Questions for analysis

Determine the market value of debt and equity and the

composition of the capital structure of the company

book value*price percentage/100

Coca Cola, 5.35% 11/15/2017 $1,748,000,000 109.8 5.35%

1,919,304,000

Coca Cola, 4.875% 3/15/2019 1,339,000,000 103.8 4.88%

1,389,882,000

Coca Cola, 3.625% 3/15/2014 897,000,000 104 3.63%

932,880,000

Coca Cola, 5.75% 3/15/2011 500,000,000 104.5 5.75%

520,000,000

Coca Cola, 7.375% 7/29/2093 116,000,000 116.9 7.38%

Coca Cola, 5.30% 2018 510,000,000 92.32 (Inferred from
financials) 5.30%

135,604,000
471,138,000
5,368,808,000
5371

2.31 bn shares are outstanding

Given in income statement

Price per share

56.54

Total market value of equity

Debt we calculated is longterm debt at market value i.e bonds
outstanding

130607.4

Total market value of finacing in million of dollars

135978.4

5371

Calculate debt equity ratio

Debt - we have calculated

5371

Equity given in balance sheet

24799
0.216581314

Debt
equity
0.2:1 be 2:1 inference: company can borrow
generally
D/Eratio
ratiois should
more debt
Determine the cost of equity using the capital asset pricing model
(CAPM)
CAPM =Rf+beta(RM-RF)
4.58%+0.62(RM-4.58%)
Return from the market RM

0.115701749

4.58%+0.62(11.57%-4.58%)
8.91%

6.99

Determine the before- and after-tax cost of debt given the

various bond issues, current prices, coupon rates and an
appropriate tax rate. (Hint: Use the market value of each bond
issue, determine the yield to maturity, the proportion of each
issue and the weighted average of the yields).

Bond1
Settlement

31/12/2009

maturity

11/15/2017

rate

5.35%

pr

109.8

Redemption

100

frequency (US markets

Basis
Yield (is also known as internal rate of return for investors they
are getting 3.8%
This yield is also otherwise called as cost to the company because
the company has to pay the money

LT debt

0.038919777
3.891977704

market value of bonds

1919
1390
933
522
136
471
5371

Income tax calculation

Overall average rate

2004

1375

2005

1818

2006

1498

2007

1892

2008

1632

2009

2040

After tax cost of debt

Using the average rate

kd(1-t)

Using the appropriate market value proportions, the after-tax cost of debt calculated in question #5 and the cost of equity from q
average cost of capital (WACC).

WACC

(1-Tc)
3.0119
3.0119

Determine the sustainable growth rate and interpret your result

First look at dividens

Payout = Dividend/EPS

2004 $1.00 $2.00

2005 $1.12 $2.04
2006 $1.24 $2.16
2007 $1.36 $2.57
2008 $1.52 $2.49
2009 $1.64 $2.93
Payout
Plow back ratio=

1-0.56

Return on Equity

Netincome/Total equity
0.275172386

is you calculate ROE on EPS, the formula is EPS/Book value per

share
Answer:
Average retention/Return on Equity
13.27% is the maximum that the coca cola company can grow its
earnings and dividends without changing its target capital
structure and raising outside equity
Considering the growth rates estimated by financial analysts and
the historical growth rates.
13.27% is on the high side

What will the price of the Coca Cola Company stock be like if the zero growth, constant growth, and variable growth models are us
assume all earnings are paid out as dividends. Based on your findings, comment on the appropriateness of each of the valuation m

Notes:
Calculated valuation using dividends model

D0

1.64

Ke

0.089

g1

13%

G2

5%

Calculate P6 as the growth rate is going to be decreased from

Next year

Assuming the Coco cola is growing @ 13% and reaching an

industry average of 5% for the next years, the value of the
dividend is 66$

Traded price at the end of 2009

96.50%
3.95
100%

i.e 11.5%

Bond 2

Bond3

Bond4

Bond5

Bond6

31/12/2009

31/12/2009

3/15/2019

3/15/2014

3/15/2011

7/29/2093

3/31/2018

4.88%

3.62%

5.75%

7.38%

5.30%

103.8

104

104.5

116.9

92.32

100

100

100

100

100

0.04373265

0.02608845

0.019521472

0.0630328

0.06516505

1.952147153 6.30327974

6.51650454

4.37326517 2.608845004

proportion of bonds
current price

31/12/2009 31/12/2009

years remaining

ytm

31/12/2009

cost of debt

35.7289145

109.8

3.90%

1.39342767

25.8797244

103.8

10

4.30%

1.11282815

17.3710668

104

2.60%

0.45164774

9.71886055

104.5

1.95%

0.18951778

2.53211692

116.9

84

6.30%

0.15952337

8.7693167

92.32

6.51%

0.57088252

100

3.87782722

6222

22.10% 0.22099004

6690

27.17% 0.27174888

6578

22.77% 0.22772879

7873

24.03%

7439

21.94% 0.21938433

8946

22.80% 0.22803488
23.47%

0.240315

in question #5 and the cost of equity from question #4, determine the weighted
apital (WACC).

Pay out PayoutRetention

ratio is 50% and retained is 50%
50

50

54.9

45.1

57.4

42.6

52.9

47.1

61.0

39.0

56.0

44.0

55.3740882

44.6 Average retention

0.44
30%

13.38777355

t growth, and variable growth models are used? In using the zero growth model,
appropriateness of each of the valuation models.

Year

Dividend
2009

91.9153846

PVIF@8.9%

PV

1.64

1.85 0.91827365

1.70174472

2.09 0.84322649

1.76581408

2.37 0.77431266

1.8322956

2.67 0.71103091

1.9012801

3.02 0.65292095

1.97286181

3.41

0.5995601

2.04713852

91.92

0.5995601

55.108797

108.98

5.10

66.33

33.33333