <http://www.sec.gov/edgar.shtml> [17] NYSE. (2015, September 23). Dr. Pepper Snapple Group, Inc. stock quote. Yahoo! Finance. <http://finance.yahoo.com/q?s=DPS&d=1> [18] NYSE. (2015, September 23). The Coca-Cola Company stock quote. Yahoo! Finance. <http://finance.yahoo.com/q?s=PEP&d=1>

Sources

14

[19] NYSE. (2015, September 23). PepsiCo, Inc. stock quote. Yahoo! Finance. <http://finance.yahoo.com/q?s=KO&d=1> [20] NYSE. (2015, September 23) NYSE. (2015, September 23). Dr. Pepper Snapple Group, Inc. Key Statistics. Yahoo! Finance. <https://finance.yahoo.com/q/ks?s=dps.> [21] NYSE. (2015, September 23) NYSE. (2015, September 23). The Coca-Cola Company Key Statistics. Yahoo! Finance. <https://finance.yahoo.com/q/ks?s=ko> [22] NYSE. (2015, September 23) NYSE. (2015, September 23). PepsiCo, Inc. Key Statistics. Yahoo! Finance. <https://finance.yahoo.com/q/ks?s=pep> [23] Professor Damodaran’s Website <http://people.stern.nyu.edu/adamodar/>

Dr Pepper Snapple Group, Inc.Key Assumptions of Valuation Model

Ticker Symbol DPSCurrent Share Price $86.86Current Model Date 11/13/2015Fiscal Year End 31-Dec

Pre-Tax Cost of Debt 4.62%Beta 0.704Risk-Free Rate 2.93%Equity Risk Premium 4.62%CV Growth of NOPLAT 2.20%CV Growth of EPS 2.40%Current Dividend Yield 2.15%Marginal Tax Rate 34.83%Effective Tax Rate 35.15%Cost of Equity 6.18%WACC 5.68%CV ROIC 22.22%

Dr Pepper Snapple Group, Inc.Revenue Decomposition

Fiscal Years Ending 42369 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV (2021)Segment Results - Net SalesBeverage Concentrates 1,221 1,229 1,228 1,256 1,285 1,314 1,344 1,375 1,406 1,434

YoY Return 2.35% 0.66% -0.08% 2.28% 2.28% 2.28% 2.28% 2.28% 2.28% 2.00%Packaged Beverages 4,358 4,306 4,361 4,439 4,519 4,601 4,684 4,768 4,854 4,919

YoY Return 1.54% -1.19% 1.28% 1.80% 1.80% 1.80% 1.80% 1.80% 1.80% 1.35%Latin America Beverages 416 462 532 580 633 685 685 738 788 823

YoY Return -0.48% 11.06% 15.15% 9.10% 9.03% 8.18% 0.00% 7.80% 6.80% 4.40%Net sales 5,995 5,997 6,121 6,276 6,437 6,599 6,712 6,880 7,048 7,176 Total sales growth 1.56% 0.03% 2.07% 2.53% 2.56% 2.52% 1.71% 2.51% 2.43% 1.82%

Dr Pepper Snapple Group, Inc.Income Statement

Fiscal Years Ending 42369 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV (2021)Net sales 5,995 5,997 6,121 6,276 6,437 6,599 6,712 6,880 7,048 7,176 Cost of sales (2,500) (2,499) (2,491) (2,554) (2,620) (2,686) (2,732) (2,800) (2,868) (2,921)Gross profit 3,495 3,498 3,630 3,722 3,817 3,913 3,980 4,080 4,179 4,255 Selling, general and administrative expenses (2,268) (2,272) (2,334) (2,397) (2,459) (2,521) (2,564) (2,628) (2,692) (2,741)Multi-employer pension plan withdrawal - (56) - 0 0 0 0 0 0 0Depreciation and amortization (124) (115) (115) (132) (134) (138) (144) (149) (155) (161)Other operating income / expense, net (11) (9) (1) 11 9 2 2 (2) (1) (0)Income / loss from operations 1,092 1,046 1,180 1,204 1,233 1,256 1,274 1,301 1,331 1,354Interest expense (125) (123) (109) (120) (139) (115) (149) (127) (127) (129)Interest income 2 2 2 1 1 1 2 2 2 2Other expense / income, net 9 (383) - 0 0 0 0 0 0 0Income / loss before provision 978 542 1,073 1,085 1,095 1,142 1,128 1,176 1,206 1,227Provision / benefit for income taxes (349) 81 (371) (378) (381) (398) (393) (410) (420) (427)Income / loss before equity in earnings of subsidiaries 629 623 702 707 713 744 735 766 786 799Equity in earnings of unconsolidated subsidiaries, net of tax - 1 1 1 1 1 1 1 1 1Net income / loss 629 624 703 708 715 745 736 768 787 801

Basic EPS 2.99$ 3.08$ 3.59$ 3.76$ 3.88$ 4.13$ 4.16$ 4.43$ 4.63$ 4.79$ Shares outstanding (million) 205.29 197.98 192.96 188.54 184.39 180.49 176.83 173.39 170.17 167.14Dividends per share 1.36$ 1.52$ 1.64$ 1.73$ 1.78$ 1.90$ 1.92$ 2.04$ 2.13$ 2.20$

