Lesson 8 Excel Project – Capital Budgeting – The Coca-Cola Company (KO)

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Capital Budgeting – The Coca-Cola Company (KO)
The Coca-Cola Company (KO) is considering selling a new fruit drink. KO has spent $520,000 to develop and test market the new product,
 and the new fruit drink will initially be introduced to a limited regional market in order to better gauge demand before taking it national.
This introduction stage will last four years. During this introductory stage, the fruit drink will have a selling price of $2.19 per unit.
The current plant facility in this region has excess capacity in a fully depreciated building to process the fruit drink product line.
The new equipment costs $2,615,000 and is depreciated to zero under the 3-year MACRS depreciation schedule. Projected sales
are 3,670,000 units in the first year, with a 6.75% growth rate for each subsequent year. Variable costs are 67% of total revenues,
and fixed costs are $1,425,000 per year. Currently, similar projects in the portfolio of KO require $0.19 in net working capital
(NWC) to support each dollar of sales in each year. In other words, as revenues change, NWC will adjust to support this
change. The NWC needed for each sales year must be in place at the beginning of that year (i.e., by the end of the previous year).
All changes to NWC will be liquidated and recovered by project-end, and the new equipment is forecasted to have a salvage
value of $415,000 at this time. The corporate tax rate for KO is 21%.
Step 1: Calculate KO’s Weighted Average Cost of Capital (WACC) using the “WACC” tab.     
Navigate to Yahoo! Finance to begin gathering data.
a. Start by entering the ticker ‘KO’ on the home page on Yahoo!Finance in the Quote Lookup window. 
b. Enter the current stock price from Yahoo!Finance. For consistency, I have entered the current stock price on KO as the closing price on Friday, October 18, 2024  
c. Look up the estimated growth rate, expected dividend, beta, and shares outstanding on Yahoo!Finance using the following steps:
1. Enter the ticker symbol for KO under quote lookup in order to go to the KO summary page.
2. Click on the Analysis tab.
3. You will find the ‘Next 5 Years (per annum)’ growth rate at the bottom of the page under the Growth Estimates section.
4. Beta and shares outstanding are on the Statistics tab under Stock Price History and Share Statistics, respectively.
5.  Next period’s expected dividend is under Dividends & Splits on the Statistics tab and is labeled as the ‘Forward Annual Dividend Rate’.
d. The Five-year Treasury Yield will be used as the proxy for the risk-free rate (because the project is expected to last four years) and can be found using the following steps:
1. Navigate to the US Treasury Department website
2. Click on the ‘Daily Treasury Par Yield Curve Rates’ from the DATA dropdown menu and record the 5-yr rate for October 18, 2024.
***This data is already in percentage terms***
g. To determine the market risk premium, we can rely on an annual report written by Pablo Fernandez from the IESE Business School in Spain.
   Dr. Fernandez is a well-known finance researcher who conducts a global survey each year that simply asks companies, analysts, regulators,
   and professors/academic researchers what market-risk premium and risk-free rate they are using. He compiles and reports the data in his annual report.
   The 2024 report contains average market-risk premium and risk-free rate information for 96 countries.
   The average market-risk premium for the U.S. can be found in Table 2 of this report, which can be downloaded for free at the following link:
Survey: Market Risk Premium and Risk-Free Rate used for 96 countries in 2024 by Pablo Fernandez, Diego Garcia de la Garza, Lucía Fernández Acín :: SSRN
f. Look up KO’s outstanding bond issues in order to calculate the firm’s weighted-average cost of debt.
1. Navigate to the Financial Industry Regulatory Authority (FINRA) Bond Center page to begin gathering the bond data.
2. Click on the View Data tab in the center of the page and enter ‘Coca Cola Co’ in the Issuer Name search window. Click Show Results.
