1

Coca-Cola Financial Review and Weighted Average Cost of Capital Study

Jose Sola

Florida Institute of Technology

Spring 2016

Financial Management

Florida Institute of Technology

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Index

Introduction………………………………………………………………………………………..3

Cost of Equity……………………………………………………………………………………..5

Beta ……………………………………………………………………………………………….5

Capital Assets Pricing Model……………………………………………………………………...5

Discounted Cash Flow Approach…………………………………………………………………6

Own-Bond-Plus-Judgement-Risk Premium……………………………………………………….6

Cost of Debt……………………………………………………………………………………….6

Market Value of Debt……………………………………………………………………………..6

Market Value of Equity…………………………………………………………………………...7

Value of Firm……………………………………………………………………………………...7

Tax Rate…………………………………………………………………………………………...7

Weighted Average Cost of Capital………………………………………………………………..7

Assumptions……………………………………………………………………………………….8

Appendix…………………………………………………………………………………………..8

References………………………………………………………………………………………..18

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Introduction

The Coca-Cola Company is the world’s largest beverage manufacturer and distributor,

producing several ready-to-drink beverages in over 200 countries. Incorporated in 1919, Coca-

Cola owns and licenses a portfolio of more than 500 beverage brands comprised of carbonated

drinks, still beverages, energy drinks, teas and juices among others. The company’s shares are

traded in the New York Stock Exchange (NYSE). In addition to the beverage operation, the

company also produces and sells syrups and concentrates, including fountain drink concentrate.

The company provides its beverages through a network of company-owned or controlled bottling

and distribution operators, as well as independent bottling partners, distributors, wholesalers, and

retailers. The company owns and markets four of the world’s top five non-alcoholic sparkling

beverage brands which include Coca-Cola, Diet Coke, Sprite and Fanta.

With a global distribution system, Coca-Cola structures its operations into segments

consisting of Eurasia and Africa, Europe, Latin America, North America, Asia Pacific, Bottling

Investments, and Corporate. As part of its finished product operations, Coca-Cola generates net

operating revenue by selling its ready-to-drink beverages to retailers, distributors, wholesalers or

bottling partners who then distribute them to retailers. As part of this operation, the company

also produces fountain syrups sold to restaurants, convenience stores or other authorized

retailers. While its finished products operations generate higher net operating revenues, its

concentrate operations generate higher gross profit margins. From its concentrate operations, the

company generates operating revenue by selling concentrates and syrups to authorized bottlers,

subsequently referred to as “bottling partners.” Bottling partners combine the concentrates with

sweeteners and still or sparkling waters to create a finished product. It is then packaged in

authorized containers such as cans or plastic bottles bearing the company’s trademark and sold to

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retailers or wholesalers. Outside the United States, concentrates are also sold to bottling partners

to produce fountain syrups. In addition to its finished products and concentrate operations, the

company generates revenues through distribution partnerships with Monster Energy Drinks, Dr.

Pepper Snapple Group, and Nestle, through ownership of Aujan Industries which is one of the

largest beverage companies in the Middle East.

The company measures its sales volume based in two ways; units of cases of finished

products which consist of 24, 8 ounce servings and concentrate sales which consist of equivalent

unit cases that form the finished products. With over 1.9 billion of its beverages consumed daily

in 2015, the company had sales of 29.2 billion unit cases in the same year of which 19 percent

were consumed by the United States. With 81 percent of its sales being worldwide, its largest

consumers were Mexico, China, Brazil, and Japan accounting for 31 percent of worldwide cases

sold. The main raw materials purchased for its products are nutritive and non-nutritive

sweeteners, including sucralose and aspartame, juices and juice concentrates, and water.

Headquartered in Atlanta, Georgia, the company owns and operates 63 production facilities and

10 concentrate manufacturing plants in North America. Outside North America, the company

owns 18 production facilities and has a majority interest in 76 other facilities. In addition to its

owned facilities, the company leases additional real estate for manufacturing, packaging and

storing, and distribution of its products. As of 2016, the company employed between 123,200

and 129,200 employees, of which 60,900 to 65,300 where based in the United States.

