# The Coca-Cola Company is a global soft drink beverage company (ticker symbol = KO) that is a

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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
Computing Coca-Cola’s Share Value Using Free Cash Flows to Common Equity Shareholders
a. Use the CAPM to compute the required rate of return on common equity capital for Coca-Cola.
b. Derive the projected free cash flows for common equity shareholders for Coca-Cola for Years +1 through +6 based on the projected financial statements. Assume that Coca-Cola’s changes in cash each year are necessary for operating liquidity purposes. The financial statement forecasts for Year +6 assume that Coca-Cola will experience a steady-state long-run growth rate of 3 percent in Year +6 and beyond.
c. Using the required rate of return on common equity from Part a as a discount rate, compute the sum of the present value of free cash flows for common equity shareholders for Coca-Cola for Years +1 through +5.
d. Using the required rate of return on common equity from Part a as a discount rate and the long-run growth rate from Part b, compute the continuing value of Coca-Cola as of the start of Year +6 based on Coca-Cola’s continuing free cash flows for common equity shareholders 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 future free cash flows for equity shareholders (from Parts c and d).
(2) Adjust the total sum of the present value using the midyear discounting adjustment factor.
(3) Compute the per-share value estimate.

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
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