Applied Valuation

Abstract

Share price is generally supposed to reflect the firm value and affect the investing decisions of investors (Perek, A. A., and Perek, S., 2012). There are generally three methods that can be applied to estimate share price; discounted cash flow valuation, relative valuation and contingent claim valuation. Given these methods, this report aims to discuss the procedure of the first two methods, and compare the final share price through these two different models. The result suggests that different methods have various assumptions and inputs, which lead to diverse firm value.

1. Introduction

Share price is an important factor for investors when they measure their portfolios (Fernandez, P., 2007). Valuation can estimate share price for managers and investors for helping them make decisions. Generally, share price can be estimated by different models, such as discounted cash flow valuation and relative valuation. Generally, different methods result in different share price for one firm. In this report, Coca-Cola Company (CCL) share price will be valued by using the two methods above. In the procedure of discounted cash flow (DCF) valuation, cost of capital and free cash flow to firm will be calculated. Comparing with the DCF method, relative valuation utilizes P/E ratio multiple or EBITDA multiple. This report also introduces the relevant information and makes some assumptions on Coca-Cola and market, calculates the firm value and compares share price under these two methods.

2. DCF Method

Discounted cash flow (DCF) analysis is a method of valuing a project, company, or asset using the concepts of the time value of money, when valuing the future growth of the firm, geometric average is more accurate than arithmetic average since it takes continuous compounding and volatile data into consideration. (Damodaran, 2012). In the annual report of Coca-Cola Amatil Limited (CCL) EBIT during 2008 to 2012 is around $800 million, but in 2013 there are two EBIT,...