Case Number 1: Valuing Coca Cola Stock.
The Coca Cola Company, founded in 1886 in Atlanta, Georgia, is the premier soft drink producer globally. Besides manufacturing the famous Coca Cola, the company is responsible for bringing a variety of different products to the global market such as Fanta, Sprite, PowerAde, Dasani and Nestea. The Coca Cola Company is divided into two main sectors: the North American Business Sector and the International Business Sector. After selling its concentrates to the different bottling manufactures, Coca Cola frequently took an equity stake in the bottling companies whenever the firms had trouble financing their businesses. Between 1981 and 1998, Coca Cola’s dividends as well as their earnings per share increased significantly each year. This trend is predicted to continue through 1998. In order to closely analyze and predict Coca Cola’s standing in the stock market within the next five to ten years, we looked at the Dividend Discount Model (DDM), the Capital Asset Pricing Model (CAPM) and the Price/Earnings Multiple. Based on these three calculations, we wish to determine the profitability of Coca Cola’s stock and ultimately advise Jessie’s clients to either purchase, sell or hold their existing Coca Cola stocks.
In order to find the future stock price of Coca Cola, we will be analyzing the Capital Asset Pricing Model (CAPM), the Dividend Discount Model (DDM) and the Price/Earnings Multiple method.
The Capital Asset Pricing Model (CAPM) illustrates the relationship between expected return of the market and the non diversifiable risk. The CAPM is used to determine the required rate of return for Coca Cola stock.
The Dividend Discount Model (DDM) shows the value of a firm’s present value of expected future dividends. In other words, the future dividends are discounted back to the present value. The formula takes the dividend per share for next year and divides it by the...
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