group5-cocacola&homedepotvaluation

7/30/2019 Group5-CocaCola&HomeDepotValuation

1/11

Discounted Cash Flow Valuation

Coca-Cola & Home Depot

Group 5 (FSAV 2012 Quarter 2) :Anand SrinivasanAnjan Kumar DashRamkumar Venkatesan

Vinod BalajiVijey Kumar


2/11

Agenda

Free cash flows calculations

Valuation of Shares at beginning of 1999

Problems & Uncertainties in valuation

Valuation of Coca-Cola at the beginning of 2004

Current Situation

2Coca-Cola & Home Depot Valuation


3/11

Free cash flow calculation

Free cash flows calculations(Coca Cola)


Net Free CashFlow Calc 2001 2000 1999

Reported CashFlow from Operations (A) 4110 3585 3883

After Tax net interest payments (B) -13.44 72.32 -39.04

Cashflow from operations (C = A + B) 4096.56 3657.32 3844

Reported cash flow from investments -1188 -1165 -3421

Net Investment in Interest bearing securities -1 -218 -342

Cash Investments in Operations (I) -1187 -947 -3079

Net Free CashFloiw 2909.56 2710.32 765

Free cash flows calculations(Home Depot)Net Free CashFlow Calc 2002 2001 2000

Reported CashFlow from Operations (A) 5963 2996 2446

After Tax net interest payments (B) -21.35 -18.91 -6.71

Cashflow from operations (C = A + B)5941.65 2977.09 2439.29

Reported cashflow from investments -3466 -3530 -2622

Net Investment in Interest bearing securities -60 -9 -2

Cash Investments in Operations (I) -3406 -3521 -2620

Net Free CashFloiw 2535.65 -543.91 -180.71


4/11

Valuation calculation

Coca Cola Home Depot

Coca-Cola & Home Depot Valuation 4

Valuation Calculation 2001 2000 1999

Cash From Operations 4096.56 3657.32 3844

Cash investments -1187 -947 -3079

Free Cash Flow 2909.56 2710.32 765

Discount Rate(1.09) 1.29503 1.1881 1.09

PV of Free Cash Flows 2,247 2,281 702

Total Present Value in 2001 5,230

Assumed Growth rate (g) 5% 4% 3% 2% 1%

Continuing Value(CV) 76,376 60,519 49,947 42,396

36,73

3

Present Value(CV) 58,976 46,732 38,569 32,738

28,36

5

Enterprise Value 64,206 51,961 43,798 37,968

33,59

5

Book Value of Debt -1,427 -1,427 -1,427 -1,427 -1,427

Value of Equity 62,779 50,534 42,371 36,541

32,16

8Number of Outstanding

Shares2465 2465 2465

Share Value 25.47 20.50 17.19

Valuation Calculation 2002 2001 2000

Cash From Operations 5941.65 2977.09 2439.29

Cash investments -3406 -3521 -2620

Free Cash Flow 2535.65 -543.91 -180.71

Discount Rate(1.09) 1.295029 1.1881 1.09

PV of Free Cash Flows 1,958 -458 -166

NPV of Cashflows 1,334

Assumed Growth rate

(g)5% 4% 3% 2% 1%

Continuing Value(CV) 66,561 52,742 43,529 36,948 32,013

Present Value(CV) 51,397 40,726 33,612 28,531 24,720

Enterprise Value 52,732 42,061 34,947 29,865 26,054

Book Value of Debt -1,499 -1,499 -1,499 -1,499 -1,499

Value of Equity 51,233 40,562 33,448 28,366 24,555

Number of Outstanding

Shares1475 1475 1475

Share Value 34.73 27.50 22.68


5/11

Problems &Uncertainties in valuation


Free cash flow not a value added concept: free cash flow is not

showing the value addition to the firm. Net operating cash flow is a

better concept for valuation

Limited Data Availability: Valuation is dependent on the cash

flows of 3 years. Forecasting/speculating cash flows for many years

in advance is unreasonable

Negative cash flow for Home Depot: Because of heavy investment

in operations, cash flow of Home Depot is negative. These

investments would lead to positive cash flows in future. But this

forecast/speculation of positive cash flows adds to the uncertainty invaluation


6/11

Valuation of Coca-Cola at 2004


What difficulties would you encounter in trying to value the

Coca-Cola Company at the beginning of 2004? What do youmake of declining free cash flow?

Increasing investment explains the decline in cash flow

Free cash flow is not a measure of value added in operations

Cash Investments are value surrendered in expectation of a payoff ina later period

In any year with this approach the adjustment of cash flow from

operations by cash investments violates the principle of matching

expense with the revenue for which it was incurred

Forecasting free cash flows beyond four years is difficult as thepattern of investments is uneven

Continuing value is hard to establish in this scenario


7/117

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2004 2005 2006 2007

Free cash flow for Coca-Cola

Cash flow fromOperations

Cash investments

Coca-Colas FCF Trends


8/11

Attempted Valuation of Coca Cola

Assumptions Cost of Capital @ 9 % Growth of Free cash flows at 5% Net Debt same as at the end of 1999 $1427 million Number of Outstanding shares 2465 million

Price in this scenario is $5.73 which appears unrealistic

By trimming the forecast horizon and stopping at 2006, theprice is derived to be $34.76

The DCF model proves to be unreliable in valuing equity usingfree cash flows that are forecast over a period with uneveninvestment pattern



9/11

Current Situation of Coca-Cola


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Coca-Cola Stock Prices

Current Price : 38.26

Change ofdirectors on14 Sep andstock pricecrashed from

80 to 38


10/11

Current Situation of Home Depot


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Home Depot stock prices

Current Price : 60.12


11/11

Q&A


group5-cocacola&homedepotvaluation

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