Question

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Homework Problems (Spring 2019) - These problems are designed to give you more practice in calculating the values for these stocks. Follow the steps we did in class to help you figure out the proper growth rates for your valuations. I will let you know when they are due in class. you have questions, please feel free to stop by my office or visit with one of the 318 tutors for assistance 1. Coca Cola (KO): I have provided you with dividend information and free cash flow information on Coca Cola. Calculate the value of the stock using the assumptions provided CAPM Model: The stock betais AS. Use beta to calculate the rate of return. Assume the risk free rate is 1.75% and the market risk premium is 7%. Calculate the stockholder expected rate of return. Dividend Model: Calculate the growth in dividends and the average growth individends. Use this as your future gestimate. Use 8% as your stockholder rate of return estimate. Use 2018 dividend as Do. Calculate the value of one share of stock FCF Model: Calculate the time value of money growth rate from 2014-2018 (solving for using PV and FV). Use this as your estimate for R. Assume a WACC or discount rate of 7% for the FCF model. Use the average of all FCFs from 2014-2018 as your FCF. Their debt level is $42,476M and number of shares is 4,284M. Calculate the value of one share of stock. Calculaters (01/PO) : The current stock price is $54.68. Use this stock price to calculate your expected rate of return using the dividend model assumptions. KO 2014 2015 2016 2017 2018 Div FCF 1.22 6,115.9 1.325,254.0 1.406,961.9 1.48 1,600.8 1.56 7,447.5 |

Answer 1

1] Coca Cola

CAPM Model

expected return = risk free rate + (beta * market risk premium)

expected return = 1.75% + (0.45 * 7%) = 4.9%.

Dividend Model

value of share = D₁ / (r - g), where

D₁ = dividend in 2019

r = required return

g = growth rate of dividend.

The dividend grew from $1.22 to $1.56 between 2014 to 2018 (4 years).

FV = PV * (1 + I)⁴, where I is the growth rate (g).

$1.56 = $1.22 * (1 + g)⁴

g = ($1.56 / $1.22)^1/4 - 1

g = 6.34%.

Dividend in 2019 = dividend in 2018 * (1 + g)

Dividend in 2019 = $1.56 * (1 + 6.34%) = $1.66.

Value of share =  D₁ / (r - g)

Value of share = $1.66 / (8% - 6.34%)

Value of share = $99.85.

FCF Model

g is calculated to 6.34% between 2014 to 2018 in the previous part.

Value of share = (Equity value / number of shares)

Equity value = firm value - debt.

firm value = FCF₁ / (WACC - g).

FCF₀ = (6115.9 + 5254.0 + 6961.9 + 1600.8 + 7447.5) / 5 = 5476.02.

FCF₁ =FCF₀ * (1 + g)

FCF₁ = 5476.02 * (1 + 6.34%) = 5823.13.

firm value = FCF₁ / (WACC - g).

firm value =   5823.13 / (7% - 6.34%)

firm value = 581,534.60.

equity value = firm value - debt.

equity value =  581,534.60 - 42,476 = 539,058.60

Value of share = (Equity value / number of shares)

Value of share = (539,058.60 / 4284)  

Value of share = $125.83.

Calculate rs

rs = (D₁ / P₀) + g

Dividend in 2019 = $1.56 * (1 + 6.34%) = $1.66.

rs = ($1.66 / $54.68) + 6.34%

rs = 9.38%