Dr Pepper Snapple Group, Inc.Balance Sheet

Fiscal Years Ending 42369 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV (2021)AssetsCash and cash equivalents 366 153 237 227 (307) 420 (88) (52) 6 80 Accounts receivable 602 622 617 640 657 673 685 702 719 732 Inventories 197 200 204 207 212 218 221 227 233 237Deferred tax assets 66 66 67 73 68 77 72 73 75 76Prepaid expenses and other current assets 104 78 86 94 97 99 101 103 106 108Total current assets 1,335 1,119 1,211 1,242 726 1,487 991 1,054 1,138 1,233

Property, plant and equipment, net 1,202 1,173 1,141 1,193 1,247 1,302 1,356 1,408 1,460 1,510Investments in unconsolidated subsidiaries 14 15 14 14 14 14 14 14 14 14Goodwill 2,983 2,988 2,990 2,990 2,990 2,990 2,990 2,990 2,990 2,990Other intangible assets, net 2,684 2,694 2,684 2,678 2,675 2,674 2,673 2,673 2,673 2,673Other non-current assets 580 127 159 377 386 396 403 413 423 431Non-current deferred tax assets 130 85 74 57 57 60 59 61 63 64Total assets 8,928 8,201 8,273 8,550 8,096 8,923 8,486 8,613 8,761 8,915

LiabilitiesAccounts payable 283 271 289 282 290 297 302 310 317 323Deferred revenue 65 65 64 63 64 66 67 69 70 72Short-term borrowings & current long-term obligations 250 66 3 500 0 724 250 245 249 265Income taxes payable 45 33 10 (26) (27) (28) (27) (29) (29) (30)Other current liabilities 589 595 672 634 650 667 678 695 712 725Total current liabilities 1,232 1,030 1,038 1,453 977 1,726 1,270 1,290 1,319 1,355Long-term obligations 2,554 2,508 2,588 2,505 2,491 2,495 2,493 2,511 2,540 2,578Non-current deferred tax liabilities 630 755 801 661 667 696 687 717 735 748Non-current deferred revenue 1,386 1,318 1,250 1,318 1,352 1,386 1,410 1,445 1,480 1,507Other non-current liabilities 846 313 302 336 344 353 359 368 377 384Total liabilities 6,648 5,924 5,979 6,273 5,831 6,655 6,219 6,330 6,451 6,571

Stockholders' equityCadbury’s net investment - - - 0 0 0 0 0 0 0Common stock & Additional paid-in capital 1,310 972 660 668 677 685 694 702 711 719Retained earnings / deficit 1,080 1,393 1,771 1,746 1,724 1,720 1,710 1,718 1,736 1,762 Accumulated other comprehensive loss / income (110) (88) (137) (137) (137) (137) (137) (137) (137) (137)Total Equity 2,280 2,277 2,294 2,277 2,264 2,268 2,267 2,283 2,309 2,344Total liabilities and stockholders' equity 8,928 8,201 8,273 8,550 8,096 8,923 8,486 8,613 8,761 8,915

Dr Pepper Snapple Group, Inc.Cash Flow Statement

Fiscal Years Ending 42369 2012 2013 2014Operating activities: Net income / loss 629 624 703 Depreciation expense 203 196 199 Amortization expense 37 38 36 Write-off of deferred loan costs - - - Amortization of deferred revenue (65) (65) (65) Employee stock-based compensation expense 35 37 48 Deferred income taxes 91 138 43 Unrealized gain / loss on derivatives - - - Loss on early extinguishment of debt - - - Impairment of goodwill and intangible assets - - - Provision for doubtful accounts - - - Other, net (18) 35 21 Net change in operating assets and liabilities (430) (137) 37 Net Operating Cash Flow 482 866 1,022

Investing activities: Acquisition of business - (10) (19) Purchase of property, plant and equipment (217) (179) (170) Purchase of intangible assets (7) (5) (1) Investments in unconsolidated subsidiaries - - - Proceeds from disposals of property, plant and equipment 7 1 8 Proceeds from disposals of intangible assets - - - Issuances of related party notes receivables - - - Repayment of / proceeds from related party notes receivables - - - Other, net - (2) (3) Net Investing Cash Flow (217) (195) (185)

Financing activities: Proceeds from issuance of related party long-term debt - - - Proceeds from senior unsecured notes/credit facility 500 - - Proceeds from / repayment of bridge loan facility - - - Repayment of senior unsecured notes/credit facility (450) (250) - Repayment of related party long-term debt - - - Repayment of / proceeds from bridge loan facility - - - Net issuance / repayment of commercial paper - 65 (65) Repurchase of shares of common stock (400) (400) (400) Dividends paid (284) (302) (317) Cash distributions to Cadbury - - - Change in Cadbury's net investment - - - Tax withholdings net share settlements - (13) (16) Other, net 31 20 51 Net Financing Cash Flow (603) (880) (747)

Change in Cash (338) (209) 90 Effect of exchange rate changes on cash and cash equivalents 3 (4) (6) Cash and cash equivalents at beginning of period 701 366 153 Ending Cash Balance 366 153 237

