The Coca-Cola Company: Valuation Project

Paper Info
Page count 5
Word count 2343
Read time 9 min
Subject Business
Type Essay
Language 🇺🇸 US

Executive Summary

The treatise estimated the present value of Coca-Cola Company. Coca-Cola Company is a multinational company that operates in the beverage industry. An overview of the financial statement shows that there was a general improvement in the financial performance of the company since 2010.

The economy of the United States has also improved tremendously since 2006. The valuation analysis shows that the cost of debt is 1.584%, while the cost of equity is 1.9530%. The resulting weighted average cost of capital is 1.82%. The present value of the firm is $78,778,119.26. Further, the estimated intrinsic value of the firm is $13.54 while the market price of the shares is $44.22. Thus, the Coca-Cola Company is currently undervalued.

About Coca-Cola company

The Coca-Cola Company is a multinational company that trades in soft drinks. It has presence in over 200 countries. The profits earned in the fiscal year ended December, 2013 were embedded on a number of financial strengths these are, effective advertisement, diversity of products, and consistency in the rate of production.

The company operates in the beverage industry. The shares of the company traded on the New York stock exchange with the ticker symbol KO. Coca-Cola is a component of Dow Jones Industrial Average and S&P 500 index. Business combinations have enabled the company has grown tremendously over the years. The Coca-Cola Company has over 3500 products across the globe. The paper seeks to estimate the intrinsic value of the firm.

Overview of the US economy

The US economy has experienced growth in the GDP from 2006 to 2013, apart from a brief disruption due to the global economic meltdown in 2009. Generally, the performance of the economy has remained predictable, especially in the natural resource and construction industry due to constant and ever increasing demand for their products. This is summarized in the table below.

2013 2006
GDP $16,800,000,000, $13,314,500,000
Inflation 1.47% 3.2%
Unemployment 7.4% 4.6%
Interest rate 1.7% 4.6%

As indicated in the table, it is apparent that the GDP of US increased from $13.314 billion in 2006 to $16.8 billion in 2013. Moreover, the rate of Inflation declined significantly from 3.2% in 2006 to 1.47% in 2013. In the year 2013, the value added prices increased by 2.1%. The recession affected the unemployment rate.

This explains why there is an increase in the unemployment rate from 4.6% in 2006 to 7.4% in 2013. The interest rate was dropped from 4.6% in 2006 to 1.7% in 2013. The annual GDP growth in the last five years has improved the standing of the beverage industry. In summary, the beverage industry shared of the total GDP of the US is currently at 7.5%.

Analysis

Free cash flow forecasting

Free cash flow represents the cash flow that can be used by the company to invest. It is arrived at after deducting the amount spent on capital items from cash flow generated from operating activities. The free cash flow forecasts are presented in appendix 3. The value of the cash flow in 2015 is $2,625,513. The value is expected to increase in 2016 to $5,714,912. In 2017, the free cash flow will drop to $3,941,897 and later increase to $5,796,115 in 2018. In the final year of the forecast, the free cash flow will be $4,857,226.

Cost of equity calculation using CAPM

Cost of equity denotes the return that shareholders require for their investment. Equity is a significant component of the capital structure. It is worth noting that the amount debt in the capital structure has an impact on the cost of equity. High amount of debt increases risk of equity, thus increasing the risk premium that shareholders will require for their investment. Cost of equity is computed using the capital asset pricing model.

The model is an identity that calculates the required rate of rate by adding a risk premium to the risk free rate of return. The model takes into account risks arising from the market in which the asset trades. The systematic risk is represented by the beta factor. It gives the amount of risk. The risk premium is the product of price of risk and the amount of risk.

Cost of equity = risk free rate of return + beta * risk premium

Risk free rate

Risk free rate is the rate of interest that does not have risks such as interest risk fluctuations, default risk, re-investment risk, and currency fluctuations. For this analysis, the interest rate for a 5-year US treasury bond will be used. The average of the data collected for a period of 5 years is 1.63%.