The company controls 42 percent of the market share of the carbonated soft drinks

market. Its main competitors include PepsiCo, which 30 percent market share, in addition to

Nestle, Kraft Foods, and Suntory Beverage Company, among others. Other risk factors include;

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raising trends in concerns of obesity which may lower future product demand, water scarcity or

poor water quality, and global political unrest or conflict.

Cost of Equity

Beta

Coca-Cola’s beta was .58. The market has a beta of 1.0 and stocks with beta’s higher than

1.0 represent stocks that a risk higher than the market with higher returns, while stocks with

beta’s less than 1.0 represent stocks with less risk in relation to the market. Coca-Cola’s beta

means that purchasing its stock can be considered safer investment. The company’s beta was

determined by performing a regression analysis of the company’s closing stock price and the

NYSE’s closing price for the previous 5 years with an outcome of .43. Additionally, a beta of .80

was obtained from Google Finance and .52 from Yahoo Finance. In order to obtain a more

comprehensive picture and to avoid placing emphasis on information that might skew one of the

beta’s, the three beta’s were averaged resulting in a beta of .58 (.43+.80+.52/3).

Capital Assets Pricing Model

The model measures the required return of investors and the cost of equity from a firm’s

perspective. After previously determining Coca-Cola’s beta, the company’s required return using

the CAPM was 4.94, meaning the company has a relatively low cost of equity and similar to its

assumption from the beta coefficient, it signifies a relative lower risk investment. The risk free

rate was determined using 10 year U.S. treasury yield. As there are several approaches to

determining the market risk premium, a market risk premium of 5.5 was used for calculations as

opposed to historical or forward-looking models with the assumption that the survey of experts

provides a closer estimate of the market risk premium since data is obtained from experts which

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might use historical or forward-looking components, in addition to being able to capture investor

confidence and market trends.

Discounted Cash Flow Approach

In addition to the CAPM, cost of equity was calculated using the DCF approach. For the

calculation, a historical growth rate of 8.70 was used. A growth rate based on historical data was

used because the company has had decades of stability and has steadily paid dividends which

have grown steadily. Additionally, dividends for 2016 are expected to be $1.40 per share and the

current price per stock was $46.20. Coca-Cola’s cost of equity using the DCF approach was

11.7%. This yield’s a number considerably higher than the CAPM and suggests that DCF

approach might not be the most accurate in determining Coca-Cola’s cost of equity because of

the inexact nature of growth rates.

Own-Bond-Yield-Plus-Judgment Risk-Premium (BPM)

Cost of long-term debt was obtained by using the weighted yield to maturity on its bonds.

Brigham and Ehrhardt (2005) recommend a judgmental risk premium between 3 and 5 percent

and as a result a midpoint of 4 was used for the judgment risk premium with a result of 5.1%.

While not an exact calculation, the approach serves as a good ballpark estimate and would seem

to support the results obtained with CAPM.

Cost of Debt

Coca-Cola’s debt represents 14 percent of its capital structure and its cost of debt is 1.12

%. This suggests that the company generates most of its capital through equity as opposed to

debt. This was calculated by obtaining the weighted yield to maturity of each of the company’s

bonds and adding the values.

Market Value of Debt

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Coca-Cola’s market value of debt is $32.6 billion. That market value of debt was derived

by obtaining the total market value of bonds, 31.9 billion and adding lease obligations of $716

million.

Market Value of Equity

Coca-Cola’s market value of equity is just above $1 trillion. The value was calculated by

multiplying the price per share of $46.20 by the number of shares outstanding of 4.3 billion.

Value of the company

Coca-Cola’s market value is $232.6 billion. The firm’s value was calculated by adding

the previously discussed market value of debt and market value of equity.

Tax Rate

Coca-Cola’s tax rate is 35% and was obtained from the company’s 2015 Annual Report

to Shareholders From 10-K.