Dr Pepper Snapple Group, Inc.Cash Flow Statement

Fiscal Years Ending 42369 2015E 2016E 2017E 2018E 2019E 2020E CV (2021)Operating Cash Flows Net income / loss 708 715 745 736 768 787 801 Depreciation 132 134 138 144 149 155 161 Amortization Expense 6 3 1 1 0 0 0 Change in deferred tax assets (6) 5 (10) 5 (1) (1) (1)Change in long term deferred tax assets 17 (1) (2) 1 (3) (2) (1)Change in long term deferred tax Liabilities (140) 6 29 (9) 29 18 13 Changes in working capital accounts Accounts receivable (23) (16) (17) (12) (17) (17) (13) Inventories (3) (5) (5) (4) (6) (6) (4) Prepaid expenses and other current assets (8) (2) (2) (2) (3) (3) (2) Accounts payable (7) 7 7 5 8 8 6 Deferred revenue (1) 2 2 1 2 2 1 Non-current Deferred Revenue 68 34 34 24 35 35 27 Income taxes payable (36) (0) (1) 0 (1) (1) (1) Other Current Liabilities (38) 16 16 11 17 17 13 Other non-Current Assets (218) (10) (10) (7) (10) (10) (8) Other non-Current Liabilities 34 9 9 6 9 9 7Net Change in Cash Flows from Operations 485 896 934 902 977 991 998

Investing Cash FlowsCapital Expenditures (184) (188) (193) (198) (201) (206) (211)Net Change in Cash Flows from Investments (184) (188) (193) (198) (201) (206) (211)

Financing Cash FlowsProceeds from issuance of long term debt (83) (14) 4 (1) 18 29 38Payments of long term debt 497 (500) 724 (474) (5) 4 16Payments of Dividends (333) (336) (350) (346) (360) (369) (375)Issuance of common stock 8 8 8 8 8 8 8Repurchases of Common Stock (400) (400) (400) (400) (400) (400) (400)Net Change in Cash Flows from Investments (311) (1,242) (14) (1,212) (739) (727) (713)

Net Change in Cash (10) (534) 727 (508) 36 58 74Beginning Cash Balanace 237 227 (307) 420 (88) (52) 6Ending Cash Balance 227 (307) 420 (88) (52) 6 80

Dr Pepper Snapple Group, Inc.Common Size Income Statement

Fiscal Years Ending 42369 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV (2021)Net sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of sales -41.70% -41.67% -40.70% -40.70% -40.70% -40.70% -40.70% -40.70% -40.70% -40.70%Gross profit 58.30% 58.33% 59.30% 59.30% 59.30% 59.30% 59.30% 59.30% 59.30% 59.30%Selling, general and administrative expenses -37.83% -37.89% -38.13% -38.20% -38.20% -38.20% -38.20% -38.20% -38.20% -38.20%Multi-employer pension plan withdrawal 0.00% -0.93% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Depreciation and amortization -2.07% -1.92% -1.88% -2.10% -2.09% -2.09% -2.15% -2.17% -2.20% -2.24%Impairment of goodwill and intangible assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Restructuring costs 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other operating income / expense, net -0.18% -0.15% -0.02% 0.18% 0.13% 0.03% 0.04% -0.03% -0.02% 0.00%Income / loss from operations 18.22% 17.44% 19.28% 19.00% 19.01% 19.01% 18.95% 18.93% 18.90% 18.86%Interest expense -2.09% -2.05% -1.78% -1.91% -2.21% -1.83% -2.37% -2.02% -2.03% -2.05%Interest income 0.03% 0.03% 0.03% 0.02% 0.02% 0.02% 0.03% 0.03% 0.03% 0.03%Loss on early extinguishment of debt 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other expense / income, net 0.15% -6.39% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Pretax Income 16.31% 9.04% 17.53% 17.11% 16.82% 17.19% 16.61% 16.94% 16.90% 16.84%Income Taxes -5.82% 1.35% -6.06% -6.02% -5.92% -6.03% -5.85% -5.95% -5.96% -5.95%Income / loss before equity in earnings of subsidiaries 10.49% 10.39% 11.47% 11.09% 10.89% 11.16% 10.76% 10.99% 10.94% 10.88%Equity in earnings of subsidiaries, net 0.00% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02%Net income / loss 10.49% 10.41% 11.49% 11.11% 10.91% 11.18% 10.78% 11.01% 10.96% 10.90%

