PLEASE ANSWER QUESTIONS #5-8

Case Study #3 FA20 Page 2 of 6 Scenario The Coca-Cola Company (ticker: KO), along with its North American anchor bottler Coca-Cola Refreshments, is considering launching a new product. This new product, Coca-Cola YOU!, will allow customers to customize the flavor of their soda at the point of sale. This project requires an initial investment at t=0 of $350 million. KO expects that cash flows in the first year of the project will be $20 million, growing to $30 million in year 2, and growing by 3% per year from year 3 onward. KO pays a corporate tax rate of 35%. The Coca-Cola YOU! platform will also allow the company to collect valuable data on consumer tastes and preferences that will be used in the development of future product offerings. Though this information is likely to prove valuable to the company in the future, it is not to be factored into the capital budgeting decision surrounding whether or not to launch the YOU! product. Assume that the market risk of this project is the same as that for Coca-Cola's overall business. You have been asked by your division manager to determine the NPV of this project. Unfortunately, before your manager left for lunch, you forgot to ask what the appropriate weighted average cost of capital is to use in your analysis. Your manager wants this analysis completed ASAP and you decide you cannot wait. Over the next few questions, you will make use of the provided information to work your way through the necessary calculations to complete your analysis. Provided Information: Coca-Cola's Debt You are aware that Coca-Cola recently issued a series of new 10-year notes. These notes will mature in 2030 and pay a semiannual coupon rate of 3.75%. This debt issuance was finalized last week and the bonds were issued at par. You know that the company has a number of other bond issuances outstanding. You jump over to your department's Bloomberg terminal to pull up some information on the rest of KO's outstanding debt and pull up the following: The Coca-Cola Company (KO) Outstanding Long-Term Debt (All data for period ending June 30, 2020) Notes Issuance 4.25% Notes due in 2028 4.50% Notes due in 2029 3.75% Notes due in 2030 3.25% Bonds due in 2035 7.375% Bonds due in 2093 Face Value Current Price Current Yield- Outstanding per $1,000 to-Maturity (in millions) Face Value (YTM) $ 5,500 $ 1,034.57 3.75% 7,700 1,056.84 3.75% 6,400 1,000.00 3.75% 6,000 943.03 3.75% 1,902.49 3.75% *Most Recent Issue 10,000 Total: $ 35,600 Use the information provided thus far to calculate KO's effective cost of debt. Question 1) KO's effective cost of debt is % Chapter 13 COKE Case Study Document 4 16 Coca-Cola's Equity Coca-Cola has class A preferred stock priced at $29.45 that pays an annual dividend of $1.25. Question 2) KO's cost of preferred equity is % You're also going to need some information on KO's common equity. Rather than trudge back over to the Bloomberg terminal, you decide to just pull up a quick quote from Yahoo! Finance: The Coca-Cola Company (KO) NYSE - NYSE Delayed Price. Currency in USD In watchlist 99 Visitors trend 2W + 10W + 9MT $49.58-0.23 (-0.43%) At close: November 27 1:00PM EST Summary Company Outlook Chart Conversations Statistics Historical Data Profile Financials Analysis Options Previous Close 49.81 Market Cap 211.296B 1D 5D 1M 6M YTD 1Y SY Max Full screen Open 50.11 0.59 Beta (5Y Monthly) PE Ratio (TTM) Bid 49.57 x 2200 25.69 Ask 49.59 x 1200 EPS (TTM) 1.93 Day's Range 49.24 - 50.36 Jan 28, 2021 Feb 01, 2021 Earnings Date Forward Dividend & Yield 52 Week Range 36.27-60.13 1.56 (3.15%) Volume 8,499.289 Ex-Dividend Date Nov 30, 2021 12 PM Trade prices are not sourced from all markets Avg. Volume 15,055,041 1y Target Est 56.40 The current yield on 10-year Treasury notes is 2.92%. You estimate the market risk premium to be 5.5%. Using this information, along with the beta of KO's common equity provided by Yahoo! in the above quote, calculate KO's cost of common equity using the capital asset pricing model (CAPM). Question 3) KO's