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Beverages – Soft Drinks Industry Module 6: Cost of Capital and Valuation

Beverages – Soft Drinks Industry Module 6: Cost of Capital and Valuation. Megan Morava. Background. World’s largest beverage company License and market 500 nonalcoholic beverage brands Primarily sparkling beverages Coca-Cola, Diet Coke, Fanta , Sprite

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Beverages – Soft Drinks Industry Module 6: Cost of Capital and Valuation

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  1. Beverages – Soft Drinks Industry Module 6: Cost of Capital and Valuation Megan Morava

  2. Background • World’s largest beverage company • License and market 500 nonalcoholic beverage brands • Primarily sparkling beverages • Coca-Cola, Diet Coke, Fanta, Sprite • Strong brand loyalty and diversified geographical operations offer competitive advantage • Revenues 2012: $48 billion, 3.17% increase

  3. Comparable Companies • Pepsi Co. • Dr. Pepper – Snapple • Monster Beverage

  4. The Cost of Equity Capital using CAPM

  5. The Cost of Equity Capital using CAPM rEqt= 0.0865 (8.65%) β = 0.5069

  6. The Cost of Equity Capital using Bloomberg β = 0.856

  7. The Cost of Equity Capital using Beta Estimates from Other Sources

  8. The Cost of Equity Capital • Beta estimates • Regression: β=0.5069 • Bloomberg: β=0.856 • Average of estimates from other sources: β= 0.516 • Used Beta calculated from the regression of the returns on the S&P 500 and KO rEqt= 0.0865 (8.65%)

  9. The Cost of Debt Capital

  10. The Cost of Enterprise Capital rEnt = [1.22% x (8,181/181,757)] + [8.65% x (173,576/181,757)] rEnt= 8.32%

  11. Discounted Cash Flow Model

  12. Conclusion • Cost of Equity Capital = 8.65% • Based on Beta calculated from regression • Cost of Debt Capital = 1.22% • Derived from Interest Expense divided by average amount of interest-bearing debt • Cost of Enterprise Capital =8.32% • WACC from Bloomberg = 7.7% • Enterprise Value = $138,569 million • Compared to market cap of $173,576 million

  13. Questions?

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