Dr Pepper Snapple Group, Inc.Common Size Balance Sheet

Fiscal Years Ending 42369 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV (2021)AssetsCash and cash equivalents 6.11% 2.55% 3.87% 3.62% -4.77% 6.37% -1.31% -0.75% 0.09% 1.11%Accounts receivable 10.04% 10.37% 10.08% 10.20% 10.20% 10.20% 10.20% 10.20% 10.20% 10.20%Related party receivable 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Note receivable from related parties 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Inventories 3.29% 3.34% 3.33% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30% 3.30%Deferred tax assets 1.10% 1.10% 1.09% 1.16% 1.05% 1.17% 1.07% 1.07% 1.06% 1.06%Prepaid expenses and other current assets 1.73% 1.30% 1.40% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%Total current assets 22.27% 18.66% 19.78% 19.78% 11.28% 22.54% 14.77% 15.32% 16.15% 17.18%Property, plant and equipment, net 20.05% 19.56% 18.64% 19.01% 19.38% 19.73% 20.20% 20.46% 20.71% 21.05%Investments in unconsolidated subsidiaries 0.23% 0.25% 0.23% 0.22% 0.22% 0.21% 0.21% 0.20% 0.20% 0.20%Goodwill 49.76% 49.82% 48.85% 47.64% 46.45% 45.31% 44.55% 43.46% 42.43% 41.67% Other intangible assets, net 44.77% 44.92% 43.85% 42.67% 41.56% 40.52% 39.82% 38.85% 37.93% 37.25%Other non-current assets 9.67% 2.12% 2.60% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%Non-current deferred tax assets 2.17% 1.42% 1.21% 0.90% 0.89% 0.90% 0.88% 0.89% 0.89% 0.89%Total assets 148.92% 136.75% 135.16% 136.23% 125.77% 135.21% 126.43% 125.19% 124.31% 124.23%

LiabilitiesAccounts payable and accrued expenses 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Accounts payable 4.72% 4.52% 4.72% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%Related party payable 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Deferred revenue 1.08% 1.08% 1.05% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%Short-term borrowings & current long-term 4.17% 1.10% 0.05% 7.97% 0.00% 10.97% 3.72% 3.56% 3.53% 3.69%Income taxes payable 0.75% 0.55% 0.16% -0.42% -0.41% -0.42% -0.41% -0.42% -0.42% -0.42%Other current liabilities 9.82% 9.92% 10.98% 10.10% 10.10% 10.10% 10.10% 10.10% 10.10% 10.10%Total current liabilities 20.55% 17.18% 16.96% 23.15% 15.19% 26.15% 18.92% 18.74% 18.72% 18.88%Long-term obligations 42.60% 41.82% 42.28% 39.92% 38.69% 37.80% 37.15% 36.50% 36.05% 35.93%Non-current deferred tax liabilities 10.51% 12.59% 13.09% 10.54% 10.37% 10.55% 10.24% 10.42% 10.43% 10.42%Non-current deferred revenue 23.12% 21.98% 20.42% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00%Other non-current liabilities 14.11% 5.22% 4.93% 5.35% 5.35% 5.35% 5.35% 5.35% 5.35% 5.35% Total liabilities 110.89% 98.78% 97.68% 99.95% 90.59% 100.85% 92.65% 92.01% 91.54% 91.57%

Owners EquityCadbury’s net investment 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Common stock & Additional paid-in capital 21.85% 16.21% 10.78% 10.65% 10.52% 10.38% 10.34% 10.21% 10.08% 10.02%Retained earnings / deficit 18.02% 23.23% 28.93% 27.82% 26.79% 26.06% 25.48% 24.96% 24.63% 24.55%AOCI/loss -1.83% -1.47% -2.24% -2.18% -2.13% -2.08% -2.04% -1.99% -1.94% -1.91%Total stockholders' equity 38.03% 37.97% 37.48% 36.29% 35.18% 34.37% 33.77% 33.18% 32.77% 32.66%Total liabilities and stockholders' equity 148.92% 136.75% 135.16% 136.23% 125.77% 135.21% 126.43% 125.19% 124.31% 124.23%

Dr Pepper Snapple Group, Inc.Value Driver Estimation

(In millions)Fiscal Years Ending 42369 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV (2021)NOPLAT ComputationEBITA

Net Sales $ 5,995 $ 5,997 $ 6,121 $ 6,276 $ 6,437 $ 6,599 $ 6,712 $ 6,880 $ 7,048 $ 7,176 -COGS $ (2,500) $ (2,499) $ (2,491) $ (2,554) $ (2,620) $ (2,686) $ (2,732) $ (2,800) $ (2,868) $ (2,921)-SG&A $ (2,268) $ (2,272) $ (2,334) $ (2,397) $ (2,459) $ (2,521) $ (2,564) $ (2,628) $ (2,692) $ (2,741)-Depreciation & Amort $ (203) $ (196) $ (199) $ (132) $ (134) $ (138) $ (144) $ (149) $ (155) $ (161)-Other Op. Income $ (11) $ (9) $ (1) $ 11 $ 9 $ 2 $ 2 $ (2) $ (1) $ (0)+PV Debt from Leases $ 11 $ 10 $ 10 $ 10 $ 10 $ 11 $ 11 $ 11 $ 12 $ 12

EBITA 1,024$ 1,030$ 1,097$ 1,193$ 1,224$ 1,254$ 1,272$ 1,303$ 1,332$ 1,354$

Less: Adjusted Taxes:Total Tax Provision 349$ (81)$ 371$ 378$ 381$ 398$ 393$ 410$ 420$ 427$ +Shield on Multi Year Emp. Pen. Plan -$ 20$ -$ -$ -$ -$ -$ -$ -$ -$ +Shield on Interest Expense 44$ 43$ 38$ 42$ 48$ 40$ 52$ 44$ 44$ 45$ -Tax on Interest Income (1)$ (1)$ (1)$ (0)$ (0)$ (0)$ (1)$ (1)$ (1)$ (1)$ Other expenses/income (3)$ 133$ -$ -$ -$ -$ -$ -$ -$ -$ -Shield on leases (1) (0) (0) (0) (0) (0) (1) (1) (1) (1)