Weighted Average Cost of Capital

Coca-Cola’s WACC calculation consisted of its weighted average cost of debt and its

weighted average cost of equity, as the company does not have preferred stocks. As previously

described, its weighted average of equity was 86% of its capital structure while weighted average

of equity represented 14% of its capital structure. The company’s WACC is 6.35%. This

suggests that the company represents a lesser risk to investors. Additionally, it also represents the

required return for the company on its investments and how much it pays for every dollar it

finances. An excel spreadsheet was used to complete the calculation and reflects the results

below. To start, the three results of cost of equity that were obtained using CAPM, DGM, and

BPM were averaged, resulting in an average cost of equity of 7.3% (4.94 + 11.73 + 5.12 / 3).

Weight of debt which represented 14% was then multiplied by after tax cost of debt (1-.35 tax

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rate) and again multiplied by the cost of debt (1.12). These results were then added to the results

of the weighted equity (86%) multiplied by the average cost of equity (7.3%).

Assumptions

The data used above assumes a risk free rate of 1.7483% and represents the current yield

to maturity on 10 year U.S. Treasury note. Additionally, a market risk premium of 5.5% was

used in calculating the data. The market risk premium was obtained from a survey of experts

conducted by Fernandez, Pizarro, and Acin (2015) comprised of 1,983 responses from financial

experts, company managers, and financial and economic professors in the United States. The

data above also assumes a growth rate of 8.70% composed of historical dividend data. Historical

data was used as the company produces a stable dividend growth. This data was obtained from

gurufocus, a financial website, which comprises and analyses financial data.

Appendix

Data for Beta Calculation and Regression Analysis

Dividend data was obtained from Yahoo Finance and placed in a spreadsheet to perform

regression analysis. The data bellow shows dividend data obtained for the company and the

NYSE.

Date

NYSE Adj

Close

Market

Return

KO Adj

Close

KO's

Return

4/1/2016 10219.96 0.0012 46.87 0.0103

3/1/2016 10207.3799 0.0678 46.39 0.0840

2/1/2016 9559.53027 -0.0076 42.79625 0.0049

1/4/2016 9632.70996 -0.0503 42.58787 -0.0009

12/1/2015 10143.4199 -0.0256 42.62756 0.0080

11/2/2015 10409.5898 -0.0049 42.2902 0.0141

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10/1/2015 10460.96 0.0675 41.70247 0.0556

9/1/2015 9799.69043 -0.0370 39.50657 0.0292

8/3/2015 10176.5 -0.0649 38.38623 -0.0428

7/1/2015 10882.2803 0.0071 40.10444 0.0472

6/1/2015 10805.2002 -0.0227 38.29837 -0.0343

5/1/2015 11056.2998 0.0006 39.66009 0.0099

4/1/2015 11049.7402 0.0138 39.27279 0.0002

3/2/2015 10899.1904 -0.0148 39.2631 -0.0557

2/2/2015 11062.79 0.0499 41.5808 0.0517

1/2/2015 10537.2197 -0.0279 39.53537 -0.0249

12/1/2014 10839.2402 -0.0106 40.54368 -0.0582

11/3/2014 10955.4102 0.0102 43.05005 0.0778

10/1/2014 10845 0.0133 39.9411 -0.0183

9/2/2014 10702.9297 -0.0311 40.68499 0.0300

8/1/2014 11046.29 0.0298 39.50073 0.0618

7/1/2014 10726.4297 -0.0230 37.2 -0.0725

6/2/2014 10979.4199 0.0207 40.10669 0.0432

5/1/2014 10756.3096 0.0122 38.44469 0.0029

4/1/2014 10627.1699 0.0094 38.33192 0.0551

3/3/2014 10527.7695 0.0098 36.33028 0.0201

2/3/2014 10425.8604 0.0460 35.61581 0.0100

1/2/2014 9967.65039 -0.0416 35.26152 -0.0845

12/2/2013 10400.3203 0.0213 38.51542 0.0279

11/1/2013 10183.2305 0.0173 37.47119 0.0228

10/1/2013 10009.6396 0.0404 36.63649 0.0446

9/3/2013 9621.24023 0.0378 35.07177 -0.0006

8/1/2013 9270.66016 -0.0301 35.0943 -0.0474

7/1/2013 9558.83008 0.0490 36.84074 -0.0007

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6/3/2013 9112.69043 -0.0204 36.86832 0.0099

