FINC330 University of Maryland Coca Cola Stock and Bond Analysis Graded Discussion Week 8 Results of the Research Project Part 2 As an initial response t

FINC330 University of Maryland Coca Cola Stock and Bond Analysis Graded Discussion Week 8

Results of the Research Project Part 2

As an initial response to the discussion topic please create a Power Point presentation of 5-7 slides plus the title slide that contains the main results of part 2 of the Research Project.

These slides should include your recommendations, with supporting rationale,

as to whether the assigned company’s recent trend in financial and stock performance is of sufficient financial strength to warrant entering in a long-term investment in bonds and/or stocks if the company.
on the financial strategy of the company, how to best balance THE COMPANY’S financial leverage to optimize shareholder wealth going forward taking into consideration the company’s current market position, credit rating, dividend policy, etc.

In your responses to other students please present your opinion,

about entering in a long-term investment in bonds and/or stocks of the company.
on the financial strategy of the company.

You are expected to make your own contribution in a main topic as well as respond with value added comments to at least two of your classmates as well as to your instructor. Running head: PART 2
1
Part 2: Stock and Bond Analysis of Coca Cola
Chelsea Love
FINC 330 6383
PART 2
2
Stock and Bond Analysis of Coca Cola
Background and Industry
The Coca-Cola Company is one of the leading beverage manufacturer and distributors
globally (yahoo finance, 2019). The company operates in the non-alcoholic beverage industry,
which it has been in operation since its incorporation in 1886. Coca Cola company trades in more
than five hundred brands of non-alcoholic beverage drinks, with its popularly recognized brands
worldwide being Fanta, Coke, Coke Diet, and Sprite (Coca Cola, 2019). Once manufactured using
its standardized method, the company distributes its products to the various geographical segments
through the use of a robust distribution channel made of company-owned and company-controlled
as well as independent distributors. The headquarters of Coca-Cola is in Atlanta, Georgia (Coca
Cola, 2019). The company has maintained its number one spot in the non-alcoholic beverage
manufacture. Irrespective of the strong performance in the market, Coca Cola dropped thirteen
positions in the Fortune 500 to be at position 100 due to its 10% decline in the total revenue for
the financial year 2018 (Fortune 500, 2019).
Financial Leverage Ratios
Ratios
Formula
2014
2015
2016
2017
2018
Debt-to-assets
Total Debt / Assets
0.45
0.49
0.52
0.54
0.52
Debt-to-equity
Total Debt/
1.38
1.73
1.99
2.79
2.56
Ratios
Shareholders’ Equity
Interest
EBIT/ interest
20.59375
18.77394
13.690
11.961
10.918
Coverage Ratios
Expense
636
05848
48738
55204
Ratio
PART 2
3
Coca Cola’s financing Approach
The analysis above indicates that over the last five years, a large amount of debt finances
Coca Cola company’s assets, hence debt financing method. In 2014, the company’s debt-to-assets
ratio was 0.45. However, the ratio increased to 0.52 in 2018. This indicates that over the last five
financial years, Coca Cola has accumulated a higher percentage of debt, such that if the company
were to be solved in the current year, it would have to utilize 52% of its assets to pay for the
outstanding debts. The D/E indicates that the majority of the firm’s assets are financed by debt.
The higher D/E ratio moving from 1.38 in 2014 to 2.56 in 2018 further demonstrates that Coca
Cola uses debts to finance its projects, hence the equity financing.
The riskiness of the Bonds
The leverage ratios of the firm can measure the riskiness of the bonds. From the above
analysis, the company utilizes large amounts of debts, which can increase the risk level of Coca
Cola. Further analysis of the firm indicates that the interest coverage ratio had decreased from
20.59 in 2014 to 10.92 in 2018. The decline in the interest coverage ratio is an indication of an
increase in the risk levels of the bonds issued by the firm. This is alarming as it indicates that the
riskiness has increased to become twice the rate it was in 2014. Even though the interest coverage
ratio is still above 1.5 times, the higher rate of decline in the ratio presents an alarming trend to
