# Coca-Cola Co. (NYSE: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 5.02%
01 FCFF0 10,162
1 FCFF1 9,633  = 10,162  × (1 + -5.20%) 9,172
2 FCFF2 9,281  = 9,633  × (1 + -3.66%) 8,414
3 FCFF3 9,085  = 9,281  × (1 + -2.11%) 7,843
4 FCFF4 9,034  = 9,085  × (1 + -0.56%) 7,425
5 FCFF5 9,122  = 9,034  × (1 + 0.98%) 7,139
5 Terminal value (TV5) 227,878  = 9,122  × (1 + 0.98%) ÷ (5.02%0.98%) 178,343
Intrinsic value of Coca-Cola Co.’s capital 218,337
Less: Debt (fair value) 43,719
Intrinsic value of Coca-Cola Co.’s common stock 174,618

Intrinsic value of Coca-Cola Co.’s common stock (per share) \$40.65
Current share price \$48.92

Based on: 10-K (filing date: 2020-02-24).

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) 210,133  0.83 5.76%
Debt (fair value) 43,719  0.17 1.51% = 1.92% × (1 – 21.56%)

Based on: 10-K (filing date: 2020-02-24).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 4,295,438,919 × \$48.92 = \$210,132,871,917.48

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
= (16.70% + 19.30% + 29.00% + 19.50% + 23.30%) ÷ 5 = 21.56%

WACC = 5.02%

### FCFF Growth Rate (g)

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

Coca-Cola Co., PRAT model

Average Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Selected Financial Data (US\$ in millions)
Interest expense 946  919  841  733  856
Income (loss) from discontinued operations, net of income taxes —  (251) 101  —  —
Net income attributable to shareowners of The Coca-Cola Company 8,920  6,434  1,248  6,527  7,351

Effective income tax rate (EITR)1 16.70% 19.30% 29.00% 19.50% 23.30%

Interest expense, after tax2 788  742  597  590  657
Add: Dividends 6,845  6,644  6,320  6,043  5,741
Interest expense (after tax) and dividends 7,633  7,386  6,917  6,633  6,398

EBIT(1 – EITR)3 9,708  7,427  1,744  7,117  8,008

Loans and notes payable 10,994  13,194  13,205  12,498  13,129
Current maturities of long-term debt 4,253  4,997  3,298  3,527  2,677
Long-term debt, excluding current maturities 27,516  25,364  31,182  29,684  28,407
Equity attributable to shareowners of The Coca-Cola Company 18,981  16,981  17,072  23,062  25,554
Total capital 61,744  60,536  64,757  68,771  69,767
Financial Ratios
Retention rate (RR)4 0.21 0.01 -2.97 0.07 0.20
Return on invested capital (ROIC)5 15.72% 12.27% 2.69% 10.35% 11.48%
Averages
RR -0.50
ROIC 10.50%

FCFF growth rate (g)6 -5.20%

Based on: 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), 10-K (filing date: 2016-02-25).

2019 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 946 × (1 – 16.70%) = 788

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
= 8,9200 + 788 = 9,708

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [9,7087,633] ÷ 9,708 = 0.21

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 9,708 ÷ 61,744 = 15.72%

6 g = RR × ROIC
= -0.50 × 10.50% = -5.20%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (253,852 × 5.02%10,162) ÷ (253,852 + 10,162) = 0.98%

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 -5.20%
2 g2 -3.66%
3 g3 -2.11%
4 g4 -0.56%
5 and thereafter g5 0.98%

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)
= -5.20% + (0.98%-5.20%) × (2 – 1) ÷ (5 – 1) = -3.66%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= -5.20% + (0.98%-5.20%) × (3 – 1) ÷ (5 – 1) = -2.11%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= -5.20% + (0.98%-5.20%) × (4 – 1) ÷ (5 – 1) = -0.56%