Financial Analysis of Coca Cola Company (Essay Sample)

Financial analysis of Coca Cola Company
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Financial analysis of Coca Cola Company
Question 1
Part (a)
The end of year market values for Coca Cola company shares has been relatively close for the past three years (2012-2014).of At the end of 2012, the closing price of shares stood at $36.25. A year later, the value had increased to $41.31. In 2014, the closing price of Coca Cola shares stood at $42.22, which was only a slight improvement from the previous year. The annual dividends per share for the last three years were $1.02, $1.12 and $1.22 respectively (Coca-colacompany.com, 2015). On the other hand, the company’s debts over the last three years have been $32,610,000, $37,079,000 and $41,745,000 in that order with a debt to equity ratio of 0.99, 1.12 and 1.38. The increasing value of the debt to equity ratio means that the company’s debts have been gradually on the rise.
Part (b)
Short-term debts can be dealt with by reducing the amount of stockholder’s equity, which in turn would have an effect of improving the financial advantage of the company. The company can also reduce its short term debts by taking part in leasing activities that overall can improve the company’s cash flow that can be used to settle the company’s short-term debts such as bank overdrafts and short-term loans. If the debt-to equity ratio remains constant the company’s financial advantage would also be constant, which from a business point of view might not be good for Coca Cola (Coca-colacompany.com, 2015). It is always advisable for companies to focus on reducing the value of their debt-to-equity ratio because if the value increases, the company would have more liabilities and less equity. In 2013, the tax rate of the company stood at 24.24.
Question 2
Part (a)
Using the CAPM method, equity cost can be calculated using the following formula:
ra = rrf + Ba (rm-rrf)
Whereby;
rrf =  HYPERLINK "/financial-dictionary/investing/rate-return-5875" rate of return for a riskless security 
rm = wider  HYPERLINK "/financial-dictionary/economics/market-3609" market's projected rate of return 
Ba =  HYPERLINK "/financial-dictionary/stock-valuation/beta-1079" beta of the  HYPERLINK "/financial-dictionary/financial-statement-analysis/asset-2278" asset
2.74 + 0.42 (7- 2.74)
2.74 + 0.42 x 4.26
2.74 + 1.79 = 4.53%
Currently, the cost of equity for Coca Cola stands at 4.53% meaning that investors would anticipate to gain a profit of that percentage on their long-term investments.
Part (b)
The company’s beta from the calculations is given as 0.42.
Part (c)
Unlevered beta refers to beta of an organization that does not have any debts. For such a company, the unlevered beta is always one (1).
Part (d)
Using equity of 10%, the cost of return can be found to be:
2.74 + 0.42 (10 - 2.74)
2.74 + 0.42 (7.76)
24.52%
Using equity of 100%, the cost of return would be astronomical:
2.74 + 0.42 (100 – 2.74)
3.16 (97.76)
308.92%
Part (e)
Marginal investor refers to a representative whose actions reflect the beliefs of those individuals who are currently trading in stock. The marginal investors are important in such transactions because they determine the price of stocks. On the other hand, well-diversified portfolio contains large numbers of individual stock and bonds that are usually selected without bias when dealing with particular economic segments (Coca-Cola, 2013). While calculating the cost of equity, the marginal investors have to be considered because they have a huge influence on the value of the company’s stock.
Part (f)
The marginal investor is considered in this calculation because of the influence they have on stock and the overall power they have on the shareholders equity. As the name suggests, marginal shareholders may not take part in the majority of investment activities, but their behind-the-scenes operations actually affect the performance of the organization.
Part (g)
A risk premium in financial terms refers to the form of compensation that companies usually offer to their investors who tolerate the extra risks. These premiums are offered because they are the excesses that returns that are obtained from riskless investments. While calculating the cost of equity for Coca Cola Company, it is imperative to consider the higher risk premium because the organization is one of the biggest multinational corporations in the world (Bloomberg.com, 2015). Coca Cola products exist in almost all the nations in the world, which makes it at high risk to lose return on some of its investments. Because of these reasons, Coca Cola Company has one of the highest risk premiums in the world considering their wider coverage.
