Coke Company Case Study
4. Some assessment (qualitative and quantitative) of the risk associated with the common stock of the company including an estimate of a fair required rate of return for the stock should be included if possible. Risk measures provided by other sources such as Value Line can be used here if you …show more content…
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