Beta

The beta of an asset measures the volatility of a company’s stock relative to the changes in the market. Computation of asset beta is founded on historical returns and thus may not give an estimate of the firm’s future share prices due to the dynamism of the prevailing market conditions. The beta of the Coca-Cola Company is 0.66.

Market risk premium

Risk premium can be defined as the incentives for investing in a risky asset. The risk premium is the amount over and above the risk free rate of return. Thus, it will be the difference between the expected return on the market portfolio and the risk free rate.

Market premium = expected return on market portfolio – risk free rate

Expected return on market portfolio = 2.1%

Risk free rate = 1.63%

= 2.1103% – 1.63%

= 0.4893%

The market risk premium is low. This shows that there is low risk associated with investing in the Coca-Cola Company.

Calculation of cost of equity

Cost of equity = risk free rate of return + beta * risk premium

= 1.63% + (0.66 * 0.4893%)

= 1.9530%

Cost of Debt

The cost of debt can be estimated using the formula presented below.

Cost of debt = (risk free rate + default spread) (1 – t)

Alternatively, the cost of debt will be the Yield-to-Maturity of your Coca-Cola’s current bond outstanding. Thus, the cost of debt based on this rate is 2.64%. Calculation of the after tax cost of debt is presented below.

After tax cost of debt = 2.64% (1 – 40%)

= 2.64% * 0.6

= 1.584%

Weighted average cost of capital

When computing the weighted average cost of capital, the proportion of debt and equity in the capital structure is used as the weights. The proportion of debt and equity for the year 2013 will be used in the analysis. The total amount of debt is $19,154,000 while the total equity is $33,173,000. The sum of equity and debt is $52,327,000. The proportion of debt in the capital structure is 36.60%, while the proportion of equity is 63.40%. The resulting WACC based on the current capital structure is 1.82%

Analysis of valuation estimate

The calculations of the value of the firm are presented in appendix 3. From the results, the estimated present value of free cash flow for 2015 is $2,578,582.79, 2016 is $5,512,433.68, 2017 is $3,734,272.01, 2018 is $5,392,679.85 and for 2019 is $4,438,362.93. The present value of terminal value is $57,121,788.00.

The sum of these values amounts to $78,778,119.26. This gives the value of the firm. The intrinsic value of stock will be estimated by deducting the market value of debt from the value of the firm and dividing the result by the total number of shares outstanding. The current market value of debt is $19,154,000. Thus, the difference between the value of the firm and debt is $59,624,119.26. The total number of shares outstanding is 4,402 million. Thus, the intrinsic value of the shares is $13.54.

Comparison

This section will entail comparing the market price with the value calculated in the section above. The current market stock price is $44.22 while the intrinsic value is $13.54. This shows that the shares of the company are trading a value lower than the intrinsic value. Therefore, they are undervalued.

Conclusion

The paper carried out an estimation of the intrinsic value of the Coca-Cola Company. Analysis of the US economy shows that there has been an improvement in the economy since 2006. This explains why there is a general improvement in the financial performance of Coca-Cola Company. The calculations show that the cost of debt is 1.584%, while the cost of equity is 1.9530%. The resulting weighted average cost of capital is 1.82%. The present value of the firm is $78,778,119.26.

Further, the estimated intrinsic value of the firm is $13.54 while the market price of the shares is $44.22. Thus, the Coca-Cola Company is currently undervalued and it is expected that the prices will rise in the future. Therefore, it is advisable to buy the shares now.

Appendices

Appendix 1

Income statement

COCA-COLA CO
The fiscal year ends in December.
USD in millions except per share data.
2010-12 2011-12 2012-12 2013-12
Revenue 35119 46542 48017 46854
Cost of revenue 12693 18216 19053 18421
Gross profit 22426 28326 28964 28433
Operating expenses
Sales, General and administrative 13158 17440 17738 17310
Other operating expenses 819 732 447 895
Total operating expenses 13977 18172 18185 18205
Operating income 8449 10154 10779 10228
Interest Expense 733 417 397 463
Other income (expense) 6527 1702 1427 1712
Income before taxes 14243 11439 11809 11477
Provision for income taxes 2384 2805 2723 2851
Net income from continuing operations 11859 8634 9086 8626
Other -50 -62 -67 -42
Net income 11809 8572 9019 8584
Net income available to common shareholders 11809 8572 9019 8584
Earnings per share
Basic 2.56 1.88 2 1.94
Diluted 2.53 1.85 1.97 1.9
Weighted average shares outstanding
Basic 4616 4568 4504 4434
Diluted 4666 4646 4584 4509
EBITDA 16419 13810 14188 13917

