I need help with this homework problem. It is ACC 670: 9E Financial Reporting, Financial Statement Analysis, and Valuation A STRATEGIC PERSPECTIVE Problem 13.19
13.19 Residual Income Valuation. The Coca-Cola Company is a global soft drink beverage company (ticker: KO) that is a primary and direct competitor with Starbucks. The data in Chapter 12s Exhibits 12.14, 12.15, and 12.16 (pages 806809) include the actual amounts for 2013, 2014, and 2015 and projected amounts for Year 1 to Year 6 for the income statements, balance sheets, and statements of cash flows, respectively, 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 had 4,324 million shares outstanding at the end of 2015, when Coca-Colas share price was $42.96. REQUIRED Part IComputing Coca-Colas Share Value Using the Residual Income Valuation Approach a. Use the CAPM to compute the required rate of return on common equity capital for Coca-Cola. b. Derive the projected residual income for Coca-Cola for Years 1 through 6 based on the projected financial statements. The financial statement forecasts for Year 6 assume that Coca-Cola will experience a steady-state, long-run growth rate of 3% in Year 6 and beyond. c. 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 income for Coca-Cola for Years 1 through 5. d. Using the required rate of return on common equity from Requirement a as a discount rate and the long-run growth rate from Requirement b, compute the continuing value of Coca-Cola as of the start of Year 6 based on Coca-Colas continuing residual income 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. e. Compute the value of a share of Coca-Cola common stock. (1) Compute the total sum of the present value of all residual income (from Requirements c and d). (2) Add the book value of equity as of the beginning of the valuation (that is, as of the end of 2015, or the start of Year 1). (3) Adjust the total sum of the present value of residual income plus book value of common equity using the midyear discounting adjustment factor. (4) Compute the per-share value estimate.
Part IISensitivity Analysis and Recommendation f. Using the residual income valuation approach, compute the value of Coca-Cola shares under two alternative scenarios. Scenario 1: Assume that Coca-Colas long-run growth will be 2%, not 3% as above, and that Coca-Colas required rate of return on equity is 1% higher than that calculated in Requirement a. Scenario 2: Assume that Coca-Colas long-run growth will be 4%, not 3% as above, and that Coca-Colas required rate of return on equity is 1% lower than that calculated in Requirement a. To quantify the sensitivity of your share value estimate for Coca-Cola to these variations in growth and discount rates, compare (in percentage terms) your value estimates under these two scenarios with your value estimate from Requirement e. g. Using these data at the end of 2015, what reasonable range of share values would you have expected for Coca-Cola common stock? At that time, what was the market price for Coca-Cola shares relative to this range? What would you have recommended? h. If you completed Problem 12.16 in Chapter 12, compare the value estimate you obtained in Requirement e of that problem (using the free cash flows to common equity shareholders valuation approach) with the value estimate you obtained here using the residual income valuation approach. The value estimates should be the same. If you have not completed Problem 12.16, you would benefit from doing so now.
It is due before June 12, 2019 at Midnight MST. Any help I could get in understanding how to do this would be helpful. Thank you!
