Reference no: EM132964558

Part 1: Coca Cola's Weighted Cost of Capital

You work in Walt Coca Cola Company's corporate finance and treasury department and have been assigned to the team estimating Coca Cola's WACC. You must estimate this WACC in preparation for a team meeting later today. You quickly realize that the information you need is readily available online.

1. You will first have to download into excel Coca Cola's Financial Statements for the past 2 fiscal years. Go to SEC EDGAR Company Search and use the option to the right using Coca Cola's Ticker "KO" to look for the information. Remember to use the 10Ks (these have the annual reports). Note: You can use the information that you used for your first project.

2. Go to https://finance.yahoo.com. Under "Market Data" you will find the yield to maturity for 10-year Treasury bonds listed as "10 Yr Bond(%)." Collect this number as your risk-free rate. The other way to look for it is to type the 10 year bond ticker symbol "TNX". Remember that the information displayed is in percentage, i.e if the yield says 1.2 it means 1.2%

3. Still in Yahoo Finance, in the box next to the "Look Up" button, type Walt Coca Cola's ticker symbol KO), and click "Search." Once you see the basic information for Coca Cola, find the current stock price and click "Key Statistics" on the left side of the screen. Collect Coca Cola's number of shares outstanding and beta. (You can also find the number of shares outstanding in the financial statements that you downloaded in step 1)

4. Calculate Coca Cola's cost of equity capital using the CAPM, the risk-free rate you collected in step 2, and a market risk premium of 10%.

5. To get Coca Cola's cost of debt and the market value of its long-term debt, you will need the price and yield to maturity on the firm's existing long-term bonds. For this go to the following https://finramarkets.morningstar.com/BondCenter/Default.jsp?, click "Search," then select "Corporate," type Coca Cola's ticker symbol (KO), and click "Show Results." A list of Coca Cola's outstanding bond issues will appear. For this exercise you will only use Coca Cola Co bond issues. (DO NOT WORRY ABOUT COCACOLA ENTERPRISES)

6. Assume that Coca Cola Co's policy is to use the yield to maturity of 20 year obligations as its cost of debt. Find the yield to maturity for your chosen bond issue (it is in the column titled "Yield") and enter that yield as your pretax cost of debt into your spreadsheet.

7. Next, you will calculate the market value of the debt. To simplify the project, you will only be required to copy and paste the data of Coca Cola Co into an Excel table. There are several ways to do this without having to type each one. (There is a video uploaded that shows different alternatives to do this)

You now have the price for each bond issue, so now you need to know the size of each issue. Returning to the Web page, go to the row of the bond you chose and click the Issuer Name in the first column. This brings up a Web page with all of the information about the bond issue. Scroll down until you find "Amount Outstanding" on the right side. Noting that this amount is quoted in thousands of dollars (eg $60,000 means 60 million) record the issue amount in the appropriate row of your spreadsheet. Repeat this step for all of the bond issues.

8. The price for each bond issue in your spreadsheet is reported as a percentage of the bond's par value. For example, 104.50 means that the bond issue is trading at 104.5% of its par value. You can calculate the market value of each bond issue by multiplying the amount outstanding by Price /100. Do so for each issue and then calculate the total of all the bond issues. This is the market value of Coca Cola's debt.

9. Before you continue, look at Coca Cola Co's longest maturity issue. What is the price of the bond? Why do you think that the bond is trading so far off par value? At what price was it offered initially?

10. Compute the weights for Coca Cola's equity and debt based on the market value of equity (Market Capitalization) and Coca Cola's market value of debt, computed in step 7.

11. Assuming that Coca Cola has a tax rate of 30%, calculate its effective cost of debt capital.

12. Calculate Coca Cola's WACC.

13. Calculate Coca Cola's net debt by subtracting its cash (collected in step 2 or in your initial project) from its debt. Recalculate the weights for the WACC using the market value of equity, net debt, and enterprise value. Recalculate Coca Cola's WACC using the weights based on the net debt. How much does it change?

14. How confident are you of your estimate? Which implicit assumptions did you make during your data collection efforts?

15. Looking at the yields of all the Coca Cola bonds outstanding, How would have the WACC changed if you had calculated the cost of debt using the information for all the bonds outstanding instead of just using the 20 year bond