Northeastern University November 10, 2016

Corporate Valuation Project The Coca-Cola Company

BriefCompanyOverview

BackgroundAnAtlantapharmacist,Dr.JohnS.Pemberton,createdaflavoredsyrupthatcouldbemixed

withcarbonatedwaterandsoldasasoftdrink,foundedTheCoca-ColaCompanyin1886.Coca-

Colawasoriginallyintroducedtothemarketasapatentmedicineconsistingofkolanutsand

cocaleaves.TwoyearsaftercreatingCoca-Cola,Dr.Pembertonsoldportionsofhisbusinessto

variouspartieswhichlaterdevelopedCoca-Cola’sworldwidebottlingsystem.Coca-Colahas

Company Name•The Coca-Cola Company

Company Headquarters •Atlanta, Georgia

Founding Date•May 8, 1886

Main Business•The Coca-Cola Company is a beverage company that manufactures and distributes various nonalcoholic beverages worldwide.

Executive Officers•Chairman/CEO: Muhtar Kent•President/COO: James R. Quincey•Chief Procurement Officer: Darlene Nicosia

Competitors•Pepsico, Inc•Dr Pepper Snapple Group, Inc•Nestlé

Key Historical Accounting Performances•Profit Margin: 15.24%•Operating Margin: 23.09%•Return on Assets: 6.88%•Return on Equity: 23.03%•Revenue: 45.17Billion•Gross Profit: 28.11Billion•Net Income: 6.88 Billion•Total Debt/Equity: 176.90

grownintoahouseholdnamewithproductssoldin200+countries.Coca-Colanowhasover

3,600productsworldwiderangingfrom:sparklingbeverages,stillbeverages,ready-to-drink

juice,juicedrinks,andready-to-drinkcoffee.

MAINBUSINESSANDCOMPETITORS

TheCoca-ColaCompanyistheworld’slargestbeveragecompanywithover500

nonalcoholicbeveragebrands.Coca-Colamanufactures,markets,anddistributessoft

drinkconcentratesandsyrupsalongwithjuicesandjuice-drinkproducts.Coca-Cola

providesitsproductsusinganetworkofcompany-ownedandcontrolledbottlingand

distributionoperationsaswellasindependentbottlingpartners,distributors,

manufactures,andretailers.AccordingtoCoca-Cola’s201410-K,beveragesbearing

trademarksownedandlicensedbyCoca-Colaaccountfor1.9billionoftheapproximate

57billionservingsofallbeveragesconsumedworldwidedaily.

Coca-Colahasseveralcompetitorsinthebeverages-softdrinksindustryandtheoverall

consumergoodsindustry.TheirmostprominentcompetitorsisPepsiCo,which

competesinthesameindustrywithasimilarproductlines.Recently,PepsiCohasbegun

tooutperformCoca-Colawiththeirexpansionintomorehealthyfoodsanddrinks.

PepsiCoderiveslessthan50%oftheirprofitsfromsodasales,comparedtoCoca-Cola’s

75%relianceonsodasales.IthasalsobeenprojectedthatPepsiCowillgrowatafaster

ratethanCoca-Colain2015.AnothercompetitorofCoca-ColaisDrPepperSnapple

Group.

Company

*NumberstakenfromYahooFinance

TheCoca-Cola

Company

PepsiCo,

Inc.

DrPepper

SnappleGroup,

Inc.

Industry

MarketCap 181.66B 143.98B 16.46B 1.64B

QuarterlyRevenueGrowth -0.05 -0.05 0.03 0.14

Revenue 45.17B 64.42B 6.24 665.47M

GrossMargin 0.61 0.54 0.59 0.45

EBITDA 12.37B 12.10B 1.44B 144.05M

OperatingMargin 0.23 0.15 0.20 0.09

NetIncome 6.88B 5.04B 729.00M N/A

EPS 1.57 3.37 3.77 0.66

P/E 26.64 29.33 23.14 28.40

Key Financial Ratios and Historical Performance Data In Millions of USD except Per Share FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 12 Months Ending 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014 Returns Return on Common Equity 42.50 27.61 28.00 26.03 22.16 Return on Assets 19.51 11.31 10.86 9.74 7.80 Return on Capital 27.13 15.55 14.88 13.17 10.49 Return on Invested Capital 15.26 13.18 12.96 11.08 9.94 Margins Gross Margin 63.86 60.86 60.32 60.68 61.11 EBITDA Margin 28.17 26.06 26.58 26.05 25.40 Operating Margin 24.06 21.86 22.45 21.83 21.11 Incremental Operating Margin 5.28 15.09 41.08 -47.38 -60.75 Pretax Margin 40.56 24.62 24.59 24.50 20.27

FreeCashFlowValuation

WACC

TheCoca-Cola’scostofdebtwasmeasuredbytakingtheyieldofaCoca-Colabond

(CUSIP:191216BS8)duetomaturein2025andthemarginaltaxratetoarriveatanafter-taxcost

ofdebtof1.63%.Seetheexhibitbelow.

CUSIP 191216BS8

Symbol KO4303881

MaturityDate 10/27/2025

CouponRate 2.875%

Yield 3.134%

MarginalTaxRate 23.60%

After-TaxCostofDebt 2.39%

ThecostofequitywasdeterminedusingtheCAPM.WeassumedthatS&P500isa

representationofthemarketandusedweeklyreturnstocaptureasmuchinformationabout

themarketaspossible,atthesametimeavoidingunnecessaryvolatilityandnoiseindatathat

occurwhendealingwithdailyreturns.Thetimehorizonusedinthecalculationswassixmonth.

