Essay about Valuing Coca Cola Stock

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Valuing of Coca Cola Stock and Analysis Andrew Burgoyne, James Desimone, Bailey Fowble, Hewei Huang, Ryan Leist, Maria Sandoval University of South Florida FIN 4414 Abstract Taking the role as Jessie Jones, we will analyze whether to recommend the Coca Cola stock to potential clients or current clients that do not have it in their portfolio. By using the Capital Asset Price Model (CAPM), Dividends Discount Model (DDM) and the Price/Earnings (P/E) ratio we will come to a conclusion. Background The Coca Cola Company, which is based out of Atlanta, Georgia, is a leader in the global soft drink market. It owns subsidiaries in over 195 countries around the world but has always remained local. According to the most recent…show more content…
The market rate of return for 1996 was 22.96%, however we averaged the previous 5 years to get a better picture of the market rate of return. This averaging put the rate of return 15.91% which is more manageable than 22.96%. We also assumed that the dividend growth rate was 12% and that the shares of Coca-Cola were trading at $58 per share at the time. Capital Asset Pricing Model The Capital Asset Pricing Model or CAPM is one of the most popular methods for estimating an equity investor’s required return by finding the discount rate. From the information provided in the case, we were informed that the current government bond yields were 5.09% on 90-day treasury bills, 5.79% on 5-year bonds, 5.91% on 10-year bonds and 6.22% on 30-year bonds. We were also given that by definition the market had a β of 1.0, less risky stocks have β < 1.0 and more risky stocks have β > 1.0. Lastly, we were told that Jessie noted that the historical market risk premium (Rm – Rf) was in the 6% range. The equation used to approximate the investor's required rate of return is: r = Rf+ β (Rm-Rf) Rf represents the risk-free return, which U.S Treasury bills are usually the proxy used. β represents the beta, which is used to measure risk associated with stocks: The adjusted β of 1.24 was used because it takes into consideration an estimation of future β’s rather than just historical which is what the raw β is based on. Rm represents
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