Adjusted Taxes 388$ 114$ 408$ 419$ 429$ 437$ 443$ 453$ 463$ 471$

Pus: Change in Deferred TaxesCurrent Deferred Tax Assets 66$ 66$ 67$ 73$ 68$ 77$ 72$ 73$ 75$ 76$ Long Term Deferred Tax Assets 130$ 85$ 74$ 57$ 57$ 60$ 59$ 61$ 63$ 64$ Total Tax Assets 196$ 151$ 141$ 129$ 125$ 137$ 131$ 135$ 138$ 140$ Deferred Tax Liabilities 630$ 755$ 801$ 661$ 667$ 696$ 687$ 717$ 735$ 748$ Deferred Tax Liabilities less Assets 434$ 604$ 660$ 532$ 542$ 559$ 556$ 582$ 597$ 607$ Net Change in Deferred Taxes 75$ 170$ 56$ (128)$ 10$ 17$ (3)$ 26$ 15$ 10$

NOPLAT 711$ 1,086$ 745$ 646$ 806$ 834$ 826$ 876$ 884$ 893$

Invested Capital ComputationOperating Current Assets:Normal Cash 44$ 44$ 45$ 46$ 48$ 49$ 50$ 51$ 52$ 53$ Accounts Receivable 602$ 622$ 617$ 640$ 657$ 673$ 685$ 702$ 719$ 732$ Inventory 197$ 200$ 204$ 207$ 212$ 218$ 221$ 227$ 233$ 237$ Prepaid Expenses 104$ 78$ 86$ 94$ 97$ 99$ 101$ 103$ 106$ 108$ Total Operating Current Assets 947$ 944$ 952$ 988$ 1,013$ 1,039$ 1,056$ 1,083$ 1,109$ 1,130$

Operating Current LiabilitiesLess Accounts Payable 283$ 271$ 289$ 282$ 290$ 297$ 302$ 310$ 317$ 323$ Deferred Revenue 65$ 65$ 64$ 63$ 64$ 66$ 67$ 69$ 70$ 72$ Income Taxes Payable 45$ 33$ 10$ (26)$ (27)$ (28)$ (27)$ (29)$ (29)$ (30)$ Total Operating Current Liabilities 393$ 369$ 363$ 319$ 327$ 335$ 342$ 350$ 358$ 365$

Net Operating Working Capital 554$ 575$ 589$ 669$ 686$ 704$ 715$ 733$ 751$ 765$

Plus: Net PPE 1,202$ 1,173$ 1,141$ 1,193$ 1,247$ 1,302$ 1,356$ 1,408$ 1,460$ 1,510$ Plus: Other Intangibles 2,684$ 2,694$ 2,684$ 2,678$ 2,675$ 2,674$ 2,673$ 2,673$ 2,673$ 2,673$ Plus: PV of lease obligation 219$ 223$ 200$ 209$ 219$ 228$ 238$ 247$ 256$ 265$ Plus: Other Assets 580$ 127$ 159$ 377$ 386$ 396$ 403$ 413$ 423$ 431$ Less: Non-Current Def. Rev. 1,386$ 1,318$ 1,250$ 1,318$ 1,352$ 1,386$ 1,410$ 1,445$ 1,480$ 1,507$ Less: Non-current Liab. 846$ 313$ 302$ 336$ 344$ 353$ 359$ 368$ 377$ 384$

Invested Capital 3,007$ 3,162$ 3,222$ 3,473$ 3,517$ 3,565$ 3,616$ 3,661$ 3,706$ 3,753$

ROIC ComputationNOPLAT 711$ 1,086$ 745$ 646$ 806$ 834$ 826$ 876$ 884$ 893$ /Beg. Invested Capital 2,531$ 3,007$ 3,162$ 3,222$ 3,473$ 3,517$ 3,565$ 3,616$ 3,661$ 3,706$ ROIC 28.08% 36.13% 23.57% 20.05% 23.20% 23.71% 23.16% 24.22% 24.15% 24.10%

Economic ProfitBeg. IC 2,531$ 3,007$ 3,162$ 3,222$ 3,473$ 3,517$ 3,565$ 3,616$ 3,661$ 3,706$ * (ROIC-WACC) 22.35% 30.39% 17.84% 14.32% 17.47% 17.98% 17.43% 18.49% 18.42% 18.37%EP 565.77$ 914.06$ 564.01$ 461.22$ 606.53$ 632.43$ 621.41$ 668.50$ 674.40$ 680.60$

Free Cash Flow ComputationNOPLAT 711$ 1,086$ 745$ 646$ 806$ 834$ 826$ 876$ 884$ 893$ - Change in Invested Capital 476$ 154$ 60$ 251$ 44$ 48$ 50$ 46$ 44$ 47$ FCF 235$ 932$ 685$ 395$ 761$ 786$ 775$ 830$ 840$ 846$

