Essay on Coca-Cola Investment Analysis

1305 Words Jun 6th, 2008 6 Pages

Coca-Cola’s earnings and growth are expected to remain positive. This is based on the quantitative and qualitative estimations by the chosen investment advisors, along with my own calculations. The investment advisors expect Coke’s operating income, net operating revenues, earnings per share, sales, and stock price to continue to increase. Based on my calculations, it is expected that Coke will grow at a rate of 9.16%, the required rate of return is 12.05%, and the current stock price ($46.65) is fairly priced with my calculation ($46.84). I am recommending Coke’s stock as a buy.
Economic Climate and Industry Performance

According to Value Line Investment Survey the Soft Drink Industry is maturing. Growth over the next
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Risk measures provided by other sources such as Value Line can be used here if you wish.

5. An application of either a dividend valuation model or earnings multiplier model should be included for the stock if possible.

The Use of the Constant Dividend Valuation Model:

The Constant Dividend Valuation Model will be used to value the common stock of Coca-Cola. For this determination, it is assumed that the dividends paid out will grow at a constant rate. We will assume this because Coke is in the beverage industry, which is a mature and stable industry known also as a defensive industry. Coke’s returns are insensitive to the state of the economy.

Calculating the constant growth rate:

The dividends reported by the Value Line Investment Survey will be used to determine Coke’s constant growth. This determination is calculated by using the dividends paid out during the last five years. It is computed as [$1.24 2006 dividend / $0.80 2002 dividend] ^1/5 – 1 = 9.16%. Based on this calculation, it is expected that the dividends will continue to grow at 9.16% forever. This growth rate will be used with the required rate of return to determine the value of Coke’s common stock.

Computing the required rate of return:

There are three different approaches that could be used to compute the required rate of return. Instead of using the capital asset pricing model or the equity risk premium approach, the following

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