Case Study Of WACC Of The Coca-Cola Company

2. Beta for mercury is calculated by comparison with the companies having similar debt/equity ratio (25%). This beta is used in the calculation of cost of equity afterwards. The equity beta comes out to be 1.12.

The cost of equity is the theoretical return that equity investors expect or receive from the company for investing their funds in the company. The risk free rate that is the Government Treasury bill rate is 3.1%, the market risk premium is 7% and the beta has been calculated as

We use Capital Asset Pricing Model (CAPM) approach to calculate the cost of equity. The formula of CAPM is re = rf + β × (E[RMkt] – rf).

The nominal risk-free rate, which includes an inflation premium equal to the average expected inflation rate over the life of the security. The T-bill rate to measure the short-term risk-free rate The T-bonds rate to measure the long-term risk-free rate. In this case,we should choose T-bonds rate. Because the T-bill is safe because it is issued by the governments, and it has a short period to maturity. That is good investment returns are usually stated as annual returns, and the T-bill rate is a one-year risk free rate.

Given these approximations, the CAPM model would total the risk-free rate and the market risk premium times beta to arrive at a cost of equity of 9.68%, which reflects the investors’ expected return from investing in shares of the company.

The mixture of debt-equity mix is important so as to maximize the stock price of the Costco. However, it will be significant to consider the Weighted Average Cost of Capital (WACC) as well so that it can evaluate the company targeted capital structure. Cost of capital (OC) may be used by the companies as for long term decision making, so industries that faced to take the important of Cost of capital seriously may not make the right choice by choosing the right project(Gitman’s, ).

Cost of Equity = Risk free rate + (Market return – risk free rate) X beta

To find the cost of equity we used the formula rs = rRF + beta*MRP in which rRF2002 = 5.86% and the Market Risk Premium (MRP) = 5% as calculated by the Southwest Airlines finance department. We then calculated the beta for Southwest Airlines based on a regression analysis of five-year monthly returns on Southwest stock from January 1997 to January 2002, compared with the S&P 500 returns over the same period. This regression analysis indicated that Beta = .2219. Therefore,

Risk free rate + Equity Beta * (Expected return on market - Risk free rate)

So, the 20 year corporate bond interest rate associated with the company’s rating is 3.86.

So, the cost of capital of any investment opportunity equals the expected return of available investments with the same beta. This estimate is

Please refer to Appendix 2 for other considerations for cost of equity calculations. Most firms use the Capital Asset Pricing Model (CAPM) to determine the cost of equity. The components that make up the CAPM include: the risk free rate, the beta of the security, and the expected market return of the stock. These values are all based on forward-looking data. The model dictates that shareholders require a return equal to the return from a risk-free investment plus an equity risk premium for bearing extra risk. Refer to Appendix 1 for a full breakdown of the CAPM formula.

The market value of debt was calculated using the existing yield of maturity on a 5 yar bond issued on a private placement basis on July 1, 2000. With the coupon of 5.75% and the discount price of 97, YTM for this bond is 6.62%. With a discount price being 97, the market value of debt is 17,654M.

Kd (Wd), Ke (We) and Kp (Wp) are the costs (weights) associated, respectively, with the firm’s interest bearing debt,

The Coca Cola Company is a multinational company with more than 140,000 employees, the company is in beverage business and its flagship product Coca Cola is considered one of the best soft drink. Coca Cola soft drink is the real revenue generator of the Coca Cola Company. The company was found in 1892 and by 2010 it was reported that the company has the serving of 1.7 billion per day so the company has only grown since its inception. The company is serving its product in more than 200 countries, and the Coca Cola Company owns more than 500 brands, this shows that the graphs of the company is moving upwards and the Coca Cola Company is growing at an immense rate.