Coke Financial Structure

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Andrea R. Hart

GB550: Financial Management
August 24, 2011
The Abstract

The topic of this research paper will be about the capital structure of Coca Cola, This paper serves as a comparison of debt and equity. It will help determine the true value of the company while also determining what their free cash flow is and the risk level for the organization. The question that this research will try to answer is if the 125 year old company is financially ready for another 125 years. The company needs to remain liquid and keep its operating costs low during times of inflation. The methodology that will be used will be multiple financial ratios to determine how the organization is operating and compare to times of exponential increases in profits. My expected findings will be that Coca Cola will have a minimal amount of free cash flow. There would be enough to remain liquid but also to remain flexible in starting new product lines or new investments. Coca Cola already operates in over 200 countries and should seek to expand advertising efforts in recently adopted countries. I anticipate that the company has endured over 125 years of economical, political and social upheavals. I hope to conclude that although there could be unpredicted unprecedented environmental events that Coca Cola will be able to continue operate.

Table of Contents

A preview of capital structure issues……………………………………………...………………4

Business and financial risks related to capital structure…………………………………………..5

Modigliani and Miller’s [MM] capital structure theory ………………………………………….6

Criticisms of the MM model and assumptions……………………………………………………6

Capital structure evidence and implications………………………………………………………7

Estimating the firm’s optimal capital structure……………………………………………………8 References…………………………………………………………………………………………9

A preview of capital structure issues
Capital structures of companies are based on the amount of debt and equity a company holds. When a company begins to increase their debt the company becomes more of a risk to investors because the company now has a higher chance that it may not be able to repay its debts. Although if there is more debt an organization taxes can be reduced because the organization is able to take out what it must pay as interest to investors and holders from being taxed. The higher cost of capital translates into a lower fair value estimate, and vice versa; furthermore, seemingly small changes in cost of capital can make a significant difference in a stock's fair value (Kathman, 2002). The giant beverage maker, that’s in a fairly stable environment does not have very much debt. The company in the non-alcoholic beverage industry, Coca Cola’s cost of equity of 8.6% when the industry average is 11.67% and is a large influence on the WACC of 8.4%. Although the company incurs an 8.6 % cost on the equity the company has averaged a return on equity for the past five years of 30.9%. A Company with a high weighted average cost of capital could be considered a risky company or a company in a risky industry that mainly uses equity for funding. Coca Cola’s debt to equity ratio is 23% however the total debt to equity has been on average for the past five years at 51% showing that the company uses only half debt to finance growth within the company which is accurate for a company that is not quite so capital intensive. Although the company finds itself in a well established industry, it must still make investments and use 51% of debt to finance the new growth.

WACC and Free Cash Flows impact a company’s value. FCF is what would come back to a company after the investment was made to enhance the company. FCF can determine if it is worth to take on an investment. Coca Cola’s current Free Cash Flow is -546.8 (COCA COLA CO (NYSE:KO ), 2011).

Business and financial...
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