Dr Pepper Snapple Group, Inc.Weighted Average Cost of Capital (WACC) EstimationCOST OF EQUITY

Risk Free Rate 2.93%Beta 0.704Equity Risk Premium 4.62%

COST OF EQUITY 6.18%

COST OF DEBTYTM 4.62%

WEIGHT CALCULATIONValue of Equity:

Share Price $86.86Shares outstanding 192.96

Value of Equity $16,760.31

Value of Debt:Book Value - Long-Term Debt 2588Book Value - Short-Term Debt 3PV of Operating Leases 200

Value of Debt 2791.205625

Weight of Equity 85.72%Weight of Debt 14.28%

WACCCost of Equity 6.18%Weight of Equity 0.857238368Cost of Debt 4.62%Weight of Debt 0.142761632Tax Rate 0.348328

WACC 5.73%

Dr Pepper Snapple Group, Inc.Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 2.20% CV ROIC 22.22% WACC 5.73% Cost of Equity 6.18%

Fiscal Years Ending 42369 2014 A 2015E 2016E 2017E 2018E 2019E 2020E CV (2021) 2014 A 2015E 2016E 2017E 2018E 2019E 2020E CV (2021)

DCF Model EP ModelFree Cash Flow 394.78 761.05 785.70 775.29 830.17 839.84 22787.12 EP 461.22 606.53 632.43 621.41 668.50 674.40 19081.43Periods to discount 1.00 2.00 3.00 4.00 5.00 6.00 6.00 Periods to discount 1.00 2.00 3.00 4.00 5.00 6.00 6.00Discount Factor 1.06 1.12 1.18 1.25 1.32 1.40 1.40 Discount factor 1.06 1.12 1.18 1.25 1.32 1.40 1.40PV CF 373.38 680.79 664.74 620.38 628.29 601.16 16311.04 436.22 542.56 535.07 497.25 505.94 482.73 13658.51Value of Operating Assets 19879.78 Sum of Discounted EP 16658.28Value of Non-Operating Assets: Beginning Invested Capital 3221.50

+Excess Cash 191.70 Value of Operating Assets 19879.78+Investment in Subsidiary 14.00 Value of Non-Operating Assets: 0.00

205.70 +Excess Cash 191.70+Investment in Subsidiary 14.00

Value of Debt: 205.70-Short Term Debt -3.00-Long Term Debt -2588.00 Value of Debt:

-2591.00 -Short Term Debt -3.00-Long Term Debt -2588.00

Value of Other Non-Equity Claims -2591.00-PV Operating Leases -200.21-Underfunded Pension -44.00 Value of Other Non-Equity Claims-ESOPs -48.00 -PV Operating Leases -200.21

-292.21 -Underfunded Pension -44.00-ESOPs -48.00

Value of Equity 17202.28 -292.21Shares Outstanding 192.96Estimated Share Price 89.15 Value of Equity 17202.28

Shares Outstanding 192.96Adjusted Price 94.44 Estimated Share Price 89.15

Adjusted Price 94.44

Dr Pepper Snapple Group, Inc.Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending 42369 2015E 2016E 2017E 2018E 2019E 2020E CV (2021)

EPS 3.76$ 3.88$ 4.13$ 4.16$ 4.43$ 4.63$ 4.79$

Key Assumptions CV growth 2.40% CV ROE 34.42% Cost of Equity 6.18%

Future Cash Flows P/E Multiple (CV Year) 12.17 EPS (CV Year) 4.79$ Future Stock Price 58.30$ Dividends Per Share 2.20$ Future Cash Flows 1.73$ 1.78$ 1.90$ 1.92$ 2.04$ 2.13$ 2.20$

CV 58.30$ Discount Periods 1 2 3 4 5 6 6Discount Factor 1.0618 1.1274 1.1971 1.2711 1.3496 1.4330 1.4330Discounted Cash Flows 1.63$ 1.58$ 1.59$ 1.51$ 1.51$ 1.48$ 40.69$

Intrinsic Value 48.36$

Adjusted DDM Price 51.23$

Dr Pepper Snapple Group, Inc.Relative Valuation Models

EPS EPS Est. 5yrTicker Company Price 2015E 2016E P/E 15 P/E 16 EPS gr. PEG 15 PEG 16KO The Coca-Cola Company $41.38 $1.99 $2.07 20.8 20.0 2.80 7.43 7.14 PEP Pepsico, Inc. $98.04 $4.56 $4.84 21.5 20.3 6.18 3.48 3.28 STZ Constellation Brands Inc. $132.20 $5.13 $5.85 25.8 22.6 14.35 1.80 1.57 WFM Whole Foods Market, Inc. $29.55 $1.55 $1.63 19.1 18.1 7.57 2.52 2.39 TAP Molson Coors Brewing Company $93.81 $3.81 $3.92 24.6 23.9 3.20 7.69 7.48