investors. Therefore, the bond is secured in the market, with an alarming rate of increased risks.
PART 2
4
Bond Performance of Coca Cola
The following two bonds are used in the analysis as obtained from Finra (2019).
Figure 1: Coca Cola Bonds. (Source: Finra, 2019)
The Last Sale Price
Given the par value of the bond as $1,000, the last prices of the bonds as per the price columns
are 102.714% and 101.550% for the KO3689314 and KO3695406 bonds respectively. Therefore,
the last prices were calculated as shown below
Bond Symbol Quoted price A
Par-Value B
Coupon payments (Amount) =A * B
KO3689314
102.714%
$1,000
$1,027.14
KO3695406
101.55%
$1,000
$1,015.50
Annual Coupon Interest
The yearly coupon interest payment for the bond is calculated as
In this case, the annual coupon rate for the bonds are shown below
Bond Symbol Coupon Rate A
Par-Value B
Coupon payments (Amount) =A * B
PART 2
5
KO3689314
4.5%
$1,000
$45
KO3695406
3.25%
$1,000
$32.5
Bond Symbol Coupon Rate A
Price B
Current Yield =(A / B) *100%
KO3689314
$45
$1,027.14
4.38%
KO3695406
$32.5
$1,015.50
3.2%
The current yield
Yield to maturity
The yield to maturity (YTM) of Coca cola’s bonds refer to the annual interests an investor is
expected to earn if he/she holds the bond till the maturity date. For the two bonds were calculated
using the DQYDJ YTM calculator. The resulting YTM of the bonds were determined as
Bond Symbol Coupon Rate A
Price B
YTM
KO3689314
$45
$1,027.14
3.08%
KO3695406
$32.5
$1,015.50
2.397%
Bond to Purchase
The yield to maturity helps to compare bonds with different maturity periods based on the
expected return of investment discounted to the current cash flows. Based on the above analysis,
PART 2
6
KO3689314 has a higher yield to maturity of 3.08% compared to KO3695406, which has a yield
to maturity of 2.397%. Therefore, an investor should invest in KO3689314 due to its higher YTM
rate.
Callable Bonds
The two bonds are callable. An investor should consider the decision to purchase callable
bonds since the issuer has the right to redeem the bond before the maturity of the bond, hence
stopping further interest payment. In this case, the cash flow of the bonds has short-time depending
on the issuer’s decision. Therefore, one cannot be sure of the length of the annual interests. If the
bonds were non-callable, the decision would have remained the same since the investor is
confident of the yearly cash flow.
Recommendation to Purchase the Bond
The current ratio of Coca Cola over the past five years has been stable at 1.05. This
indicates the company is in a better position to pay its liabilities as they become due. However, the
company operates with higher total liabilities / total assets, which further makes it essential to
consider the riskiness of the bonds in the market. The higher debts and the reducing interest
coverage ratio is a crucial warning to the shareholder. However, the past five years’ trend indicated
that the company had a declining interest coverage ratio, which moved by half. In this case, the
interest coverage ratio for the next five years should be around five times. This will still be healthy
as it is above 1.5 times. As a result, an investor should buy the chosen corporate bond of Coca
Cola, which is KO3689314 with a maturity date of 09/01/2021.
Market Ratios
The market ratio for Coca Cola is as shown below for the past one year
PART 2
7
Ratio
Formula
2018
P/E Ratios
Price Per Share/ EPS
33.66
EPS
Net Profit/total shares outstanding
1.64
BPS
(Shareholders equity – preference shares) / outstanding
4.25
shares
Market value per
Market capitalization / outstanding shares
55.05
Dividend Yield
Dividend paid / outstanding shares
1.55
Market to Book
Price of shares/book value of shares
13.87263412
share
Ratio
One of the competitors of Coca Cola is the PepsiCo. The market ratios for PepsiCo is as shown
below
Ratio
Formula
2018
P/E Ratios
Price Per Share/ EPS
19.02
EPS
Net Profit/total shares outstanding
9.03
BPS
(Shareholders equity – preference shares) / outstanding
9.97
shares
Market value per
Market capitalization / outstanding shares
136.55
Dividend Yield
Dividend paid / outstanding shares
2.81
Market to Book
Price of shares/book value of shares
13.18514947
share
Ratio
PART 2
8
The analysis shows that the forward PE ratio for Coca Cola is 24.03 compared to its trailing
ratio of 33.56. Therefore, the company will have a decreased level of profitability to the investors
