Stock Analysis on Net
Stock Analysis on Net
Microsoft Excel LibreOffice Calc

Coca-Cola Co. (NYSE:KO)

Present Value of Free Cash Flow to Equity (FCFE)

Intermediate level

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company’s asset base.


Intrinsic Stock Value (Valuation Summary)

Coca-Cola Co., free cash flow to equity (FCFE) forecast

US$ in millions, except per share data

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Year Value FCFEt or Terminal value (TVt) Calculation Present value at 7.92%
01 FCFE0 6,994
1 FCFE1 5,288 = 6,994 × (1 + -24.40%) 4,900
2 FCFE2 4,382 = 5,288 × (1 + -17.12%) 3,763
3 FCFE3 3,951 = 4,382 × (1 + -9.84%) 3,144
4 FCFE4 3,850 = 3,951 × (1 + -2.56%) 2,839
5 FCFE5 4,032 = 3,850 × (1 + 4.72%) 2,755
5 Terminal value (TV5) 132,114 = 4,032 × (1 + 4.72%) ÷ (7.92%4.72%) 90,259
Intrinsic value of Coca-Cola Co.’s common stock 107,659
 
Intrinsic value of Coca-Cola Co.’s common stock (per share) $24.98
Current share price $53.18

Based on: 10-K (filing date: 2021-02-25).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.


Required Rate of Return (r)

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Assumptions
Rate of return on LT Treasury Composite1 RF 2.22%
Expected rate of return on market portfolio2 E(RM) 11.72%
Systematic risk of Coca-Cola Co.’s common stock βKO 0.60
 
Required rate of return on Coca-Cola Co.’s common stock3 rKO 7.92%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

2 See details »

3 rKO = RF + βKO [E(RM) – RF]
= 2.22% + 0.60 [11.72%2.22%]
= 7.92%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Coca-Cola Co., PRAT model

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Average Dec 31, 2020 Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016
Selected Financial Data (US$ in millions)
Dividends 7,047  6,845  6,644  6,320  6,043 
Net income attributable to shareowners of The Coca-Cola Company 7,747  8,920  6,434  1,248  6,527 
Net operating revenues 33,014  37,266  31,856  35,410  41,863 
Total assets 87,296  86,381  83,216  87,896  87,270 
Equity attributable to shareowners of The Coca-Cola Company 19,299  18,981  16,981  17,072  23,062 
Financial Ratios
Retention rate1 0.09 0.23 -0.03 -4.06 0.07
Profit margin2 23.47% 23.94% 20.20% 3.52% 15.59%
Asset turnover3 0.38 0.43 0.38 0.40 0.48
Financial leverage4 4.52 4.55 4.90 5.15 3.78
Averages
Retention rate -0.74
Profit margin 17.34%
Asset turnover 0.41
Financial leverage 4.58
 
FCFE growth rate (g)5 -24.40%

Based on: 10-K (filing date: 2021-02-25), 10-K (filing date: 2020-02-24), 10-K (filing date: 2019-02-21), 10-K (filing date: 2018-02-23), 10-K (filing date: 2017-02-24).

2020 Calculations

1 Retention rate = (Net income attributable to shareowners of The Coca-Cola Company – Dividends) ÷ Net income attributable to shareowners of The Coca-Cola Company
= (7,7477,047) ÷ 7,747
= 0.09

2 Profit margin = 100 × Net income attributable to shareowners of The Coca-Cola Company ÷ Net operating revenues
= 100 × 7,747 ÷ 33,014
= 23.47%

3 Asset turnover = Net operating revenues ÷ Total assets
= 33,014 ÷ 87,296
= 0.38

4 Financial leverage = Total assets ÷ Equity attributable to shareowners of The Coca-Cola Company
= 87,296 ÷ 19,299
= 4.52

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= -0.74 × 17.34% × 0.41 × 4.58
= -24.40%


FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (229,169 × 7.92%6,994) ÷ (229,169 + 6,994)
= 4.72%

where:
Equity market value0 = current market value of Coca-Cola Co.’s common stock (US$ in millions)
FCFE0 = the last year Coca-Cola Co.’s free cash flow to equity (US$ in millions)
r = required rate of return on Coca-Cola Co.’s common stock


FCFE growth rate (g) forecast

Coca-Cola Co., H-model

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Year Value gt
1 g1 -24.40%
2 g2 -17.12%
3 g3 -9.84%
4 g4 -2.56%
5 and thereafter g5 4.72%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= -24.40% + (4.72%-24.40%) × (2 – 1) ÷ (5 – 1)
= -17.12%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= -24.40% + (4.72%-24.40%) × (3 – 1) ÷ (5 – 1)
= -9.84%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= -24.40% + (4.72%-24.40%) × (4 – 1) ÷ (5 – 1)
= -2.56%