Financial Statement

12.16

Part I

Rate of return on CE= 3.0% + (0.75 × 6.0%)= 7.50%

the continuing free cash flows for common equity in Years +6 and beyond: 149,312.9= [9,640/(0.0750 – 0.03) × 0.697]

182239.02million/4,469 million shares=40.78 per share

PartII

35.48*4469=158560million

the weighted-average cost of capital= [0.170 × 3.00 × (1 – 0.230)] + [0.828 × 7.50] + [0.002 × 15.00]= 0.39 + 6.21 + 0.03 = 6.63%

Free cash flows available for debt and equity stakeholders include cash flows to satisfy all debt, preferred, noncontrolling, and common equity claims.

Present Value of Continuing Value 187,657= [9,395.8 /(0.0663 – 0.03)×0.725]

Part III

Scenario 1: If we assume that Coca-Cola’s long-run growth will be 2%, not

3% as above, and that Coca-Cola’s required rate of return on equity is 8.50%,

the resulting share value estimate falls to $30.48 per share. That amount is

25% lower than our base case estimate of $40.78 and 14% lower than current

market price of $35.48.

Scenario 2: If we assume that Coca-Cola’s long-run growth will be 4%, not

3% as above, and that Coca-Cola’s required rate of return on equity is 6.50%,

the resulting share value estimate increases to $72.85 per share. That amount

is 78% greater than our base case estimate of $40.78 and 105% above current

market price of $35.48.

Sensitivity analysis shows that slight variations in the long-term growth rate and discount rate can cause the share value estimate to vary between $30 per share and $72 per share. The mkt price should also fall in this range. Coca-Cola shares are under-priced at around $35; therefore, I would have recommended to buy it.

The data in Exhibit 13.B show the results of various sensitivity analysis scenarios,

varying discount rates, and growth rates.

Scenario 1: If we assume that Coca-Cola’s long-run growth will be 2%, not

3% as above, and that Coca-Cola’s required rate of return on equity is 8.50%,

the resulting share value estimate falls to roughly $32 per share. That...