compared to past performance. However, in comparison with the competitor indicates that the
stockholders of Coca Cola receive a higher return on their funds compared to those of PepsiCo,
which has a forward PE of 22.90. Further, the Coca Cola’s EPS indicates lower earnings for each
share the stockholder has compared to the market. In this case, the shareholders do not receive a
fair value of returns on their invested funds. The company has lower BPS, the lower market value
per share, as well as lower dividend yield, compared to PepsiCo. With a similar market to book
ratio, the shareholders of Coca Cola receive lower returns on investment compared to those of
PepsiCo.
The average five-year PE ratio of Coca Cola was 46.58 (Ycharts, 2019). The current PE
ratio of the company is 33.66. However, comparison with competitors indicates that Coca Cola’s
PE is higher than the PepsiCo’s PE. However, the lower PE than the five-year average indicates
an undervaluation of Coca Cola’s stock. An investor should, therefore, consider investing in the
company’s stock as it has not reached its potential, hence a higher chance of gaining value in the
future.
Historical Prices of Coca Cola and PepsiCo
The stock price of the two companies for the past year, starting August 31st, 2018 to August 31st
2019 is presented in the following chart
PART 2
9
Stock Price
Stock Price trends
160
140
120
100
80
60
40
20
0
Date
Coca Cola
PepsiCo
Figure 2: Stock price trend analysis
The above comparison indicates that Coca Cola’s stock price has been lower than the price
of PepsiCo over the past one year. The trend further suggests that while the stock price of PepsiCo
has maintained a slow but constant growth over the past one year, the Coca Cola’s price has
indicated a much slower rate, moving from $43 to $55 over the past one year. However, the two
companies have similar growth trends in the market, making them be stiff competitors of each
other. The highest adjusted closing price of Coca Cola Company was on 28th August 2019 at
$55.11, whereas the highest adjusted closing price for PepsiCo stock was on 30th August 2019 at
$136.73. In the same way, the lowest stock price for Coca Cola over the past one year was on 31st
August 2018 at $43.1312 whereas the lowest stock price for PepsiCo was on 11th October 2018 at
$102.64.
CAPM
The ten-year US treasury bonds rates on 31st August 2019 was 1.506% (yahoo finance,
2019). It is utilized as the risk-free rate. The rate is appropriate since it is updated daily and does
PART 2
10
not suffer from market forces but is updated by the Fed as a monetary tool. The S&P 500 rate is
10%, which is used as the market return. This rate is appropriate since the S&P 500 companies
represent the largest and leading 500 companies in the country, hence a benchmark for the market
performance. According to Yahoo (2019), Coca Cola’s 3-year monthly beta is 0.34. The beta
refers to the sensitivity rate of Coca Cola’s excess returns to the expected market excess returns.
The positive beta indicates that the company has a positive sensitivity, such that an increase in the
market expected excess return would make Coca Cola’s expected increase move by 34%.
The required return on the stock using CAPM is calculated using the formula
= 1.506% + 0.34(10% ? 1.506%) = 4.85%
Company’s Sustainable Growth Rate (g0
The g of the company is calculated using the formula
?? = ?????? ? (1 ? ???????????????? ???????????? ??????????)
As per the yahoo finance (2019) statistics for Coca Cola, the ROE was 36.21%, and the dividend
payout ratio was 92.40%. Therefore, the sustainable growth rate was
36.21% × (1 ? 92.4%) = 2.75%
Intrinsic Value of the Stock
The Gordon Model was used to calculate the intrinsic value of Coca Cola’s stock as shown
below
PART 2
11
?????????? =
??1
?????
In 2017, the company paid a dividend of $1.48 per share. In 2018, the dividend grew to $1.56 per
share. Therefore, the dividend growth rate is (1.56 – 1.48)/1.48 = 5.41%. The expected next
year’s dividend, D1 is (1.0541* 1.56) = $1.64
The required rate of return is 4.85% as obtained from CAPM calculation.
The sustainable growth rate is 2.75%.
1.64
Therefore, the intrinsic value of the stock is (4.85%?2.75%) = $78.095 ? $78.10
Comparison with the Current Stock Price
The current stock price of the company is $55.04, whereas the calculated intrinsic value of