Question 3
Part (a)
A closer look at the company’s bonds reveals a number of important issues about Coca Cola. First, the company’s outstanding bond stands at $27.6 billion. In addition, the company also has a corporate issuer type of bond. The issuer domicile is the United States, because the company’s headquarters are located in that country. The debt to assets ratio of the company’s bonds also stands at 47.38%. The company bond sector is found in the consumer defensive sector because the products produced by the company targets the final consumer. Company’s bonds are usually classified as either preferred or equity bonds. The company has no preferred bonds because of the debt that it has. The company does not have a preferred bond because of the debt it has (SEC, 2015). Currently, the company has a debt ratio of 59.6% representing 42.5 billion while the equity ratio is 40.4%, which represents $28.8 billion.
Part (b)
From the data provided, it can be estimated that it would take the company a significant amount of time to reach maturity. Currently, the debt ratio stands at 2.0% while the maximum maturity level for these bonds is set at 6.0%. This means that the company’s bonds are only halfway through to reach the maturity level (Coca-colacompany.com, 2015). At the current maturity rate of these bonds, it is estimated that the company would achieve maturity around 2046.
Part (c)
The debt cost refers to the effective means that a company uses to pay the debts that it currently has. Debt cost can be determined prior to or after tax returns because after deducting the interest expense it is possible to obtain the after tax cost. The debt cost is one of the fundamental parts of the any organization’s capital structure, which also includes the equity cost. Therefore, a company’s debt cost can be calculated as:
Marginal tax rate (before-tax rate * (1 – marginal tax)
In the year ended 2014, the debt cost before tax for Coca Cola was 1.8% while the tax rate stood at 24.24%. The cost of debate can be calculated using the procedure that follows:
0.018 * (1 – 0.2424)
(0.018 * 0.7576)
0.0136368
This amount translates to 1.36%.
Part (d)
Using a marginal tax rate of between 10% and 100%, the cost of equity can be equated as follows:
Using marginal tax rate of 10%
* (1 – 0.2424)
(0.1* 0.7576)
0.07576
This amount in percentage translates to 7.58%.
Using marginal tax rate 100%
1 * (1 -0.2424)
(1 * 0.7576)
0.7576
This amount in terms of percentage translates to 75.76.
From the above calculations, it can be deduced that as the amount of marginal tax increases, the cost of equity increases. Because of this, companies should always strive to keep the marginal tax rate low.
Part (e)
Just like in the calculation of the cost of equity, the high premium risks are also considered because of the high risks associated with the owners’ equity in the calculation of these financial ratios. This is because Coca Cola is a high-risk business because it operates in many areas that put it under pressure of losing various investments (Coca-colacompany.com, 2015). The high-risk premiums are covered for in the marginal tax rates while calculating for the debt cost.
Question 4
In the above calculations, a number of financial ratios have been provided in the calculations of various financial issues such as tax tariffs, the cost of debt, equity cost and the total debts. The stock price, the outstanding shares and the stock shares have also been provided in the above discussion. Using the above information, the weighted average cost of capital (WACC) for the company can be calculated using a number of steps (Coca-colacompany.com, 2015).
WACC = R = (1 – tax rate) * R debt (D/D + E) + R equity (E/D + E)
(1 – Tax rate) * R debt (D/D + E) R equity (E/D + E)
(1 – 0.2424) * 0.018 * ($53.384/$231.024) + 0.0435 ($177.340/$231.024)
(0.7576 * 0.018 * 0.2311 + 0.0435 * 0.7676)
(0.0032 + 0.0334)
3.66%
Part (a)
Debt ratio is one of the financial ratios that measure the extent of an organization’s leverage towards its consumers. The debt ratio normally includes both the long term and short-term debts of a company. Mathematically, debt ratio is calculated by dividing a company’s total debts with its total assets. In normal circumstances, a company would want its debts to be lower than its assets because this would mean that the company would be able to pay of its debt in case it is liquidated (Bloomberg.com, 2015). As such, the debt ratio should always be less than and move towards zero to show that the company is in ...