Question

Coca Cola (KO) is an iconic American name. The company’s logo is immediately recognized worldwide. The...

Coca Cola (KO) is an iconic American name. The company’s logo is immediately recognized worldwide. The company has been in business since 1887 and sells 4,300 products worldwide. The company has increased dividends every year since 1963.

On December 31, Coca-Cola ended its fiscal year. The following data was reported:

Shareholder Equity                   $21.1 billion

Earnings                                          8.92 billion

Paid Dividends                              6.85 billion

The last price for KO was $49/share. The company paid a dividend in November of $.40/share. Coca- Cola pays a quarterly dividend and the company increased the dividends to $.41/share; an annual dividend of $1.64/share.

Using the information, and your investment expected return requirement is 14%, what is your price for investment valuation of KO stock and based on this valuation alone would you purchase it now?

A.

$ 44.00 yes, the current price is higher than my price

B.

$ 44.00 no, the current price is higher than my price

C.

$45.10 no, the current price is higher than my price

D.

$ 45.10 yes, the current price is higher than my price

Homework Answers

Answer #1

We can get the price using dividend growth model (Gordan growth Model)

As per gordan growth model:

Price of the share (Intrinsic Value) = D1 / (k – g)

D1 = Expected annual dividend for coming financial year = $1.64/share

k = expected return on investments = 14%

g = growth rate = retention ratio * ROE (Earnings/Average Shareholders Equity) = [($8.92-$6.85)/$8.92] x $8.92/$20.065 = 10.32%

Price per share = $1.64/(0.14 - 0.1032)

Price per share = $1.64/0.0368 = $44 per share

Answer: Option A

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