the firm is $78.10. In this case, the stock [rice of Coca Cola is undervalued in the market. It is
reasonable to purchase the stock of Coca Cola since it is undervalued in the market. An
undervalued stock has a higher chance of gaining its value in the market, which further makes the
holder of the stock gain higher profits if they sell the stock in the prevailing market prices.
Recommendation to the Client
The analysis indicates the trends of Coca Cola over the past one year. The company’s stock
is undervalued in the market, which makes it possible for Coca Cola’s stocks to gain value in the
future. However, an investor should consider the high rate at which the company’s interest
coverage ratios declined over the past five years. This is an alarming trend, making Coca Cola be
a suitable investment for a risk-assertive investor. The one year trend indicates that the company
has had a positive increase in stock prices from 2018 August to 2019 August. This suggests that
PART 2
12
irrespective of the poor financial performance, the investors and the market have a strong belief in
Coca Cola’s potential to perform better in the market. Therefore, an investor should consider
investing his funds in the stocks of Coca Cola for it to perform in the future. Besides, the higher
debt ratio indicates that Coca Cola can get access to higher debt finance to help it finance its
projects, which will further improve the efficiency and return of the firm over the long period.
Based on the fact that the intrinsic value and the PE ratio analysis indicates the stock of Coca Cola
to be undervalued, an investor should consider investing in the shares of coca Cola to earn future
higher returns as the market is likely to adjust the price to present the intrinsic value of the stock.
Recommendation to the Company
Coca Cola’s position in the market fell by 13 spots to be 100 in the Fortune 500. This has
an effect of reducing the confidence levels that shareholders have on the performance of the
market. The dividend payout ratio of the firm is also small, with a lower EPS than the industry.
The company should, therefore, start by reducing the amount of debt it borrows, which will further
help increase the interest coverage ratio. Once the interest coverage ratio increases, the investors
will view the company as less risky, hence making them invest more in the company’s stocks.
Therefore, a better way to improve the credit rating and the leverage features of the firm is to
reduce the debt borrowed. Secondly, the firm should increase the dividends paid to its
shareholders, which will help attract potential shareholders, increase demand for the stock and
adjust the stock price to be closer to its intrinsic value.
Reflection
From the stock and bond analysis, the primary skills learned is the importance of
conducting critical and technical analysis for the performance of the stock of an organization in
PART 2
13
the market. The historical stock analysis is essential as it outlines the strengths and weaknesses of
the firm in the market, giving out the reasons why a firm is either undervalued or overvalued. In
the same way, the analysis has helped to understand the importance of a firm’s capital structure on
its risk levels in the market. The assignment has helped to improve on the financial analysis skills,
which further enhances the competitiveness of a person in the job market.
PART 2
14
References
Fortune 500. (2019). Coca Cola. Retrieved from https://fortune.com/fortune500/2019/coca-cola
Yahoo finance. (2019). The Coca Cola Company (KO): Profile. Retrieved from
https://finance.yahoo.com/quote/KO/profile?p=KO
DQYDJ. (2019). Bond Yield to Maturity (YTM) Calculator. Retrieved from
https://dqydj.com/bond-yield-to-maturitycalculator/#Whats_the_Exact_Yield_to_Maturity_Formula
Yahoo finance. (2019). US Treasury Bonds Rates. Retrieved from
https://finance.yahoo.com/bonds?.tsrc=fin-srch
Yahoo finance. (2019). Coca Cola Company (KO). Retrieved from
https://finance.yahoo.com/quote/KO/key-statistics?p=KO
Yahoo finance. (2019). PepsiCo, Inc. (PEP). Retrieved from
https://finance.yahoo.com/quote/PEP/
Yahoo finance. (2019). Coca Cola Company (KO). Historical data. Retrieved from
https://finance.yahoo.com/quote/KO/history?p=KO
Yahoo finance. (2019). PepsiCo, Inc. (PEP). Historical Prices. Retrieved from
https://finance.yahoo.com/quote/PEP/history?p=PEP

Purchase answer to see full
attachment