Exhibit 12.16 The Coca-Cola Com pany Projected Implied Statements of Cash Flows for Year +1 through Year +6 (amounts in million s; allow for rounding) (Problem 12.16) Forecasts Year +1 Year +2 Year +3 Year +4 Year +5 Year +6 S 7374 $ 7835 2,242 (135) (96) (88) 0 $ 8,315 2,681 (143) (102) (93) 0 7,607 2,032 (131) (93) $8,071 2459 (139) (99) (90) 0 63 $8,564 Net Income Add back depreciation expense (net)
Decrease in receivables-net 1,829 (434) (208) (83) 3,900 (797) 631 (148) (105) (96) 0 67 Decrease in inventories Decrease in prepaid expenses Decrease in other current assets (85) Increase in accounts payable-trade Increase in current accrued liabilitiies Increase in income taxes payable Increase in other current liabilities 47 61 65 206 118 212 16 218 225 232 239 16 16 16 15 (1,133) (16) 129 0 0 Net change in deferred tax assets and liabilities Increase in long-tem accrued liabilities Net Cash Flows from Operations Decrease in property, plant, & equip. at cost Decrease in marketable securities 163 145 165 166 164 160 133 137 141 150 $9477 (1,104) (438) (472) (13) $10,885 (2,737) (378) (616) 149 9,903 (2,796) (389) (647) 113 $10,357 (2,880) (401) (679) 60 $10,810 (2,966) (413) (713) 57 $11,278 (3,055) (425) (749) 52 Decrease in investment securities Increase> Decrease in amortizable intangible assets (net) Decrease in goodwill and nonamort intangibles Decrease in other noncurrent assets (698) (230) $(4,511) 105 (719) (741) (763) (252) $ (5.050) 744 1,338 (786) (259) (810) (267) $(3,102) 566 1,017 (237) (244) Net Cash Flows from Investing Activities Increase in short-term debt Increase in long-tem debt Increase in common stock + paid-in capital $(4,675) 722 $ (4,885) 738 1,326 S(5,222) 751 189 1,298 1,350 (53) 556 559 553 547 538 Increase in accumula ted OCI Increase in treas ury stock Dividends Increase in noncontroll ing interests Net Cash Flows from Financing Activities Net Change in Cash 0 0 (1,979 (5,853) (32) $ (5,241) 232 0 0 (886) (5,507) (2096) (6,029) (32) $ (5,522) 3 239 (1,928) (6,288) (26) S(6,122) 3 253 (1,866) (5,682) (2,214) (6,212) (32) $(5,810) 246 (32) $ (6,183) S 191 (32) S(5,002) 3 225 8! Exhibit 12.15 The Coca-Cola Company Balance Sheets for 2015 (Actual) and Year +1 through Year +6 (Projected) (amounts in millions; allow for round ing) (Problem 12.16) Actual Forecasts Year +1 Year +2 Year +3 Year +4 Year +5 Year +6 2015 ASSETS 7,309 12.591 $ 7,500 $ 7,725 Cash and cash equiva lents Marketable securities 7,956 8,195 8441 8,694 15,034 12969 13,358 13,759 14,171 14,596 Accounts and notes receivable-net 3,941 4,780 3,399 4375 4,506 4,641 4,924 5,072 3,606 Inventories 2,902 3,110 3,204 3300 3,501 Prepaid expenses a nd other current assets 2,752 2835 2,920 3,007 3,097 3,190 3,286 Assets held for sale 3,900 0 0 S 34,652 $ 35,692 16,193 Current Assets $33,395 $30,788 $31,712 32,663 $33,643 13,581 14,260 Investments in noncontroll ed affiliates 12,318 12934 14,973 15,721 Property, plant, and equipment-at cost Accumulated depreciation Amortizable intangible assets (net) 36,789 22,354 25,091 27,887 30,767 33,734 37,893 (13,644) (15,887 (18,345) (9,783) (11612) (21,026) (21,657) 854 705 592 532 423 436 475 Goodwill 11628 11,289 11,977 12336 12,706 13,087 13480 Other nonamortizable