cost of equity using CAPM is % + KO stock is priced at $49.58, you anticipate next year's dividend to be $1.56, and long-run earnings are expected to grow at 4%. Calculate the firm's cost of common equity capital using the constant dividend growth model (CDGM). Question 4) KO's cost of equity using CDGM is % Chapter 13 COKE Case Study Document 5 / 6 Case Study #3 FA20 Page 5 of 6 Capital Weightings and WACC Calculation The market values of KO's common stock, preferred stock, and debt are $211,296 million, $101 million, and $44,910 million. Question 5) KO's common equity weighting is % KO's preferred equity weighting is % KO's debt weighting is % Calculate Coca-Cola's weighted average cost of capital (WACC) using the information you have collected thus far. Use of the cost of common equity capital determined using the constant dividend growth model (CDGM) approach in your calculation of WACC. Question 6) KO'S WACC is % Final NPV Calculation + Calculate the NPV of the Coca-Cola YOU! project using the provided cash flows and the WACC you just calculated. Question 7) Project NPV: $ Chapter 13 COKE Case Study Document 6 / 6 Case Study #3 - FA20 Page 6 of 6 Cost of Issuing New Securities Coca-Cola plans on financing the entire investment via the issuance of new equity and debt. These new securities issues will be structured so as not to alter the current capital structure of the firm (the relative weightings of common equity, preferred equity, and debt will remain unchanged). Coca-Cola will need to have $350 million left over after paying the underwriting fees related to the issuance of these new securities. Underwriting fees are determined based upon the size of the issuance. If Coca-Cola will have to pay a fee of 4% of the total amount of financing raised to the investment bank handling the issuance, what is the updated NPV of the project? Question 8) 4- The NPV of the project, updated to reflect the underwriting fees, is: + $ - Please make sure that you submit a response for each question within the MyFinance Lab Case Study #3 FA20 Page 2 of 6 Scenario The Coca-Cola Company (ticker: KO), along with its North American anchor bottler Coca-Cola Refreshments, is considering launching a new product. This new product, Coca-Cola YOU!, will allow customers to customize the flavor of their soda at the point of sale. This project requires an initial investment at t=0 of $350 million. KO expects that cash flows in the first year of the project will be $20 million, growing to $30 million in year 2, and growing by 3% per year from year 3 onward. KO pays a corporate tax rate of 35%. The Coca-Cola YOU! platform will also allow the company to collect valuable data on consumer tastes and preferences that will be used in the development of future product offerings. Though this information is likely to prove valuable to the company in the future, it is not to be factored into the capital budgeting decision surrounding whether or not to launch the YOU! product. Assume that the market risk of this project is the same as that for Coca-Cola's overall business. You have been asked by your division manager to determine the NPV of this project. Unfortunately, before your manager left for lunch, you forgot to ask what the appropriate weighted average cost of capital is to use in your analysis. Your manager wants this analysis completed ASAP and you decide you cannot wait. Over the next few questions, you will make use of the provided information to work your way through the necessary calculations to complete your analysis. Provided Information: Coca-Cola's Debt You are aware that Coca-Cola recently issued a series of new 10-year notes. These notes will mature in 2030 and pay a semiannual coupon rate of 3.75%. This debt issuance was finalized last week and the bonds were issued at par. You know that the company has a number of other bond issuances outstanding. You jump over to your department's Bloomberg terminal to pull up some information on the rest of KO's outstanding debt and pull up the following: The Coca-Cola