***You will need to expand the ‘Quick Filters’ search section in order to enter the Issuer Name.
3. Collapse the ‘Quick Filters’ search section to view the list of outstanding bonds of Coca Cola Co.
***We are only interested in the debt issues for COCA COLA CO that have not yet matured or been called***
4. These issues represent the list of KO’s outstanding bond issues that correspond to those listed in the “6.WACC” tab.
***Click on the link for each bond for more information***
5. Fill in the input variable cells and create formulas in the calculation cells in order to calculate the firm’s weighted average cost of debt.
g. Calculate the weighted-average cost of capital (WACC) in the calculation cells at the bottom of the “WACC” tab.
h. Answer the following questions by linking these answer cells to the appropriate calculation cell on the “WACC” tab:
1. What is the weighted-average pre-tax cost of debt? 
2. What is the cost of equity using the CAPM approach? 
3. What is the cost of equity using the DDM approach? 
4. What is the average cost of equity? 
5. What is KO’s weighted-average cost of capital (WACC)? 
Step 2: Create a pro-forma income statement for each year of the project, calculate the base case NPV &     
             IRR, and conduct sensitivity analyses using the “Pro-Forma” tab       
a. Use the input variables to create pro-forma income statements for each year of the project in order to calculate the PV of each year’s free cash flow in row 33.
    (For row 33, you can either use the EXCEL formula PV() or use the algebraic formula for PV of a lump sum.)
b. Calculate the NPV and the IRR of the fruit drink project and link these answer cells to the appropriate calculation cell on the “Pro-Forma” tab:
1. What is the Base Case NPV of the fruit drink project? 
2. What is the Base Case IRR of the fruit drink project? 
c. Conduct a senstivity analysis of the project’s base case NPV on the projected sales price and sales volume.
    You will construct a Sensitivity Analysis Table (SAT) that presents an analysis of what is projected to happen to the base case NPV if price and sales volume turn out to be +/- 20%.
    To construct the SAT requires that you use the “What-If Analysis” tool that is located under “Data Tools” on the “Data” tab.
    You will use the “Data Table” option under “What-If Analysis”. Part of the assignment is learning how to use this tool for sensitivity analysis.
    Therefore, if you have not used this previously, you will need to research its use.
   *** On the Pro-Forma tab, I have provided the template and many notes, hints, and cell commments to help guide you.***
(The Sensitivity Analyses begins at row 39)
d. Calculate percentage and dollar sensitivities of NPV on both projected sales price and projected sales volume and link these answer cells to the appropriate calculation cell on the “Pro-Forma” tab:
1. What is the Dollar (Cent) sensitivity of NPV to a change in Price? 
2. What is the Percentage sensitivity of NPV to a change in Price? 
3. What is the Dollar sensitivity of NPV to a change in Sales Volume? 
4. What is the Percentage sensitivity of NPV to a change in Sales Volume? 
e. Conduct a sensitivity analysis of the project’s base case NPV on the projected fixed and variable costs.
    You will construct a Sensitivity Analysis Table (SAT) that presents an analysis of what is projected to happen to the base case NPV if costs turn out to be +/- 12% for fixed costs
    and +/- 12 percentage points for variable costs.
f. Calculate percentage and dollar sensitivities of NPV on both projected fixed and variable costs and link these answer cells to the appropriate calculation cell on the “Pro-Forma” tab:
1. What is the Dollar sensitivity of NPV to a change in Fixed Costs? 
2. What is the Percentage sensitivity of NPV to a change in Fixed Costs? 
3. What is the Dollar sensitivity of NPV to a change in Variable Costs? 
4. What is the Percentage sensitivity of NPV to a change in Variable Costs? 
g. What can you conclude about the new fruit drink project based upon the sensitivity analyses?
Step 3: Create a Base Case NPV profile using the “NPV Profile” tab.       
a. Instructions for this graphing step are in red on the “NPV Profile” tab.
HINTS for all steps:
*Unless the value is given above (or pulled straight from external data sources), all highlighted cells require 
a calculation done using formulas, or a reference to another cell.
*Do not forget the correct sign conventions.
*Double-check all calculations using your calculator
*Pay attention to cells with embedded comments (i.e., any cells with red triangles in the upper-right corner)
Excel solution

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