intangible assets Other assets 11,989 12349 12,719 13,101 13,494 13,899 14,315 7,677 7,907 8,145 8389 8,641 8,900 9,167 $90,093 $89,790 $92,968 $102445 $105,518 Total Assets $96,161 $99,320 LIABILITIES $ 1,998 Accounts payable Current accrued expenses Notes payable and short-tem debt Current maturities of long-te m debt Income taxes paya ble Liabilities held for sale 2,795 2169 S 2,044 2106 2,234 2,301 6,865 7,071 13,216 7,283 13,816 7,502 14/429 7,727 7,958 8,197 13,129 15,671 15,047 16,141 3,291 2677 2,695 2,817 2942 3,068 3,195 331 449 481 497 512 528 465 0 0 C 1,133 0 0 $ 30,458 S 29,571 Current Liabilities $26,930 $25,429 $26425 $ 27,459 $28.507 Long-term debt obligations Long-term accrued lkabilities 28407 28,596 29,894 31,219 32,557 33,907 34,924 4,301 4430 4,563 4,700 4,841 4,986 5,136 5,171 $71,076 Deferred tax liabilities-noncurrent 5494 4,691 4675 4,841 5,007 5,334 68,385 S 73,798 Total Liabilities $64,329 $63,130 $65,723 76,012 SHAREHOLDERS' EQUITY Common stock+ Additional paid-in capital Retained earnings Accum. other compre hens ive income (loss) Treasury stock Total Common Shareho ld ers' Equity Noncontrolling intere sts Total Equity Total Liabilities and Equities 17,939 18477 15,776 15,723 16,279 16,839 17,392 65,018 66,854 68,747 70698 72,708 (10,174) 74,779 77,022 (10,174) (10,174) (45,066) (10,174) (45,952) (10,174) (54,107) (10,174) (47,818) (10,174) (49,797 $ 27,566 (51,892) (56,035) S 28437 $ 29,290 $25,554 $26,451 $27,035 $28,033 210 210 210 210 210 210 216 $ 29,506 $ 27,776 $ 28,647 $25,764 $26,661 $27,245 $28,243 $90,093 $89,790 $92,968 $96,161 $99,320 $102445 $105,518 Source for Actuals The Coca-Cola Company, Fom 10-K for the Fiscal Year Ended December 31, 2015. Exhibit 12.14 The Coca-Cola Company Income Statements for 2015 (Actual) and Year +1 through Year +6 (Projected) (amounts in millions; al low for round ing) (Problem 12.16) Actual Forecasts Year +1 Year +2 Year +5 2015 Year +3 Year +4 Year +6 INCOME STATEMENT Revenues $44,294 (17482) $45,623 $46,992 $48,401 $49,853 $51,349 $52,889 Cost of goods sold (18,021) (18,562) (19,118) (19,692) (20,283) (20,891) $26,812 $29,283 Gross Profit $27,602 $28,430 $30,161 $31,066 $31,998 (17,387) (18,446) Selling, general, and administrative expenses Other operating expenses Operating Profit (16427) (16,880) (17,908) (18,999) (19,569) (1,540) $10,527 (1,657) (1,369) (1410) (1452) S9,922 (1496) (1,587) $10,842 $ 8,728 $ 9,633 $10,220 9,353 Interest income 613 606 623 642 661 681 701 Interest expense (856) (910) (951) (993) (1,034) (1,065) (887) Income from equity affiliates Other gains (losses) 489 631 663 696 731 767 790 631 0 0 0 $9,702 $10,009 $10,309 Income before Tax $9,605 $10,619 $10,940 $11,269 Income tax expense (2,239) (2,329) (2402) (2474) (2,549) (2.626) (2,704) $ 7,607 $ 8,315 $ 7,366 $ 7374 $ 7835 $ 8,071 $8,564 Net Income Net in come attributa ble to nancantrolling (15) (32) (32) (32) (32) (32) (32) interests Net Income attrib utab le to common sharehokders $ 7,351 $ 8.532 $7,342 $7,803 8,039 7,575 8,283 Other comprehensive income items (4412) 0 0 0 $ 7,575 $ 8,283 $ 8,532 Comprehensive Income 2,954 $7,342 7,803 $8,039 e for Actuals The Coca-Cola Company, Fom 10-K for the Fiscal Year Ended December 31, 