## 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.

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 companyâ€™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 firmâ€™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 â€“ 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 â€“ t)

Alternatively, the cost of debt will be the Yield-to-Maturity of your Coca-Colaâ€™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 â€“ 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.