5/1/2013 9302.26953 0.0027 36.5057 -0.0553

4/1/2013 9276.87988 0.0186 38.64181 0.0467

3/1/2013 9107.04004 0.0269 36.91648 0.0520

2/1/2013 8868.71973 -0.0029 35.09232 0.0397

1/2/2013 8894.70996 0.0534 33.75098 0.0273

12/3/2012 8443.50977 0.0222 32.85373 -0.0440

11/1/2012 8260.42969 0.0047 34.36727 0.0269

10/1/2012 8221.40039 -0.0036 33.46698 -0.0198

9/4/2012 8251 0.0295 34.14208 0.0211

8/1/2012 8014.93018 0.0192 33.43772 -0.0743

7/2/2012 7863.93018 0.0080 36.11989 0.0334

6/1/2012 7801.83984 0.0453 34.95314 0.0534

5/1/2012 7463.95996 -0.0807 33.17987 -0.0208

4/2/2012 8119.06006 -0.0107 33.88582 0.0312

3/1/2012 8206.92969 0.0115 32.86019 0.0672

2/1/2012 8113.24023 0.0351 30.7921 0.0345

1/3/2012 7838.47998 0.0483 29.76511 -0.0349

12/1/2011 7477.02979 -0.0010 30.84059 0.0408

11/1/2011 7484.5 -0.0104 29.63288 -0.0088

10/3/2011 7563.37988 0.1136 29.89614 0.0112

9/1/2011 6791.6499 -0.0979 29.56357 -0.0345

8/1/2011 7528.39014 -0.0682 30.61937 0.0359

7/1/2011 8079.43994 -0.0288 29.55889 0.0107

6/1/2011 8319.09961 -0.0187 29.24596 0.0145

5/2/2011 8477.28027 -0.0224 28.82862 -0.0096

SUMMARY OUTPUT

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Regression Statistics

Multiple R 0.4059441

R Square 0.1647906

Adjusted R

Square 0.1503905

Standard Error 0.0365586

Observations 60

ANOVA

df SS MS F

Significance

F

Regression 1 0.0152948 0.0152948 11.443664 0.0012906

Residual 58 0.0775188 0.0013365

Total 59 0.0928137

Coefficient

s

Standard

Error t Stat P-value Lower 95%

Upper

95% Lower 95.0% Upper 95.0%

Intercept 0.0072757 0.0047397 1.5350584 0.1302069 -0.0022118 0.0167633 -0.002211825 0.016763266

X Variable 1 0.4279392 0.1265026 3.3828486 0.0012906 0.1747167 0.6811617 0.174716694 0.681161691

Capital Assets Pricing Model

Capital Asset Pricing Model

Where Rrf = 1.7483 Bi = .58 Rp = 5.5

Ri = Rrf+Bi (RP)

Ri = 1.7483 + .58 x 5.5

Ri = 2.3283 x 5.5

Ri = 4.9383

Discounted Cash Flow Approach

Discounted Cash Flow Approach

Rs= D1/P0 + g

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Where:

G= 8.70

D1= 1.4

P0= 46.2

Rs = 1.4/46.2 + 8.70

Rs = 3.0% + 8.70 %

Rs= 11.7

Own-Bond-Plus-Judgement Risk Premium

Rs = Rd + Judgment risk premium

Where: Rd = 1.116 Judgement risk premium = 4% Rs = 1.116 + 4.0

Rs = 5.116

Cost of Debt

A list of bonds issued by Coca-Cola was obtained from Morningstar. The bonds were placed in a

spreadsheet where their market values and weights were calculated. The data is shown below.