Income before XO Margin 33.77 18.58 18.92 18.41 15.49 Net Income Margin 33.77 18.58 18.78 18.32 15.43 Net Income to Common Margin 33.77 18.58 18.78 18.32 15.29 Additional Effective Tax Rate 16.74 24.54 23.06 24.84 23.60 Dvd Payout Ratio 34.25 49.66 50.94 57.85 76.08 Sustainable Growth Rate 27.94 13.90 13.74 10.97 5.30 Source: Bloomberg

ThisisduetofactthatCoca-Colahasbeengoingthroughsignificantchangesinitscapital

structure:startingin2010,thecompanyincreaseditsdebtfromalmost0%to20%.Sincewe

wanttovaluethefutureofthecompanyratherthananalyzeitspast,weagreedonthese

parameterstothemodel.ThemarketriskpremiumnumberiscomingfromtheDamodaran’s

analysisofhistoricalriskpremiumoftheUSequitymarketsandtherisk-freerateistakenfrom

UStreasury’swebsite.

ThecostofequitywasdeterminedusingtheCAPM.WeassumedthatS&P500isa

representationofthemarketandusedweeklyreturnstocaptureasmuchinformationabout

themarketaspossible,atthesametimeavoidingunnecessaryvolatilityandnoiseindatathat

occurwhendealingwithdailyreturns.Thetimehorizonusedinthecalculationswassixmonth.

ThisisduetofactthatCoca-Colahasbeengoingthroughsignificantchangesinitscapital

structure:startingin2010,thecompanyincreaseditsdebtfromalmost0%to20%.Sincewe

wanttovaluethefutureofthecompanyratherthananalyzeitspast,weagreedonthese

parameterstothemodel.ThemarketriskpremiumnumberiscomingfromtheDamodaran’s

analysisofhistoricalriskpremiumoftheUSequitymarketsandtherisk-freerateistakenfrom

UStreasury’swebsite.

Beta 0.69RiskFreeRate(10yearT-Bond) 2.12%MarketRiskPremium 6.25%

EstimatedCostOfEquity(CAPM) 6.5%

Coca-Coladoesnothavepreferredequity,sothisdidnothavetobecalculatedintotheWACC.

ThetotaldebtthatCoca-Colahasis$41,745.00whilethetotalequityis$179,373.05.Thismeans

thatthecapitalstructureis81.1%commonequityand18.9%debt.

Usingtheaboveweights,theWACCiscalculatedtobe7.5%(CostofDebtxWeightofDebt)+

(CostofEquityxWeightofEquity)

WACCCostofDebt 2.39%WeightofDebt 18.9%

CostofEquity 6.45%WeightofEquity 81.1%

WACC 5.69%ProjectedfuturefinancialstatementsforthecompanyWeappliedtheforecastedyear-on-yeargrowthrateslistedonYahooFinance.Thesegrowth

rateswerespecifictoCoca-Cola,inadditiontothiswecross-checkedthenumbersagainstother

sourceslikeBankofAmericaandavailableindustryaveragestoensureacredibleestimateof

thecompany’sfutureperformance.WeassumednochangeintheCOGSratiofortheseperiods.

Estimatedfuturefreecashflowsandthehorizonvalue

o Estimatedvaluepershare

Actionsthatmanagementcantaketoenhancethecompany'svalue

NewWACC VOPS

Wd 0.3 EBIT 9,708.0

Ws 0.7 (1-Tax) 0.76

rd 2.39% FCF 7416.599678

UnleveredBeta 0.59 WACC 0.0562

(1-Tax) 76.40% VOPS 131962.0509

D/E 0.43

LeveragedBeta 0.78 Vold 9,708.0

rs 7.00% Vnew 131962.0509

WACC 5.62% ChangeinV 122,254.1

CurrentStockPrice 41.24

NewStockPrice 69.36

Potentialobstacles

§ Growthintheindustryhasbeenmarginalduetothematurityofthe

marketandchangingconsumertrends

§ Coca-cola’spolepositioninthisshrinkingmarketisalsobeing

challengedbydirectcompetitorslikePepsi

• PepsiovertookDietCokeas2ndmostpopularsodathisyear

Solutionstoobstacles§ IncreaseRevenue

• Addresstheneedsofanincreasinglyhealth-consciousconsumer

marketbydiversifyingandacquiringalternativedrinklabelsthat

willenrichtheirproductportfolioeg.SodaWater,OrganicTeas,

Juices

• Healthylifestyleassociation-ImprovingPRbysponsoring

health-relatedactivitiesandfundingcharitiesthatchampion

similarinitiatives

• TakeanapproachsimilartoPepsiCo.wheretheyhaveshifted

fromonlysellingbeveragestoincludefoodproducts

§ ReduceCosts

• Consolidationofmarketingeffortsunderoneblanketbrand

(Coca-Cola)insteadofallocatingindividualbudgetstospecific

productlineseg.DietCoke,VanillaCoke

• Downsizingofexistingproductioninlieuoftherecentdipin

sales

• Relocatingtheremainingproductioncapacitytocheaper

regionsintheemergingmarketsthathavealucrativemixof

lowerlaborcostsandhealthyexpansionopportunities

Citations

ValuelineValuationofCoca-Cola:http://www3.valueline.com/dow30/f2084.pdf

"Coca-ColaHistory│WorldofCoca-Cola."Coca-ColaHistory│WorldofCoca-Cola.Web.

10Nov.2015.

TheCocaColaCompany.(2014).AnnualReport2014.RetrievedfromCocaColaOnline

database.

D'Altorio,Tony."Cokevs.Pepsi...AretheColaWarsFinallyOver?"Cokevs.Pepsi...Are

theColaWarsFinallyOver?26Feb.2012.Web.10Nov.2015.

Reynolds,Ben."PepsiCoVs.Coca-Cola:WhichStockIstheBetterChoicefor2015?"

TheStreet.11Feb.2015.Web.10Nov.2015.