Company (KO) Outstanding Long-Term Debt (All data for period ending June 30, 2020) Notes Issuance 4.25% Notes due in 2028 4.50% Notes due in 2029 3.75% Notes due in 2030 3.25% Bonds due in 2035 7.375% Bonds due in 2093 Face Value Current Price Current Yield- Outstanding per $1,000 to-Maturity (in millions) Face Value (YTM) $ 5,500 $ 1,034.57 3.75% 7,700 1,056.84 3.75% 6,400 1,000.00 3.75% 6,000 943.03 3.75% 1,902.49 3.75% *Most Recent Issue 10,000 Total: $ 35,600 Use the information provided thus far to calculate KO's effective cost of debt. Question 1) KO's effective cost of debt is % Chapter 13 COKE Case Study Document 4 16 Coca-Cola's Equity Coca-Cola has class A preferred stock priced at $29.45 that pays an annual dividend of $1.25. Question 2) KO's cost of preferred equity is % You're also going to need some information on KO's common equity. Rather than trudge back over to the Bloomberg terminal, you decide to just pull up a quick quote from Yahoo! Finance: The Coca-Cola Company (KO) NYSE - NYSE Delayed Price. Currency in USD In watchlist 99 Visitors trend 2W + 10W + 9MT $49.58-0.23 (-0.43%) At close: November 27 1:00PM EST Summary Company Outlook Chart Conversations Statistics Historical Data Profile Financials Analysis Options Previous Close 49.81 Market Cap 211.296B 1D 5D 1M 6M YTD 1Y SY Max Full screen Open 50.11 0.59 Beta (5Y Monthly) PE Ratio (TTM) Bid 49.57 x 2200 25.69 Ask 49.59 x 1200 EPS (TTM) 1.93 Day's Range 49.24 - 50.36 Jan 28, 2021 Feb 01, 2021 Earnings Date Forward Dividend & Yield 52 Week Range 36.27-60.13 1.56 (3.15%) Volume 8,499.289 Ex-Dividend Date Nov 30, 2021 12 PM Trade prices are not sourced from all markets Avg. Volume 15,055,041 1y Target Est 56.40 The current yield on 10-year Treasury notes is 2.92%. You estimate the market risk premium to be 5.5%. Using this information, along with the beta of KO's common equity provided by Yahoo! in the above quote, calculate KO's cost of common equity using the capital asset pricing model (CAPM). Question 3) KO's cost of equity using CAPM is % + KO stock is priced at $49.58, you anticipate next year's dividend to be $1.56, and long-run earnings are expected to grow at 4%. Calculate the firm's cost of common equity capital using the constant dividend growth model (CDGM). Question 4) KO's cost of equity using CDGM is % Chapter 13 COKE Case Study Document 5 / 6 Case Study #3 FA20 Page 5 of 6 Capital Weightings and WACC Calculation The market values of KO's common stock, preferred stock, and debt are $211,296 million, $101 million, and $44,910 million. Question 5) KO's common equity weighting is % KO's preferred equity weighting is % KO's debt weighting is % Calculate Coca-Cola's weighted average cost of capital (WACC) using the information you have collected thus far. Use of the cost of common equity capital determined using the constant dividend growth model (CDGM) approach in your calculation of WACC. Question 6) KO'S WACC is % Final NPV Calculation + Calculate the NPV of the Coca-Cola YOU! project using the provided cash flows and the WACC you just calculated. Question 7) Project NPV: $ Chapter 13 COKE Case Study Document 6 / 6 Case Study #3 - FA20 Page 6 of 6 Cost of Issuing New Securities Coca-Cola plans on financing the entire investment via the issuance of new equity and debt. These new securities issues will be structured so as not to alter the current capital structure of the firm (the relative weightings of common equity, preferred equity, and debt will remain unchanged). Coca-Cola will need to have $350 million left over after paying the underwriting fees related to the issuance of these new securities. Underwriting fees are determined based upon the size of the issuance. If Coca-Cola will have to pay a fee of 4% of the total amount of financing raised to the investment bank handling the issuance, what is the updated NPV of the project? Question 8) 4- The NPV of the project, updated to reflect the underwriting fees, is: + $ - Please make sure that you submit a response for each question within the MyFinance Lab