Name Maturity

Date

Amoun

t $(Mil)

Par

Value

Number

Bonds

Price YT

M

YTM as

a

decimal

Market

Value

$(Mil)

Weigh

t

Weighte

d YTM

Coca Cola 1.8% 9/1/2016

1646.0

0 1000 1646000 1004.00 0.83 0.008 1652.58 0.05

0.0004

Coca Cola 144A

1.8%

9/1/2016 8.92 1000 8923 1000.00 1.80 0.018 8.92 0.00

0.0000

Coca Cola 0.28275% 9/1/2016 8.92 1000 8923 996.00 2.97 0.030 8.89 0.00 0.0000

Coca Cola 0.75% 11/1/2016 500.00 1000 500000 1001.00 0.61 0.006 500.50 0.02 0.0001

Coca Cola 11/1/2016 500.00 1000 500000 1000.00 0.38 0.004 500.00 0.02 0.0001

Coca Cola 3/9/2017 2229.3 1000 2229300 1000.00 0.00 0.000 2229.30 0.07 0.0000

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0

Coca-Cola 10/2/2017 202.50 1000 202500 1002.00 0.00 0.000 202.91 0.01 0.0000

Coca Cola 0.875% 10/27/2017 750.00 1000 750000 1001.00 0.84 0.008 750.75 0.02 0.0002

Coca Cola 5.35% 11/15/2017

1159.8

0 1000 1159800 1192.00 0.90 0.009 1382.48 0.04

0.0004

Coca Cola 1.65% 3/14/2018 750.00 1000 750000 1014.00 0.89 0.009 760.50 0.02 0.0002

Coca Cola 1.15% 4/1/2018

1250.0

0 1000 1250000 1005.00 0.90 0.009 1256.25 0.04

0.0004

Coca Cola 1.65% 11/1/2018

1250.0

0

1000 1250000 1018.00 0.93 0.009 1272.50 0.04

0.0004

Coca Cola 4.875% 3/15/2019 890.70 1000 890700 1184.00 0.23 0.002 1054.59 0.03 0.0001

Coca Cola 9/9/2019

2229.3

0

1000 2229300 1000.00 0.27 0.003 2229.30 0.07

0.0002

Coca Cola 1.875% 10/27/2020

1500.0

0 1000 1500000 1017.00 1.48 0.015 1525.50 0.05

0.0007

Coca Cola 2.45% 11/1/2020

1250.0

0

1000 1250000 1044.00 1.45 0.015 1305.00 0.04

0.0006

Coca Cola 3.15% 11/15/2020

1000.0

0

1000 1000000 1072.00 1.53 0.015 1072.00 0.03

0.0005

Coca Cola 3.3% 9/1/2021

1324.1

0 1000 1324100 1080.00 1.73 0.017 1430.03 0.04

0.0008

Coca Cola 0.28275% 9/1/2021 0.35 1000 350 1079.00 1.75 0.018 0.38 0.00 0.0000

Coca Cola 144A

3.3% 9/1/2021 0.35 1000 350 1000.00 3.30 0.033 0.35 0.00

0.0000

Coca Cola 1.125% 9/22/2022 888.60 1000 888600 1000.00 1.13 0.011 888.60 0.03 0.0003

Coca Cola 0.25% 12/22/2022 558.00 1000 558000 1024.00 0.13 0.001 571.39 0.02 0.0000

Coca Cola 0.75% 3/9/2023

1666.1

0

1000 1666100 1000.00 0.75 0.008 1666.10 0.05

0.0004

Coca Cola 2.5% 4/1/2023 750.00 1000 750000 1026.00 2.09 0.021 769.50 0.02 0.0005

Coca Cola 3.2% 11/1/2023

1500.0

0

1000 1500000 1072.00 2.16 0.022 1608.00 0.05

0.0011

Coca Cola 2.875% 10/27/2025

1750.0

0 1000 1750000 1037.00 2.44 0.024 1814.75 0.06

0.0014

Coca Cola 1.875% 9/22/2026

1332.8

0

1000 1332800 1000.00 1.88 0.019 1332.80 0.04

0.0008

14

Coca Cola 1.125% 3/9/2027

1666.1

0 1000 1666100 1000.00 1.12 0.011 1666.10 0.05

0.0006

Coca Cola 1% 10/2/2028 583.30 1000 583300 1098.00 0.20 0.002 640.46 0.02 0.0000

Coca Cola 1.625% 3/9/1935

1666.1

0 1000 1666100 1000.00 1.62 0.016 1666.10 0.05

0.0008

Coca Cola 7.375% 7/29/1993 95.80 1000 95800 1379.00 5.32 0.053 132.11 0.00 0.0002

