Signature Assignment: Coca-Cola Financial Analysis

Coca-Cola Financial Analysis
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Coca-Cola Company is the oldest company in the carbonated drink industry. The company was founded in the year 1919 and headquartered in Georgia Atlanta, Today, it has turned out to be the leading and largest global manufacturer, distributor and marketer of carbonated drink. The company offers more than 450 brands including Fanta, Dasani, Sprite as well as over 30 manufacturing plant and operates in approximately 200 countries across the world. According to the NYSE and S&P 50 index the company features among the best corporation with highly valuable shares and dividends. Coca-Cola. The company has managed to become competitive in such a highly competitive industry with the aid of its vast-assets brands, unravelled logistic operations as well as strong financial strength. The company has been able to maintain an impressive gross profit margins over the last 5 years between a 66% and 63% , which is better than that of its major competitor PepsiCo, which only managed a correspond gross profit margin that stood between 54% and industry standard of 42.8%. In terms of revenue, the company gunners approximately, 74% from foreign sales annually, It terms of capital structure, the Value Line Report reveals that the company has a debt to equity ratio of 15% only, which is within the recommended industry norm. This percentage includes a liability of $9 billion spend in the acquisition of U.S. bottlers holding.However, the beverage industry is under pressure due to the global pressure on the fluctuations of high fuel prices. Another threat is the increasing consumer and regulatory awareness on health and nutrition considerations which have slightly affected the company’s sales. Thus, the reports to seek to investigate Coca-Cola financially situation capital structure as well as its performance in the capital market, particularly examining the issuance of securities, assess the company’s capital budgeting decisions and the application of Capital Asset Pricing Model (CAPM).
Question 1
According to the Coco-Cola 2013 annual report, the company did not issue any convertible bonds and preferred stocks. Also, the Ychart.com reveals the Coca-Cola did not issue any warranty in the fiscal year 2013. However, according to the company websites stock history, Coco-Cola common stock increase from 11,200,000,000 shares in 2012 to 17, 600 000 0000 shares in 2013 (Coca-Cola, 2013). The stock was issued as two-for-one stock split effective July 27, 2013, the common stocks were issued at a value of $25 per share.
Question 2
As a financial manager, deciding on bond prices will largely depend on three distinct aspects, namely, interest rates, inflation and credit ratings. It is important to check the interest’s rate stratus as an increase interest rates leads to a fall in bond prices and a decline in interest rates causes bond prices to fall (Ehrhardt & Brigham, 2016). This because low interest rates makes the bonds appear attractive to their investors whereas a significant rise in interest rates renders the bonds less attractive to investors. Concerning inflation, high inflation rates causes the bond prices to fall and decreasing inflation causes the bond prices to rise (Coca-Cola, 2017). This is because a high inflation rate tends depletes investors purchasing power, hence making the bond prices less attractive. In other words, the bond value will be low when they mature in an economy with high inflation. (Ehrhardt & Brigham, 2016) Lastly, credit ratings is an external force from credit rating agencies who rate bonds and bond issuers, A higher credit rating implies that a bond issuer has a high liquidity level according to the credit rating agency opinion. Therefore, higher rating leads to high bond prices, and a low credit ratings will lead to corresponding decline in bond price.
All these aspects have to be put into consideration to calculate the issue price of a bond. The first step is to determine the interest rates paid by the bond. For instance, a bond with an interest rate 5% on a face amount of $ 1000, the bond price payment will be $50 within a year. The next step is to determine the present value of the bond. In reference to the above example, the present value factor will be 0.74726, according to the present value of 1 due in n periods if the bond is bound to mature within five years. (Ehrhardt & Brigham, 2016) Therefore, considering the market interest rate of 6%, the bond will have a present value of $747.26. Next, is to calculate the present value of interest payments and finally determine the bond price.
Question 3
Capital budgeting refers to an approach of budgeting that companies uses for assessing and ranking probable costs or valuable investments (Patel, 2015). For Coca-Cola, most of the cost are capital investments that include purchases of delivery vehicles, new machineries as well as expanding their stores. Therefore, a capital budgeting entails the calculations of projects future cash flows, present values in a specified period of time after factoring the time value of money.
Coco-Cola Company will benefit from the application of capital budgeting decisions in a number of ways. First, it will help the company to estimate the investments option with the mots possible return before making the decision. Second, it helps the company make decision regarding the long term strategic investments (Patel, 2015). Third, through capital budgeting, Coca-Cola will able to offer control on expenditure projects. Fourth it will help the company control aspect of under investment and under investment. Lastly, capital budgeting helps decide on feasible investment options based with the aid of comprehensive analysis.
The most typical capital budgeting methods include; Payback Period (PB), Net Present Value (NPV), Profitability Index (PI) and Internal Rate of Return (IRR). However, net present value approach is the best capital budgeting method due to the following reason. First, it can be employed in on projects with an irregular cash flows (McGowan, 2014). Second, it gives a value maximizing decision when evaluating mutually exclusive projects. Lastly, NPV also gives the value-maximizing decision used to choose projects in a situation where there is capital rationing.
Questions 4
Capital Asset Pricing Model (CAPM), refers to a tool that is used to assess the association between the expected return for assets and systemic risk specifically on stocks. This model is extensively used by companies in the calculations of highly volatile securities to obtain expected returns for assets based on the cost of capital and the risks level of those capitals (Lee & Lee, 2016). The CAPM will benefit Coca-Cola a number of ways: First, it will help the company to focus on systematic risk only, to reveal the reality whereby investors with diversified portfolios that have eliminated instances of unsystematic risk. Another benefit is that CAPM will help the company to identify a theoretical association between the required rate of return and systematic risk to make solid investments decision (McGowan, 2014). As a financial manager for Coca-Cola, I will adopt the CAPM because it is clearly effective than the weighted average cost of capital (WACC) as it provides rates for use in investment appr...