2015. Exhibit 12.16 The Coca-Cola Com pany Projected Implied Statements of Cash Flows for Year +1 through Year +6 (amounts in million s; allow for rounding) (Problem 12.16) Forecasts Year +1 Year +2 Year +3 Year +4 Year +5 Year +6 S 7374 $ 7835 2,242 (135) (96) (88) 0 $ 8,315 2,681 (143) (102) (93) 0 7,607 2,032 (131) (93) $8,071 2459 (139) (99) (90) 0 63 $8,564 Net Income Add back depreciation expense (net) Decrease in receivables-net 1,829 (434) (208) (83) 3,900 (797) 631 (148) (105) (96) 0 67 Decrease in inventories Decrease in prepaid expenses Decrease in other current assets (85) Increase in accounts payable-trade Increase in current accrued liabilitiies Increase in income taxes payable Increase in other current liabilities 47 61 65 206 118 212 16 218 225 232 239 16 16 16 15 (1,133) (16) 129 0 0 Net change in deferred tax assets and liabilities Increase in long-tem accrued liabilities Net Cash Flows from Operations Decrease in property, plant, & equip. at cost Decrease in marketable securities 163 145 165 166 164 160 133 137 141 150 $9477 (1,104) (438) (472) (13) $10,885 (2,737) (378) (616) 149 9,903 (2,796) (389) (647) 113 $10,357 (2,880) (401) (679) 60 $10,810 (2,966) (413) (713) 57 $11,278 (3,055) (425) (749) 52 Decrease in investment securities Increase> Decrease in amortizable intangible assets (net) Decrease in goodwill and nonamort intangibles Decrease in other noncurrent assets (698) (230) $(4,511) 105 (719) (741) (763) (252) $ (5.050) 744 1,338 (786) (259) (810) (267) $(3,102) 566 1,017 (237) (244) Net Cash Flows from Investing Activities Increase in short-term debt Increase in long-tem debt Increase in common stock + paid-in capital $(4,675) 722 $ (4,885) 738 1,326 S(5,222) 751 189 1,298 1,350 (53) 556 559 553 547 538 Increase in accumula ted OCI Increase in treas ury stock Dividends Increase in noncontroll ing interests Net Cash Flows from Financing Activities Net Change in Cash 0 0 (1,979 (5,853) (32) $ (5,241) 232 0 0 (886) (5,507) (2096) (6,029) (32) $ (5,522) 3 239 (1,928) (6,288) (26) S(6,122) 3 253 (1,866) (5,682) (2,214) (6,212) (32) $(5,810) 246 (32) $ (6,183) S 191 (32) S(5,002) 3 225 8! Exhibit 12.15 The Coca-Cola Company Balance Sheets for 2015 (Actual) and Year +1 through Year +6 (Projected) (amounts in millions; allow for round ing) (Problem 12.16) Actual Forecasts Year +1 Year +2 Year +3 Year +4 Year +5 Year +6 2015 ASSETS 7,309 12.591 $ 7,500 $ 7,725 Cash and cash equiva lents Marketable securities 7,956 8,195 8441 8,694 15,034 12969 13,358 13,759 14,171 14,596 Accounts and notes receivable-net 3,941 4,780 3,399 4375 4,506 4,641 4,924 5,072 3,606 Inventories 2,902 3,110 3,204 3300 3,501 Prepaid expenses a nd other current assets 2,752 2835 2,920 3,007 3,097 3,190 3,286 Assets held for sale 3,900 0 0 S 34,652 $ 35,692 16,193 Current Assets $33,395 $30,788 $31,712 32,663 $33,643 13,581 14,260 Investments in noncontroll ed affiliates 12,318 12934 14,973 15,721 Property, plant, and equipment-at cost Accumulated depreciation Amortizable intangible assets (net) 36,789 22,354 25,091 27,887 30,767 33,734 37,893 (13,644) (15,887 (18,345) (9,783) (11612) (21,026) (21,657) 854 705 592 532 423 436 475 Goodwill 11628 11,289 11,977 12336 12,706 13,087 13480 Other nonamortizable