Case- Coca-Cola Co. Analysis
How much overall risk is there in the company? Discuss the methods used arrive at this estimate. There are two ways to look at the risk
Beta and standard deviation. One of the most popular indicators of risk is a statistical measure called beta which measures the stock's volatility in relation to the market (measures the market/unique risk) Beta of 0.59 measures the financial and business risk for Coca Cola in other words referred as the levered beta for Coca Cola Company. To calculate the business risk of coca cola we will use unlevered beta which comes down to βu=βl/(1 + (1-0.228)0.2) = 0.511-->business risk. Standard deviation is a statistical measurement that sheds light on historical volatility. This measures the total risk of the company. Total risk = 2.38 For standard deviation we took the stock price from 27.07.2009 to 19.07.2010 date. Then we calculated weekly holding period (HPR) i.e. (Pt+1-Pt/Pt) and we found weekly returns. From these numbers we computed Annual actual return by using the formula 1+EAR= (1+HPR) n. Using S&P500 returns for Coca Cola from the previous year i.e. 2009 we also tried to calculate R- squared of the firm which comes down to 28.24%. R-squared measures the % of stocks variance that is explained by the market. Pepsi’s R-squared 27.33%. Let’s see the below tables. We computed values for Pepsi as well for comparison as it till date remains Coca Cola’s biggest competitor. What we analyzed is that Pepsi’s total risk profile is lower than Coca Cola but this also accounts in the factor of size of both. | | |Beta |Standard Deviation |Return | |COCA COLA |KO |0.59 |2,38% |10,4% | |PEPSI |PEP |0.57 |2,20% |18,8% |
| |Return |Standard deviation | |S&P 500 (Market) |13,7% |2,52% |
The explanations are as follows.
✓ Coca Cola has very low beta which is 0.59. it is not correlated with market risk. ✓ Coca Cola has the most total risk as measured by the standard deviation which is 2.38% ✓ Coca Cola has the greater beta (0.59) and will add more risk to diversify when we compare between Coca Cola and Pepsi.
Where is the risk coming from? (Market, firm, industry, or currency) Business Risk and Financial Risk have been discussed above but we feel it would be appropriate enough to share some information on Coca Cola’s foreign exchange risk as 70% of their revenues are coming from abroad; hence, Coca Cola has a high exchange risk exposure since their financial statements are presented in dollars and they need to convert at the end . After reading a report and understanding Coca Cola deep market share in Europe we can understand that it was being affected by the weak euro but it has placed itself well by taking a Put Option to cover the down side. Also there are some health concerns related to Coca Cola’s carbonated drink. It has a sweetened chemical HFCS which raises concerns about obesity and poses negative impression on the brand. Coca Cola has a big brand name and it has to be very careful about it. Other than that Coca Cola faces some challenges from the business side of its risk mainly from China where it is still struggling to get the market share due to tough competition. Not only that it relies heavily on its bottlers for their products and faces a big risk from its operations. Recently it has been trying to acquire its bottlers to reduce such risks especially in North America. Coca Cola’s growth prospects as compared to industry are relatively stable but do face constant threat of innovation as its competitors are equally innovative. Coca Cola faces an indirect threat from increased taxes in U.S. or other operating countries which may affect its...