Balance sheet

COCA-COLA CO
The fiscal year ends in December.
USD in millions except per share data.
2010-12 2011-12 2012-12 2013-12
Assets
Current assets
Cash
Cash and cash equivalents 8517 12803 8442 10414
Short-term investments 2820 1232 8109 9854
Total cash 11337 14035 16551 20268
Receivables 4430 4920 4759 4873
Inventories 2650 3092 3264 3277
Prepaid expenses 3162 3450 2781 2886
Other current assets 2973
Total current assets 21579 25497 30328 31304
Non-current assets
Property, plant and equipment
Gross property, plant and equipment 21706 23151 23486 25032
Accumulated Depreciation -6979 -8212 -9010 -10065
Net property, plant and equipment 14727 14939 14476 14967
Equity and other investments 7585 8374 10448 11512
Goodwill 11665 12219 12255 12312
Intangible assets 15244 15450 15082 15299
Other long-term assets 2121 3495 3585 4661
Total non-current assets 51342 54477 55846 58751
Total assets 72921 79974 86174 90055
Liabilities and stockholders’ equity
Liabilities
Current liabilities
Short-term debt 9376 14912 17874 17925
Accounts payable 1887 2172 1969 1933
Taxes payable 273 362 471 309
Accrued liabilities 6972 6837 6711 7644
Other current liabilities 796
Total current liabilities 18508 24283 27821 27811
Non-current liabilities
Long-term debt 14041 13656 14736 19154
Deferred taxes liabilities 4261 4694 4981 6152
Minority interest 314 286 378 267
Other long-term liabilities 4794 5420 5468 3498
Total non-current liabilities 23410 24056 25563 29071
Total liabilities 41918 48339 53384 56882
Stockholders’ equity
Common stock 880 880 1760 1760
Additional paid-in capital 10057 11212 11379 12276
Retained earnings 49278 53550 58045 61660
Treasury stock -27762 -31304 -35009 -39091
Accumulated other comprehensive income -1450 -2703 -3385 -3432
Total stockholders’ equity 31003 31635 32790 33173
Total liabilities and stockholders’ equity 72921 79974 86174 90055

Cash flow

COCA-COLA CO
The fiscal year, year ends in December.
USD in millions except per share data.
2010-12 2011-12 2012-12 2013-12
Cash Flows From Operating Activities
Net income 11859 8634 9086 8626
Depreciation & amortization 1443 1954 1982 1977
Deferred income taxes 617 1028 632 648
Stock based compensation 380 354 259 227
Accounts receivable -41 -562 -33 28
Inventory 182 -447 -286 -105
Prepaid expenses -148 -350 -29 -163
Accrued liabilities -266 -132 770 22
Other working capital 643 -402 -1502 -714
Other non-cash items -5137 -603 -234 -4
Net cash provided by operating activities 9532 9474 10645 10542
Cash Flows From Investing Activities
Investments in property, plant, and equipment -2215 -2920 -2780 -2550
Property, plant, and equipment reductions 134 101 143 111
Acquisitions, net -1539 562 2189 519
Purchases of investments -4817 -5821 -16391 -14782
Sales/Maturities of investments 4032 5647 5622 12791
Other investing activities -93 -187 -303
Net cash used for investing activities -4405 -2524 -11404 -4214
Cash Flows From Financing Activities
Debt issued 15251 27495 42791 43425
Debt repayment -13403 -22530 -38573 -38714
Common stock issued 1666 1569 1489 1328
Common stock repurchased -2961 -4513 -4559 -4832
Dividend paid -4068 -4300 -4595 -4969
Other financing activities 50 45 100 17
Net cash provided by (used for) financing activities -3465 -2234 -3347 -3745
Effect of exchange rate changes -166 -430 -255 -611
Net change in cash 1496 4286 -4361 1972
Cash at beginning of period 7021 8517 12803 8442
Cash at end of period 8517 12803 8442 10414
Free Cash Flow
Operating cash flow 9532 9474 10645 10542
Capital expenditure -2215 -2920 -2780 -2550
Free cash flow 7317 6554 7865 7992

