Module 5 Case Analysis

 Module 5 Case Analysis Questions 

 

WACC = [wd*Rd*(1-T)] + [we*Re] +[wp*Rp] 

1. Access the current data and information on the Coca Cola Co (KO) from FINRA

Click “Company Information” and enter the ticker symbol KO to access information on Coca Cola. Use this site wherever you see a reference to FINRA* below.  

2. Use the information from FINRA to complete Table 1 which includes the guidelines tocalculate the wacc and its components.

Table 1. Cost of Capital (wacc) and Components (Rd, Re, Rp) 

Capital Type 

Rd Cost of LongTerm Debt 

Source: FINRA Assumptions: Semiannual (SA) compounding and $1000 Face Value 

Go to the FINRA Bond Center below: http://finra-markets.morningstar.com/BondCenter/Default.jsp 

Search for a long term (greater than 30 years if possible) Coca Cola corporate bond. Use the features related to this bond and the Assumptions listed for Rd 

(cost of debt or YTM on long term bond) above to calculate. Use the information from FINRA and the assumptions to fill in the financial calculator inputs and outputs below. 

P_YR=

N=

I/YR= 

PV= 

PMT= 

FV= 

Re Cost of Common Stock or Equity Source: 

Method 1 CAPM Rs = RRF + Beta(MRP) 

Assumptions: 

Risk Free Rate is based on the yield of a U.S. 10 Year Treasury https://www.treasury.gov/resource-center/data-chart-center/interestrates/Pages/TextView.aspx?data=yield

MRP is based on KPMG estimate where MRP = 6% 

Beta comes from FINRA* KO page (Quote Tab)  

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Method 2 Discounted Cash Flow (DCF) or Constant Growth Model Rs = D1/Po + g 

Po is current Price from FINRA KO data Quote Tab. 

D1 is next year Dividend or D1 = most recent dividend or Do multiplied by *(1+g) where g is the sustainable growth rate or assumed constant growth rate as a decimal.

Most recent dividend from FINRA KO page 

Use price from FINRA KO data page under Quote Tabg = sustainable growth rate = ROE * (1-POR). Both ROE and the Payout Ratio (POR) are available on FINRA* KO data page under “Key Ratio.”  POR is treated as a decimal in the calculation (example POR=49%, use .49 in calculating g above. Use ROE as is.  

Hint: Use gas decimal in equations.  

Convert final Re answer from decimal to percentage for this method. 

Method 3 Rule of Thumb 

Re = Rd + Risk Premium where Risk Premium = 4-6% 

Rd = YTM calculated above. 

Use a Risk Premium = 5% 

Rp Cost of Preferred Stock or Equity Rp = D/Po 

There is no preferred stock for Coca Cola so its 0. 

3.. Use the data and information from the provided resource FINRA* KO page to get the current Tax Rate (T). Enter the Tax rate as a decimal not as a percentage when calculating wacc in  

Table 2 below: 

Table 2 

T Marginal Tax Rate 

Source: FINRA*KO data under Key Ratio Tab 

Assume the following for we and wd 

Let we = .50 and wd = .50 and wp =0. 

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4. Use the data collected in Table 1 and Table 2 to calculate the WACC for Coca Cola Co.  

WACC = [wd*Rd*(1-T)] + [we*Re] +[wp*Rp] 

For Re, use the average of the three Re values you calculated using the different methods.  

Hint: In the formula, include cost of capital by type (Rd, Re, and Rp) as percentages (%) and weight of capital by type (wd, we, wp) and Tax Rates as decimals. 

5. Discuss how you would adjust the wacc you calculated in #4 above to use it to address the needs of different levels of risk in different projects and divisions in the Coca Cola Company. In your answer explain whether one single wacc estimate should be used for different projects or if different ones should be used based on level of risk.  (2 paragraphs)