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Chapter 12
Valuation: Cash-Flow-Based Approaches
12-11
in whole or in part.
Exhibit 12.A
Free-Cash-Flows-Based Valuation of The Coca-Cola Company
(amounts in millions except per share amounts; allow for rounding)
(Problem 12.16)
Continuing
1 2 3 4 5 Value
Free Cash Flows for Common Equity Year +1 Year +2 Year +3 Year +4 Year +5 Year +6
Net Cash Flow from Operations 13,258.7 11,777.9 12,476.5 13,216.8 13,994.8 11,851.6
Decrease (Increase) in Cash Required for Operations –2,608.5 –552.5 –580.2 –609.2 –639.6 –403.0
Present Value Factors 0.930 0.865 0.805 0.749 0.697
Present Value Free Cash Flows 6,578.1 6,722.1 6,630.8 6,542.0 6,451.1
Chapter 12
Valuation: Cash-Flow-Based Approaches
12-12
in whole or in part.
b. Projected free cash flows for common equity shareholders in Years +1 to +6
are as follows (allow for rounding):
Free Cash Flows for Common Equity Year +1 Year +2 Year +3 Year +4 Year +5 Year +6
Net Cash Flow from Operations $13,258.7 $11,777.9 $12,476.5 $13,216.8 $13,994.8 $11,851.6
Decrease (Increase) in Cash
The forecasts assume that Coca-Cola generates large amounts of cash, which
it can use to repurchase shares and pay dividends. In the long run, the
c. The data in Exhibit 12.A show that the sum of the present value of free cash
e. The data in Exhibit 12.A show the following computations:
(3) The per share value estimate for Coca-Cola, after dividing the total
present value by the 4,469 million shares outstanding, equals $42.28.
Chapter 12
Valuation: Cash-Flow-Based Approaches
12-13
in whole or in part.
Part II—Computing Coca-Cola’s Share Value Using Free Cash Flows to All
Debt and Equity Stakeholders
f. Coca-Cola’s capital structure at the end of 2008 consists of the following
amounts and proportions:
Amount Weight
The equation presented in Chapter 12 for computing the weighted-average
cost of capital is as follows:
Using this equation, Coca-Cola’s weighted-average cost of capital at the end
of 2012 is computed as follows:
g., h., i., and j.
statements, assuming 3.0% long-run growth. The remaining rows of the table
include discounting the free cash flows for Years +1 through +5 to present
In computing weighted-average cost of capital in Solution f, we
determined the weight of equity using the market price of Coca-Cola’s stock
at the time. Our share value estimates from Solutions e and j likely differ from
the market price, so the weights we used to compute the weighted average
estimated.
Chapter 12
Valuation: Cash-Flow-Based Approaches
12-14
in whole or in part.
Exhibit 12.B
Free-Cash-Flows-Based Valuation of The Coca-Cola Company
(amounts in millions except per share amounts; allow for rounding)
(Problem 12.16)
Continuing
1 2 3 4 5 Value
Free Cash Flows for All Debt and Equity Year +1 Year +2 Year +3 Year +4 Year +5 Year +6
Net Cash Flow from Operations 13,258.7 11,777.9 12,476.5 13,216.8 13,994.8 11,851.6
Add back: Interest Expense after tax 772.1 814.2 861.5 910.4 961.0 989.8
Present Value Factors 0.938 0.879 0.825 0.774 0.725
Present Value Free Cash Flows 5,878.3 5,828.8 5,835.5 5,841.0 5,840.6
Chapter 12
Valuation: Cash-Flow-Based Approaches
12-15
in whole or in part.
g. Projected amounts of free cash flows for all debt and equity stakeholders in
Years +1 through +6 are as follows:
Free Cash Flows for All Debt and Equity Year +1 Year +2 Year +3 Year +4 Year +5 Year +6
Net Cash Flow from Operations $13,258.7 $11,777.9 $12,476.5 $13,216.8 $13,994.8 $11,851.6
is a cash cow.
h. The data in Exhibit 12.B show that the sum of the present value of free cash
million.
i. The data in Exhibit 12.B show that the present value at the start of Year +1 of
j. The data in Exhibit 12.B show the following computations:
(1) The sum of the present value of free cash flows for all debt and equity
(2) Subtracting the value of debt and noncontrolling interests provides the
present value of free cash flows for all debt and equity stakeholders is
$190,017.8 million.
(4) The per share value estimate for Coca-Cola, after dividing the total
Chapter 12
Valuation: Cash-Flow-Based Approaches
12-16
in whole or in part.
Part III—Sensitivity Analysis and Recommendation
k. The data in Exhibit 12.C show the results of various sensitivity analysis
scenarios, varying discount rates and growth rates.
market price of $35.48.
Scenario 2: If we assume that Coca-Cola’s long-run growth will be 4%, not
l. At the start of Year +1, Coca-Cola’s share price was $35.48. Our baseline
share value estimate is $42.28, implying that Coca-Cola shares are under-
priced by roughly 19%. Sensitivity analysis reveals that slight variations in the
therefore, we would have recommended a buy.
Chapter 12
Valuation: Cash-Flow-Based Approaches
12-17
in whole or in part.
Exhibit 12.C
Free-Cash-Flows-Based Valuation of The Coca-Cola Company
(Problem 12.16)
Free Cash Flows Valuation Sensitivity Analysis:
Long-Run Growth Assumptions
42.28 0% 2% 3% 4% 5% 6% 8% 10%
Discount 5% 45.88 67.59 94.72 176.12
Rates: 6% 38.08 50.67 63.26 88.43 163.94
6.5% 35.09 45.03 54.27 70.89 109.67 303.57
Chapter 12
Valuation: Cash-Flow-Based Approaches
12-18
in whole or in part.
12.17 Free-Cash-Flows-Based Valuation. This is an extensive integrated problem that
connects the topics of Chapter 12 to those of Chapters 10 and 11 using Walmart
The problem also asks students to run a bit of sensitivity analysis and make a
recommendation on Walmart stock based on this analysis. The market equity beta
Part I—Computing Walmart’s Share Value Using Free Cash Flows to
Common Equity Shareholders
b., c., d., e., and f.
long-run growth. The remaining rows of the table include discounting the free
cash flows for Years +1 through +5 to present value, computing continuing
Chapter 12
Valuation: Cash-Flow-Based Approaches
12-19
in whole or in part.
b. Projected free cash flows for common equity shareholders in Years +1 to +5
are as follows (allow for rounding):
Year +1 Year +2 Year +3 Year +4 Year +5
follows:
Year +6
Net Cash Flows from Operations $26,036.6
e. The data in Exhibit 12.D show that the present value at the start of Year +1 of
(1) The sum of the present value of free cash flows for common equity is
(2) After adjusting the sum of the present value using the mid-year
Chapter 12
Valuation: Cash-Flow-Based Approaches
12-20
in whole or in part.
Exhibit 12.D
Free-Cash-Flows-Based Valuation of Walmart Stores
(amounts in millions except per share amounts; allow for rounding)
(Problem 12.17)
Continuing
1 2 3 4 5 Value
Free Cash Flows for Common Equity Year +1 Year +2 Year +3 Year +4 Year +5 Year +6
Net Cash Flows from Operations 28,071.9 29,636.4 30,907.5 32,354.6 33,834.9 26,036.6
Decrease (Increase) in Cash Required for Operations 0.0 0.0 0.0 0.0 0.0 –233.4
Present Value Factors 0.917 0.842 0.772 0.708 0.650
Present Value Free Cash Flows 13,585.6 14,222.9 14,034.8 13,905.3 13,722.8