Appendix 2

Value of Beta

Value of Beta

Yield to maturity

Yield to maturity

Appendix 3

Free cash flow

Numbers in thousands
2015 2016 2017 2018 2019
EBIT $10,272,522 $10,353,187 $10,418,161 $10,095,192 $10,100,376
NOPAT (tax = 40%) $6,163,513 $6,211,912 $6,250,897 $6,057,115 $6,060,226
Depreciation $1,955,000 $1,962,000 $1,927,000 $1,949,000 $1,936,000
Operating Cash Flow $8,118,513 $8,173,912 $8,177,897 $8,006,115 $7,996,226
Net Operating Working Capital $3,492,000 $2,800,000 $4,394,000 $4,745,000 $5,158,000
Operating Long term assets $64,632,000 $65,821,000 $66,536,000 $66,446,000 $67,236,000
Net Operating Capital $68,124,000 $68,621,000 $70,930,000 $71,191,000 $72,394,000
NET Investment in Operating Capital $3,538,000 $497,000 $2,309,000 $261,000 $1,203,000
Gross Investment $5,493,000 $2,459,000 $4,236,000 $2,210,000 $3,139,000
Free Cash Flow $2,625,513 $5,714,912 $3,941,897 $5,796,115 $4,857,226

Weighted average cost of capital

Source of funds Amount Proportion Cost of capital
1 Total long term debt 19,154,000 36.60% 1.58%
2 Total equity 33,173,000 63.40% 1.95%
Total 52,327,000 1.82%

Value of the firm

Year Free cash flow 1 + WACC Free cash flow * 1 + WACC
2015 $2,625,513 1.0182 $2,578,582.79
2016 5714912.2 1.03673124 $5,512,433.68
2017 3941896.6 1.055599749 $3,734,272.01
2018 5796115.2 1.074811664 $5,392,679.85
2019 4857225.6 1.094373236 $4,438,362.93
Terminal value 4857225.6 * 1.0035 = 4874225.89
4,874,225.89 / (0.0182 – 0.0035) = 62,512,555.98
1.094373236 $57,121,788.00
Total $78,778,119.26

Shares outstanding

Shares outstanding

Cite this paper

Reference

EduRaven. (2022, April 9). The Coca-Cola Company: Valuation Project. Retrieved from https://eduraven.com/the-coca-cola-company-valuation-project/

Reference

EduRaven. (2022, April 9). The Coca-Cola Company: Valuation Project. https://eduraven.com/the-coca-cola-company-valuation-project/

Work Cited

"The Coca-Cola Company: Valuation Project." EduRaven, 9 Apr. 2022, eduraven.com/the-coca-cola-company-valuation-project/.

References

EduRaven. (2022) 'The Coca-Cola Company: Valuation Project'. 9 April.

References

EduRaven. 2022. "The Coca-Cola Company: Valuation Project." April 9, 2022. https://eduraven.com/the-coca-cola-company-valuation-project/.

1. EduRaven. "The Coca-Cola Company: Valuation Project." April 9, 2022. https://eduraven.com/the-coca-cola-company-valuation-project/.


Bibliography


EduRaven. "The Coca-Cola Company: Valuation Project." April 9, 2022. https://eduraven.com/the-coca-cola-company-valuation-project/.

References

EduRaven. 2022. "The Coca-Cola Company: Valuation Project." April 9, 2022. https://eduraven.com/the-coca-cola-company-valuation-project/.

1. EduRaven. "The Coca-Cola Company: Valuation Project." April 9, 2022. https://eduraven.com/the-coca-cola-company-valuation-project/.


Bibliography


EduRaven. "The Coca-Cola Company: Valuation Project." April 9, 2022. https://eduraven.com/the-coca-cola-company-valuation-project/.