Average 22.4 21.0 4.6 4.4

DPS Dr Pepper Snapple Group, Inc. $86.86 $ 3.76 $ 3.88 23.1 22.4 4.25 5.4 5.3

Implied Value: Relative P/E (EPS15) $ 83.97 Relative P/E (EPS16) 81.32$ PEG Ratio (EPS15) 73.11$ PEG Ratio (EPS16) 71.97$

Dr Pepper Snapple Group, Inc.Key Management Ratios

Fiscal Years Ending 42369 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E CV (2021)Liquidity RatiosCurrent ratio Current assets/Current liabilities 1.08 1.09 1.17 0.85 0.74 0.86 0.78 0.82 0.86 0.91Acid-test ratio (Cash+ST Securities+A/R)/CL 0.79 0.75 0.82 0.60 0.36 0.63 0.47 0.50 0.55 0.60Working capital Current assets - Current liabilities 103.00 89.00 173.00 -210.99 -251.31 -238.39 -278.33 -235.68 -180.73 -122.00

Activity or Asset-Management RatiosReceivables turnover ratio Net sales/Average A/R (net) 9.69 9.80 9.88 9.98 9.93 9.93 9.89 9.93 9.92 9.89Average collection period 365/Receivables turnover ratio 37.66 37.25 36.94 36.56 36.76 36.77 36.92 36.77 36.79 36.90Inventory turnover ratio COGS/Average inventory 12.22 12.59 12.33 12.43 12.49 12.49 12.44 12.49 12.48 12.44Average days inventory held 365/Inventory turnover ratio 29.86 28.99 29.60 29.37 29.22 29.23 29.35 29.23 29.24 29.33Payables turnover ratio Inventory purchases/Average accounts payable 9.07 9.03 8.91 8.95 9.18 9.18 9.13 9.17 9.17 9.14Average days payables outstanding 365/Payables turnover ratio 40.25 40.41 40.96 40.78 39.77 39.78 39.96 39.78 39.80 39.94Asset turnover ratio Net sales/Average total assets 0.66 0.70 0.74 0.75 0.77 0.78 0.77 0.80 0.81 0.81

Financial Leverage RatiosDebt to equity ratio Total liabilities/Stockholders' equity 2.92 2.60 2.61 2.75 2.58 2.93 2.74 2.77 2.79 2.80Debt to total assets ratio Total liabilities/Total assets 0.74 0.72 0.72 0.73 0.72 0.75 0.73 0.73 0.74 0.74Times interest earned ratio (Net income + interest expense + taxes)/Interest expense 8.82 5.41 10.85 10.08 8.89 10.93 8.59 10.28 10.47 10.52

Profitability RatiosProfit margin on sales Net income/Net sales 10.49% 10.41% 11.49% 11.29% 11.10% 11.30% 10.97% 11.16% 11.17% 11.16%Return on assets (ROA) Net income/Average total assets 6.91% 7.29% 8.53% 8.42% 8.59% 8.76% 8.46% 8.98% 9.06% 9.06%Return on shareholders' equity (ROE) Net income/Average stockholders' equity 27.69% 27.39% 30.76% 30.99% 31.47% 32.90% 32.47% 33.75% 34.28% 34.42%

Payout Policy RatiosDividend payout ratio Dividend per share/EPS 45.48% 49.35% 45.68% 46.00% 46.00% 46.00% 46.00% 46.00% 46.00% 46.00%Total payout ratio (Dividend + Repurchase)/Net income 107.98% 112.33% 101.91% 102.47% 101.97% 99.66% 100.34% 98.10% 96.82% 95.95%

Dr Pepper Snapple Group, Inc.Sensitivity Analysis

Share Price89.15 0.55 0.60 0.65 0.70 0.75 0.80 0.85

2.63% 97.30 97.30 97.30 97.30 97.30 97.30 97.302.73% 94.44 94.44 94.44 94.44 94.44 94.44 94.442.83% 91.73 91.73 91.73 91.73 91.73 91.73 91.732.93% 89.15 89.15 89.15 89.15 89.15 89.15 89.153.03% 86.69 86.69 86.69 86.69 86.69 86.69 86.693.13% 84.35 84.35 84.35 84.35 84.35 84.35 84.353.23% 82.11 82.11 82.11 82.11 82.11 82.11 82.11

Share Price89.15 4.32% 4.42% 4.52% 4.62% 4.72% 4.82% 4.92%

4.32% 95.69 95.38 95.07 94.76 94.46 94.16 93.864.42% 93.72 93.42 93.13 92.82 92.54 92.25 91.964.52% 91.82 91.53 91.25 90.95 90.68 90.40 90.124.62% 89.99 89.71 89.43 89.15 88.89 88.61 88.354.72% 88.22 87.95 87.68 87.41 87.15 86.89 86.634.82% 86.50 86.24 85.99 85.72 85.47 85.22 84.974.92% 84.85 84.60 84.35 84.09 83.85 83.61 83.36

Share Price89.15 1.300% 1.600% 1.900% 2.200% 2.500% 2.800% 3.100%

19.22% 74.33 78.14 82.54 87.70 93.81 101.18 110.2320.22% 74.58 78.47 82.97 88.23 94.47 102.00 111.2321.22% 74.80 78.77 83.35 88.71 95.07 102.73 112.1422.22% 75.01 79.04 83.70 89.15 95.62 103.40 112.9723.22% 75.20 79.29 84.02 89.55 96.11 104.02 113.7324.22% 75.37 79.51 84.31 89.92 96.57 104.58 114.4225.22% 75.53 79.72 84.58 90.26 96.99 105.10 115.06

