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% 10,000 1,902.49 3.75% *Most Recent ssue Total: $ 35,600 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% 10,000 1,902.49 3.75% *Most Recent Issue 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 4/6 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) Visitors trend 2W + 10W + + NYSE. NYSE Delayed Price Currency in USD $49.58-0.23 (-0.43%) AldoseNovember 271.00PM EST Inchis Summary Company Outlook Chart Conversations Statistics Historical Data Profile Financials Analysis Options Previous Close 49.81 211,296B 10 0 IMGM YTD IY S M Fullscreen Open 50.11 Market Cap Beta (SY Monthly) PE Ratio (TTM) 0.59 Bid 49.57 x 2200 25.69 Ask Days Range S2 Week Range 49.59 x 1200 EPS (ITM) 1.93 49.24.50.36 Earnings Date Jan 28, 2021 Feb 01, 2021 Forward 36.27-60.13 Dividend & Yield 1.56 (3.15%) 8,499,289 Ex-Dividend Date Nov 30, 2021 15,055,041 ly Target Est 56.40 Volume 10 AM Trate prices are not sourced from all are Avg. Volume 137 15,055,041 Aug. Volume 1y Target Est 56.40 Trade coured from allt 4/6 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 % 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: 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% 10,000 1,902.49 3.75% *Most Recent ssue Total: $ 35,600 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% 10,000 1,902.49 3.75% *Most Recent Issue 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 4/6 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) Visitors trend 2W + 10W + + NYSE. NYSE Delayed Price Currency in USD $49.58-0.23 (-0.43%) AldoseNovember 271.00PM EST Inchis Summary Company Outlook Chart Conversations Statistics Historical Data Profile Financials Analysis Options Previous Close 49.81 211,296B 10 0 IMGM YTD IY S M Fullscreen Open 50.11 Market Cap Beta (SY Monthly) PE Ratio (TTM) 0.59 Bid 49.57 x 2200 25.69 Ask Days Range S2 Week Range 49.59 x 1200 EPS (ITM) 1.93 49.24.50.36 Earnings Date Jan 28, 2021 Feb 01, 2021 Forward 36.27-60.13 Dividend & Yield 1.56 (3.15%) 8,499,289 Ex-Dividend Date Nov 30, 2021 15,055,041 ly Target Est 56.40 Volume 10 AM Trate prices are not sourced from all are Avg. Volume 137 15,055,041 Aug. Volume 1y Target Est 56.40 Trade coured from allt 4/6 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 % 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