# Coca-Cola Co. (KO)

## Present Value of Free Cash Flow to the Firm (FCFF)

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 the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

### Intrinsic Stock Value (Valuation Summary)

Coca-Cola Co., free cash flow to the firm (FCFF) forecast

US\$ in millions, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 6.56%
01 FCFF0 6,921
1 FCFF1 6,600  = 6,921  × (1 + -4.63%) 6,194
2 FCFF2 6,438  = 6,600  × (1 + -2.46%) 5,669
3 FCFF3 6,419  = 6,438  × (1 + -0.29%) 5,305
4 FCFF4 6,540  = 6,419  × (1 + 1.88%) 5,072
5 FCFF5 6,805  = 6,540  × (1 + 4.05%) 4,952
5 Terminal value (TV5) 282,266  = 6,805  × (1 + 4.05%) ÷ (6.56%4.05%) 205,414
Intrinsic value of Coca-Cola Co.’s capital 232,605
Less: Debt (fair value) 43,632
Intrinsic value of Coca-Cola Co.’s common stock 188,973

Intrinsic value of Coca-Cola Co.’s common stock (per share) \$44.11
Current share price \$56.82

Based on: 10-K (filing date: 2019-02-21).

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.

### Weighted Average Cost of Capital (WACC)

Coca-Cola Co., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 243,445  0.85 7.45%
Debt (fair value) 43,632  0.15 1.63% = 2.11% × (1 – 22.94%)

Based on: 10-K (filing date: 2019-02-21).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 4,284,491,377 × \$56.82 = \$243,444,800,041.14

Debt (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

Required rate of return on debt. See details »

Required rate of return on debt is after tax.

Estimated (average) effective income tax rate
= (19.30% + 29.00% + 19.50% + 23.30% + 23.60%) ÷ 5 = 22.94%

WACC = 6.56%

### FCFF Growth Rate (g)

#### FCFF growth rate (g) implied by PRAT model

Coca-Cola Co., PRAT model

Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US\$ in millions)
Interest expense 919  841  733  856  483
Income (loss) from discontinued operations, net of income taxes (251) 101  —  —  —
Net income attributable to shareowners of The Coca-Cola Company 6,434  1,248  6,527  7,351  7,098

Effective income tax rate (EITR)1 19.30% 29.00% 19.50% 23.30% 23.60%

Interest expense, after tax2 742  597  590  657  369
Add: Dividends 6,644  6,320  6,043  5,741  5,350
Interest expense (after tax) and dividends 7,386  6,917  6,633  6,398  5,719

EBIT(1 – EITR)3 7,427  1,744  7,117  8,008  7,467

Loans and notes payable 13,194  13,205  12,498  13,129  19,130
Current maturities of long-term debt 4,997  3,298  3,527  2,677  3,552
Long-term debt, excluding current maturities 25,364  31,182  29,684  28,407  19,063
Equity attributable to shareowners of The Coca-Cola Company 16,981  17,072  23,062  25,554  30,320
Total capital 60,536  64,757  68,771  69,767  72,065
Financial Ratios
Retention rate (RR)4 0.01 -2.97 0.07 0.20 0.23
Return on invested capital (ROIC)5 12.27% 2.69% 10.35% 11.48% 10.36%
Averages
RR -0.49
ROIC 9.43%

FCFF growth rate (g)6 -4.63%

Based on: 10-K (filing date: 2019-02-21), 10-K (filing date: 2018-02-23), 10-K (filing date: 2017-02-24), 10-K (filing date: 2016-02-25), 10-K (filing date: 2015-02-25).

2018 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 919 × (1 – 19.30%) = 742

3 EBIT(1 – EITR) = Net income attributable to shareowners of The Coca-Cola Company – Income (loss) from discontinued operations, net of income taxes + Interest expense, after tax
= 6,434-251 + 742 = 7,427

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [7,4277,386] ÷ 7,427 = 0.01

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 7,427 ÷ 60,536 = 12.27%

6 g = RR × ROIC
= -0.49 × 9.43% = -4.63%

#### FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (287,077 × 6.56%6,921) ÷ (287,077 + 6,921) = 4.05%

where:
Total capital, fair value0 = current fair value of Coca-Cola Co.’s debt and equity (US\$ in millions)
FCFF0 = the last year Coca-Cola Co.’s free cash flow to the firm (US\$ in millions)
WACC = weighted average cost of Coca-Cola Co.’s capital

#### FCFF growth rate (g) forecast

Coca-Cola Co., H-model

Year Value gt
1 g1 -4.63%
2 g2 -2.46%
3 g3 -0.29%
4 g4 1.88%
5 and thereafter g5 4.05%

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)
= -4.63% + (4.05%-4.63%) × (2 – 1) ÷ (5 – 1) = -2.46%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= -4.63% + (4.05%-4.63%) × (3 – 1) ÷ (5 – 1) = -0.29%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= -4.63% + (4.05%-4.63%) × (4 – 1) ÷ (5 – 1) = 1.88%