# Question

The Coca-Cola Company is a global soft drink beverage company (ticker symbol = KO) that is a primary and direct competitor with PepsiCo. The data in Exhibits 12.13–12.15 include the actual amounts for 2006, 2007, and 2008 and projected amounts for Year +1 to Year +6 for the income statements, balance sheets, and statements of cash flows for Coca-Cola (in millions).

The market equity beta for Coca-Cola at the end of 2008 is 0.61. Assume that the risk-free interest rate is 4.0 percent and the market risk premium is 6.0 percent. Coca-Cola has 2,312 million shares outstanding at the end of 2008, when Coca-Cola’s share price was $44.42.

Required

Sensitivity Analysis and Recommendation

a. Using the free cash flows to common equity shareholders, recompute the value of Coca-Cola shares under two alternative scenarios. Scenario 1: Assume that Coca-Cola’s long-run growth will be 2 percent, not 3 percent as before, and assume that Coca-Cola’s required rate of return on equity is 1 percent higher than the rate you computed for Part a. Scenario 2: Assume that Coca-Cola’s long-run growth will be 4 percent, not 3 percent as before, and assume that Coca-Cola’s required rate of return on equity is 1 percent lower than the rate you computed in Part a. To quantify the sensitivity of your share value estimate for Coca-Cola to these variations in growth and discount rates, compare (in percentage terms) your value estimates under these two scenarios with your value estimate from Part e.

b. Using these data at the end of 2008, what reasonable range of share values would you have expected for Coca-Cola common stock? At that time, what was the market price for Coca-Cola shares relative to this range? What investment strategy (buy, hold, or sell) would you have recommended?

The market equity beta for Coca-Cola at the end of 2008 is 0.61. Assume that the risk-free interest rate is 4.0 percent and the market risk premium is 6.0 percent. Coca-Cola has 2,312 million shares outstanding at the end of 2008, when Coca-Cola’s share price was $44.42.

Required

Sensitivity Analysis and Recommendation

a. Using the free cash flows to common equity shareholders, recompute the value of Coca-Cola shares under two alternative scenarios. Scenario 1: Assume that Coca-Cola’s long-run growth will be 2 percent, not 3 percent as before, and assume that Coca-Cola’s required rate of return on equity is 1 percent higher than the rate you computed for Part a. Scenario 2: Assume that Coca-Cola’s long-run growth will be 4 percent, not 3 percent as before, and assume that Coca-Cola’s required rate of return on equity is 1 percent lower than the rate you computed in Part a. To quantify the sensitivity of your share value estimate for Coca-Cola to these variations in growth and discount rates, compare (in percentage terms) your value estimates under these two scenarios with your value estimate from Part e.

b. Using these data at the end of 2008, what reasonable range of share values would you have expected for Coca-Cola common stock? At that time, what was the market price for Coca-Cola shares relative to this range? What investment strategy (buy, hold, or sell) would you have recommended?

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