Coca-Cola, established in the nineteenth century, is a manufacturer and distributor of nonalcoholic beverages, syrups, and juices under recognized brand names. It operates in nearly 200 countries around the world. At the beginning of 2008, Coke traded at $62 per share, with a PIE of 23.9, a price-to-book ratio of 6.6, and a price-to-sales ratio of 5.0 on annual sales of $28.9 billion. With 2,318 million shares outstanding, the market capitalization of the equity was $143.7 billion, putting it among the top 20 U.S. firms in market capitalization.

Exhibit 4.5 provides a partial statement of cash flow for Coca-Cola for three years,

2008- 2010, along with some additional information.

Suppose that you were observing the stock price at the beginning of2008 and were trying to evaluate whether to buy the shares. Suppose, further, that you had the actual cash flow statements for the next three years (as given in the exhibit), so you knew for sure what the cash flows were going to be.

1. Calculate free cash flows for the firm for the three years using the information given Exhibit 4.5.

2. Attempt to value the shares of Coca-Cola at the beginning of 2008. Use a cost of capital of 9 percent for the firm.

List the problems you run into and discuss the uncertainties you have about the valuation. Below are the free cash flows reported by Coke for 2004- 2007 (in millions of dollars). They are based on the actual reported cash flow but are adjusted for interest and investments in interest-bearing securities.

If you used these cash flows for your forecasts, what difficulties would you encounter in trying to value the Coca-Cola Company at the beginning of2004? What do you make of the declining free cash flows over the four years?

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2004 2005 2006 $5,969 2,258 2007 Cash flow from operations Cash investments $7,258 $5,929 618 $6,421 1,496 7,068 $4,925 $ 190 Free cash flow $5,311 $3,711