Solved: The Coca Cola Company is a global soft drink

beverage company ticker

The Coca-Cola Company is a global soft drink beverage company (ticker symbol = KO) that is a
primary and direct competitor with PepsiCo. The data in Exhibits 12.13–12.15 include the actual
amounts for 2006, 2007, and 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).
The market equity beta for Coca-Cola at the end of 2008 is 0.61. Assume that the risk-free
interest rate is 4.0 percent and the market risk premium is 6.0 percent. Coca-Cola has 2,312
million shares outstanding at the end of 2008, when Coca-Cola’s share price was $44.42.

Required

Computing Coca-Cola’s Share Value Using Free Cash Flows to All Debt and Equity
Stakeholders
a. At the end of 2008, Coca-Cola had $9,312 million in outstanding interest-bearing short-term
and long-term debt on the balance sheet and no preferred stock.
Assume that the balance sheet value of Coca-Cola’s debt is approximately equal to the market
value of the debt. The forecasts assume that Coca-Cola will face an interest rate of 4.5 percent
on debt capital and that Coca-Cola’s average tax rate will be 23.2 percent (based on the past
five-year average effective tax rate). Compute the weighted average cost of capital for Coca-
Cola as of the start of Year +1.
b. Beginning with projected net cash flows from operations, derive the projected free cash flows
for all debt and equity stakeholders for Coca-Cola for Years +1 through +6 based on the
projected financial statements. Assume that the change in cash each year is related to
operating liquidity needs.
c. Using the weighted average cost of capital from Part f as a discount rate, compute the sum of
the present value of free cash flows for all debt and equity stakeholders for Coca-Cola for Years
+1 through +5.
d. Using the weighted average cost of capital from Part f as a discount rate and the long-run
growth rate from Part b, compute the continuing value of Coca-Cola as of the start of Year +6
based on Coca-Cola’s continuing free cash flows for all debt and equity stakeholders in Year
+6 and beyond. After computing continuing value as of the start of Year +6, discount it to
present value as of the start of Year +1.
e. Compute the value of a share of Coca-Cola common stock.
(1) Compute the total value of Coca-Cola’s net operating assets using the total sum of the
present value of free cash flows for all debt and equity stakeholders (from Parts h and i).
(2) Subtract the value of outstanding debt to obtain the value of equity.
(3) Adjust the present value of equity using the midyear discounting adjustment factor.
(4) Compute the per-share value estimate of Coca-Cola’s common equity shares.

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 The Coca Cola Company is a global soft drink beverage company ticker

ANSWER
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