The Coca-Cola Company is a global soft-drink beverage company that is a direct competitor with Starbucks. The data in Chapter 12, Exhibits 12.14 through 12.16 (pages 806-809), include the actual amounts for 2015 and projected amounts for Year +1 to Year +6 for the income statements, balance sheets, and statements of cash flows for Coca-Cola. The market equity beta for Coca-Cola at the end of 2015 is 0.75. Assume that the risk-free interest rate is 3.0% and the market risk premium is 6.0%. Coca-Cola has 4,324 million shares outstanding at the end of 2015, when Coca-Cola's share price was $42.96.

REQUIRED

Part I Computing Coca-Cola's Value-to-Book Ratio Using the Value-to-Book Valuation Approach

a. Use the CAPM to compute the required rate of return on common equity capital for Coca-Cola.

b. Using the projected financial statements in Exhibits 12.14 through 12.16, derive the projected residual ROCE (return on common shareholders' equity) for Coca-Cola for Years +1 through +5.

c. The projected income statements and balance sheets for Year +6 assume Coca-Cola will grow at a steady-state growth rate of 3.0%. Derive the projected residual ROCE for Year +6 for Coca-Cola.

d. Using the required rate of return on common equity from Requirement a as a discount rate, compute the sum of the present value of residual ROCE for Coca-Cola for Years +1 through +5.

e. Using the required rate of return on common equity from Requirement a as a discount rate and the long-run growth rate from Requirement c, compute the continuing value of Coca-Cola as of the start of Year +6 based on Coca-Cola's continuing residual ROCE in Year +6 and beyond. After computing continuing value as of the start of Year +6, discount it to present value at the start of Year +1.
f. Compute Coca-Cola€™s value-to-book ratio as of the end of 2015 with the following three steps:
(1) Compute the total sum of the present value of all future residual ROCE (from Requirements d and e).
(2) To the total from Requirement f(1), add 1 (representing the book value of equity as of the beginning of the valuation as of the end of 2015).
(3) Adjust the total sum from Requirement f(2) using the midyear discounting adjustment factor.
g. Compute Coca-Cola€™s market-to-book ratio as of the end of 2015. Compare the value-to book ratio to the market-to-book ratio. What investment decision does the comparison suggest? What does the comparison suggest regarding the pricing of Coca-Cola shares in the market: under priced, overpriced, or fairly priced?
h. Use the value-to-book ratio to project the value of a share of common equity in Coca-Cola.
i. If you computed Coca-Cola€™s common equity share value using the free cash flows to common equity valuation approach in Problem 12.16 in Chapter 12 and/or the residual income valuation approach in Problem 13.19 in Chapter 13, compare the value estimate you obtained in those problems with the estimate you obtained in this case. You should obtain the same value estimates under all three approaches. If you have not yet worked those problems, you would benefit from doing so now.
Part II Analyzing Coca-Cola's Share Price Using the Value-Earnings Ratio, Price-Earnings Ratio, and Reverse Engineering
j. Use the forecast data for Year +1 to project Year +1 earnings per share. To do so, divide the projection of Coca-Cola's comprehensive income available for common shareholders in Year +1 by the number of common shares outstanding at the end of 2015. Using this Year +1 earnings-per-share forecast and the share value computed in Requirement h, compute Coca-Cola's value-earnings ratio.
k. Using the Year +1 earnings-per-share forecast from Requirement j and using the share price at the end of 2015, compute Coca-Cola's price-earnings ratio. Compare Coca-Cola's value-earnings ratio with its price-earnings ratio. What investment decision does the comparison suggest? What does the comparison suggest regarding the pricing of Coca Cola shares in the market: under priced, overpriced, or fairly priced? Does this comparison lead to the same conclusions you reached when comparing value-to-book ratios with market-to-book ratios in Requirement g?
l. Reverse engineer Coca-Cola's share price at the end of 2015 to solve for the implied expected rate of return. First, assume that value equals price and that the earnings and 3% long-run growth forecasts through Year +6 and beyond are reliable proxies for the market's expectations for Coca-Cola. Then solve for the implied expected rate of return (the discount rate) the market has impounded in Coca-Cola's share price. (Hint: Begin with the forecast and valuation spreadsheet you developed to value Coca-Cola shares. Vary the discount rate until you solve for the discount rate that makes your value estimate exactly equal the end-of-2015 market price of $42.96 per share.)
m. Reverse engineer Coca-Cola's share price at the end of 2015 to solve for the implied expected long-run growth. First, assume that value equals price and that the earnings forecasts through Year +5 are reliable proxies for the market's expectations for Coca-Cola. Also assume that the discount rate implied by the CAPM (computed in Requirement a) is a reliable proxy for the market's expected rate of return. Then solve for the implied expected long-run growth rate the market has impounded in Coca-Cola's share price.

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Ex hibit 12.14 The Coca-Cola Company Income Statements for 2015 (Actual) and Year +1 through Year +6 Projected) (amounts in millions; allow for round ing) (Problem 12.16) Actual Fomcasts 2015 Year +3 Year +4 Year +1 Year +2 Year +5 Year +6 INCOME STATEMENT $ 45,623 (18,02 1) $ 46,992 (18,562) $ 51,349 (20,283) $ 31,066 (18,999) (1,540) 10,527 Re venues $44,294 $48 A01 (19,118) $49,853 (19692) $52889 (20,891) Cost of goods sold Gross Profit (17482) $26,812 $ 27,602 $ 28,430 (17,387) (1,410) $29283 (17,908) (1,452) $30,161 $31998 (16427) (1657) $ 8,728 (18446) (1496) $10,220 (19,569) (1,587) Selling geneal, and administrative expenses Other operating expenses Operating Pofit (16880) (1369) $ 9,922 $ 9,353 $10842 9,633 613 Interest income 606 623 642 661 681 701 Interest expense (856) (887) (910) (951) (993) (1,034) (1,065) 790 Income from equity affilates Other gains (losses) Income before Tax 489 631 696 731 663 767 631 $ 9,605 $ 9,702 (23 29) $ 7,374 $10309 $10,619 (2,549) $ 8071 $ 10,940 (2,626) $11269 10,009 (2,474) $ 7,835 (2,704) $ 8564 (2239) $ 7,366 (2,402) $ 7,607 Income tax expense Net Income 8,315 Net income attrbutable to noncontrolling (15) (32) (32) (32) (32) (32) (32) interests Net Income attributable to common $ 7,575 $ 7,342 $ 7,803 $ 8,039 $ 8,283 $ 8532 $ 7,351 shareholders Other comprehensive income items Comprhensive Income (4,412) $ 7,342 $ 2,954 $ 7,575 $ 7,803 $ 8,532 8,039 8,283