The Coca-Cola Company is a global soft drink beverage company (ticker: KO) that is a primary and direct competitor with Starbucks. The data in Chapter 12’s Exhibits 12.14, 12.15, and 12.16 include the actual amounts for 2013, 2014, and 2015 and projected amounts for Year +1 to Year +6 for the income statements, balance sheets, and statements of cash flows, respectively, for Coca-Cola. The market equity beta for Coca-Cola at the end of 2015 is 0.75. Assume that the risk-free interest rate is 3.0% and the market risk premium is 6.0%. Coca-Cola had 4,324 million shares outstanding at the end of 2015, when Coca-Cola’s share price was $42.96.

REQUIRED

Part I—Computing Coca-Cola’s Share Value Using the Residual Income Valuation Approach

a. Use the CAPM to compute the required rate of return on common equity capital for Coca-Cola.

b. Derive the projected residual income for Coca-Cola for Years +1 through +6 based on the projected financial statements. The financial statement forecasts for Year +6 assume that Coca-Cola will experience a steady-state, long-run growth rate of 3% in Year +6 and beyond.

c. Using the required rate of return on common equity from Requirement a as a discount rate, compute the sum of the present value of residual income for Coca-Cola for Years +1 through +5.

d. Using the required rate of return on common equity from Requirement a as a discount rate and the long-run growth rate from Requirement b, compute the continuing value of Coca-Cola as of the start of Year þ6 based on Coca-Cola’s continuing residual income in Year +6 and beyond. After computing continuing value as of the start of Year +6, discount it to present value at the start of Year +1.

e. Compute the value of a share of Coca-Cola common stock.

(1) Compute the total sum of the present value of all residual income (from Requirements c and d).

(2) Add the book value of equity as of the beginning of the valuation (that is, as of the end of 2015, or the start of Year +1).

(3) Adjust the total sum of the present value of residual income plus book value of common equity using the midyear discounting adjustment factor.

(4) Compute the per-share value estimate.

Exhibits 12.14, 12.15, and 12.16

Exhibit 12.14 The Coca-Cola Company Income Statements for 2015 (Actual) and Year +1 through Year +6 (Projected) (amounts in millions; allow for rounding) (Problem 12.16) Actual Forecasts 2015 Year +1 Year +2 Year +3 Year +4 Year +5 Year +6 INCOME STATEMENT Revenues Cost of goods sold Gross Profit $ 44,294 $ 45,623 $ 48,401 $ 49,853 (19,692) $ 30,161 $46,992 $51,349 $52,889 (20,891) $ 31,998 (17482) (18,562) (18,021) $ 27,602 (19,118) (20,283) $31,066 $ 26,812 $28,430 $ 29,283 selling, general, and administrative expenses Other operating expenses Operating Profit Interest income Interest expense Income from equity affiliates Other gains (losses) Income before Tax Inicome tax expense Net Income Net income attributable to noncontrolling interests Net Income attributable to common sharehokders Other comprehensive income items Comprehensive Income (16,427) (1,657) $ 8,728 (16,880) (1,369) $ 9,353 (17,387) (1410) $ 9,633 (17,908) (1,452) $ 9,922 (18,446) (1,496) $ 10,220 (18,999) (1,540) (19,569) (1,587) $ 10,842 $10,527 613 606 623 642 661 681 701 (856) (887) (993) (910) 663 (951) (1,034) 767 (1,065) 790 489 631 696 731 631 $ 9,605 $ 9,702 (2,329) $ 7,374 $ 10,309 (2,474) $ 10,619 (2,549) $10,009 $10,940 (2,626) $11,269 (2,704) $ 8,564 (2,239) (2,402) $ 7,366 $ 7,607 $ 7835 $ 8,071 $ 8,315 (15) (32) (32) (32) (32) (32) (32) $ 7,351 (4,412) $ 2,954 $ 7,342 $ 7,575 $ 7803 $ 8,039 $ 8,283 $ 8,532 $ 7,342 $ 7,575 $ 7803 $ 8,039 $ 8,283 $ 8,532 Source for Actuals: The Coca-Cola Company, Form 10-K for the Fiscal Year Ended December 31, 2015. Cepyrigni 20ts Cengage Lear