intangible assets Other assets 11,989 12349 12,719 13,101 13,494 13,899 14,315 7,677 7,907 8,145 8389 8,641 8,900 9,167 $90,093 $89,790 $92,968 $102445 $105,518 Total Assets $96,161 $99,320 LIABILITIES $ 1,998 Accounts payable Current accrued expenses Notes payable and short-tem debt Current maturities of long-te m debt Income taxes paya ble Liabilities held for sale 2,795 2169 S 2,044 2106 2,234 2,301 6,865 7,071 13,216 7,283 13,816 7,502 14/429 7,727 7,958 8,197 13,129 15,671 15,047 16,141 3,291 2677 2,695 2,817 2942 3,068 3,195 331 449 481 497 512 528 465 0 0 C 1,133 0 0 $ 30,458 S 29,571 Current Liabilities $26,930 $25,429 $26425 $ 27,459 $28.507 Long-term debt obligations Long-term accrued lkabilities 28407 28,596 29,894 31,219 32,557 33,907 34,924 4,301 4430 4,563 4,700 4,841 4,986 5,136 5,171 $71,076 Deferred tax liabilities-noncurrent 5494 4,691 4675 4,841 5,007 5,334 68,385 S 73,798 Total Liabilities $64,329 $63,130 $65,723 76,012 SHAREHOLDERS' EQUITY Common stock+ Additional paid-in capital Retained earnings Accum. other compre hens ive income (loss) Treasury stock Total Common Shareho ld ers' Equity Noncontrolling intere sts Total Equity Total Liabilities and Equities 17,939 18477 15,776 15,723 16,279 16,839 17,392 65,018 66,854 68,747 70698 72,708 (10,174) 74,779 77,022 (10,174) (10,174) (45,066) (10,174) (45,952) (10,174) (54,107) (10,174) (47,818) (10,174) (49,797 $ 27,566 (51,892) (56,035) S 28437 $ 29,290 $25,554 $26,451 $27,035 $28,033 210 210 210 210 210 210 216 $ 29,506 $ 27,776 $ 28,647 $25,764 $26,661 $27,245 $28,243 $90,093 $89,790 $92,968 $96,161 $99,320 $102445 $105,518 Source for Actuals The Coca-Cola Company, Fom 10-K for the Fiscal Year Ended December 31, 2015. Exhibit 12.14 The Coca-Cola Company Income Statements for 2015 (Actual) and Year +1 through Year +6 (Projected) (amounts in millions; al low for round ing) (Problem 12.16) Actual Forecasts Year +1 Year +2 Year +5 2015 Year +3 Year +4 Year +6 INCOME STATEMENT Revenues $44,294 (17482) $45,623 $46,992 $48,401 $49,853 $51,349 $52,889 Cost of goods sold (18,021) (18,562) (19,118) (19,692) (20,283) (20,891) $26,812 $29,283 Gross Profit $27,602 $28,430 $30,161 $31,066 $31,998 (17,387) (18,446) Selling, general, and administrative expenses Other operating expenses Operating Profit (16427) (16,880) (17,908) (18,999) (19,569) (1,540) $10,527 (1,657) (1,369) (1410) (1452) S9,922 (1496) (1,587) $10,842 $ 8,728 $ 9,633 $10,220 9,353 Interest income 613 606 623 642 661 681 701 Interest expense (856) (910) (951) (993) (1,034) (1,065) (887) Income from equity affiliates Other gains (losses) 489 631 663 696 731 767 790 631 0 0 0 $9,702 $10,009 $10,309 Income before Tax $9,605 $10,619 $10,940 $11,269 Income tax expense (2,239) (2,329) (2402) (2474) (2,549) (2.626) (2,704) $ 7,607 $ 8,315 $ 7,366 $ 7374 $ 7835 $ 8,071 $8,564 Net Income Net in come attributa ble to nancantrolling (15) (32) (32) (32) (32) (32) (32) interests Net Income attrib utab le to common sharehokders $ 7,351 $ 8.532 $7,342 $7,803 8,039 7,575 8,283 Other comprehensive income items (4412) 0 0 0 $ 7,575 $ 8,283 $ 8,532 Comprehensive Income 2,954 $7,342 7,803 $8,039 e for Actuals The Coca-Cola Company, Fom 10-K for the Fiscal Year Ended December 31, 2015
