Valuing Coca-Cola using the free cash flow to equity valuation model

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Accounting and Finance


A study combined the concepts of equity valuation, super-normal growth, required rate of return on equity, and sustainable growth to determine the long-term value of Coca Cola Corporation (KO). The value of the equity of a firm is defined as the present value of all future cash flows from the firm to the shareholders. The value of the firm is FCFE divided by the sum of the required rate of return for equity minus the growth rate of the firm's earnings. Free Cash Flow to Equity is defined as net income minus net capital expenditures minus the change in net working capital plus the net change in long-term debt financing. The required rate of return for equity is computed using the CAPM using a five-year monthly rate of return beta relative to the S&P 500 index. Sustainable growth for the super-normal growth period is computed with the extended DuPont model. The long-term growth rate is assumed to be the same as the growth rate of the economy. The table in Appendix C shows the results of this analysis.