Share Price89.15 -38.30% -39.10% -39.90% -40.70% -41.50% -42.30% -43.10%

-36.70% 111.22 106.68 102.14 97.60 93.05 88.51 83.97-37.20% 108.41 103.86 99.32 94.78 90.24 85.70 81.16-37.70% 105.59 101.05 96.51 91.97 87.42 82.88 78.34-38.20% 102.78 98.23 93.69 89.15 84.61 80.07 75.52-38.70% 99.96 95.42 90.88 86.34 81.79 77.25 72.71-39.20% 97.15 92.60 88.06 83.52 78.98 74.44 69.89-39.70% 94.33 89.79 85.25 80.70 76.16 71.62 67.08

Share Price89.15 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50%

0.30% 95.36 93.34 91.32 89.30 87.28 85.26 83.240.45% 95.31 93.29 91.27 89.25 87.23 85.21 83.190.60% 95.26 93.24 91.22 89.20 87.18 85.16 83.140.74% 95.21 93.19 91.17 89.15 87.13 85.11 83.090.90% 95.15 93.14 91.12 89.10 87.08 85.06 83.041.05% 95.10 93.08 91.06 89.05 87.03 85.01 82.991.20% 95.05 93.03 91.01 88.99 86.97 84.96 82.94

COGS/Sales

SG&A/Sales

CapEx % of Sales

Normal Cash

Beta

RF Rate

Pre Tax Cost of Debt

Equity Risk Premium

CV Growth of NOPLAT

CV Growth of ROIC

Dr Pepper Snapple Group, Inc.Operating Leases(In millions)

Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)

Operating Operating OperatingFiscal Years Ending 42369 Leases Fiscal Years Ending Leases Fiscal Years Ending Leases2015 47 2014 55 2013 562016 40 2015 44 2014 482017 32 2016 38 2015 392018 24 2017 30 2016 302019 21 2018 22 2017 23Thereafter 75 Thereafter 76 Thereafter 60Total Minimum Payments 239 Total Minimum Payments 265 Total Minimum Payments 256Less: Interest 39 Less: Interest 42 Less: Interest 37PV of Minimum Payments 200 PV of Minimum Payments 223 PV of Minimum Payments 219

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 4.62% Pre-Tax Cost of Debt 4.62% Pre-Tax Cost of Debt 4.62%Number Years Implied by Year 6 Payment 3.6 Number Years Implied by Year 6 Payment 3.5 Number Years Implied by Year 6 Payment 2.6

Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment1 47 44.9 1 55 52.6 1 56 53.52 40 36.5 2 44 40.2 2 48 43.93 32 27.9 3 38 33.2 3 39 34.14 24 20.0 4 30 25.0 4 30 25.05 21 16.8 5 22 17.6 5 23 18.36 & beyond 21 54.0 6 & beyond 22 54.9 6 & beyond 23 44.1PV of Minimum Payments 200.2 PV of Minimum Payments 223.4 PV of Minimum Payments 219.0

Dr Pepper Snapple Group, Inc.Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 1,529Average Time to Maturity (years): 8.20Expected Annual Number of Options Exercised: 186

Current Average Strike Price: 45.27$ Cost of Equity: 6.18%Current Stock Price: $86.86

2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022EIncrease in Shares Outstanding: 186 186 186 186 186 186 186 186Average Strike Price: 45.27$ 45.27$ 45.27$ 45.27$ 45.27$ 45.27$ 45.27$ 45.27$ Increase in Common Stock Account: 8.441 8.441 8.441 8.441 8.441 8.441 8.441 8.441

Change in Treasury Stock 400,000 400,000 400,000 400,000 400,000 400,000 400,000 400,000400,000 per year included in deduction of Retained Earnings

Expected Price of Repurchased Shares: 86.86$ 92.23$ 97.93$ 103.98$ 110.41$ 117.23$ 124.47$ 132.17$ Number of Shares Repurchased: 4,605 4,337 4,085 3,847 3,623 3,412 3,214 3,027

Shares Outstanding (beginning of the year) 192,958 188,539 184,388 180,490 176,830 173,393 170,168 167,141Plus: Shares Issued Through ESOP 186 186 186 186 186 186 186 186Less: Shares Repurchased in Treasury 4,605 4,337 4,085 3,847 3,623 3,412 3,214 3,027 Shares Outstanding (end of the year) 188,539 184,388 180,490 176,830 173,393 170,168 167,141 164,300

Dr Pepper Snapple Group, Inc.Valuation of Options Granted in ESOP

Ticker Symbol DPSCurrent Stock Price $86.86Risk Free Rate 2.93%Current Dividend Yield 2.28%Annualized St. Dev. of Stock Returns 19.35%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 1,529 45.27 8.20 37.77$ 57,745$ Total 1,529 45.27$ 8.20 51.68$ 57,745$