Mv

Bonds 31898.64 1.00

1.116%

Mv

Leases 716.00

MVd 32614.64

Common shares

433000000

0

MVe 200046.00

preferred shares 0

MVPF 0.00

Common Price

4/15/16 46.2

MVf 232660.64

preferred price 0

Ws 0.86

Wd 0.14

wpf 0

Market Value of Debt

Mv

Bonds 31898.64

Mv

Leases 716.00

MVd 32614.64

Market Value of Equity

Common shares 4330000000

Common Price

4/15/16 from Yahoo

Finance 46.2

MVe 200046.00

Firm’s Value

15

MVd 32614.64

MVe 200046.00

MVf 232660.64

Weighted Average Cost of Capital

Input Data (Millions Except Per Share Data) Source

Tax rate 35%

2015 Annual

Report Form 10k

Debt (D) $32,614,640,000.00

Morningstar Bonds

and 2015 Annual

Report Form 10k

Number of common shares (n) 4,330,000,000 Yahoo Finance

Stock price per share (P) $46.20 Yahoo Finance

Capital Structure (Millions Except Per Share

Data)

Market value of equity (S = P ´ n) $200,046,000,000.00

Total value (V = D + S) $232,660,640,000.00

Percent financed with debt (wd = D/V) 14.0%

Percent financed with stock (ws = S/V) 86.0%

Cost of Capital

Cost of debt (rd) 1.12%

Morningstar Bonds

Weighted cost of

debt

16

Beta (b) 0.58

Beta from 5 years

data

Risk-free rate (rRF) 1.75%

30 Year Treasury

Yield, Yahoo

Finance 4/15/16

Market risk premium (RPM) 5.50%

Cost of equity from CAPM (rs = rRF + b ´ RPM ) 4.94%

Cost of Equity from Dividend Growth Model

Future Dividend Growth Rate 8.70%

2016 Dividend $ 1.4000

Share Price $ (4/15/16)

$

46.20

Cost of Equity from Dividend Growth Model 11.73%

Cost of Equity from Bond Plus Markup

Cost of debt 1.12%

Risk Markup 4.00%

Cost of Equity from Bond Plus Markup 5.12%

Average rs 7.3%

WACC 6.35%

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References

2015 Annual Report on Form 10-K. (2016, February 22). Retrieved April 15, 2016, from

http://www.coca-colacompany.com/investors/annual-other-reports/

Brigham, E. F., & Ehrhardt, M. C. (2005). Financial management: Theory and practice. Mason,

OH: Thomson/South-Western.

Coca-Cola Co (KO) Dividend Data. (n.d.). Retrieved April 15, 2016, from

http://www.gurufocus.com/dividend/KO

Coke Vs. Pepsi: By The Numbers. (2014, March 24). Retrieved April 15, 2016, from

http://www.nasdaq.com/article/coke-vs-pepsi-by-the-numbers-cm337909

KO Coca-Cola Co XNYS:KO Stock Quote Price News. (n.d.). Retrieved April 15, 2016, from

http://www.morningstar.com/stocks/XNYS/KO/quote.html

Fernandez, P., Ortiz Pizarro, A., & Fernandez Acin, I. (2015, April 23). Market Risk Premium &

Risk-Free Rate Used For 41 Countries In 2015. Retrieved April 14, 2016, from

http://www.valuewalk.com/2015/05/market-risk-premium-risk-free-rate-used-for-41-

countries-in-2015/

The Coca-Cola Company. (n.d.). Retrieved April 15, 2016, from

http://finance.yahoo.com/q?s=KO