Coke Financial Structure

pic Andrea R. Hart GB550 Financial Management supercilious 24, 2011 The Abstract The base of this look into paper depart be closely the big(p) construction of coca plant pinhead, This paper serves as a comparison of debt and equity. It will overhaul restrict the true valuate of the go with season similarly determine what their free cash flow is and the risk of infection level for the organization. The question that this research will try to answer is if the 125 year old social club is mo net incomearyly ready for another 125 years. The go with needs to sojourn liquid and keep its operating be low during times of inflation.The methodology that will be used will be multiple financial ratios to determine how the organization is operating and comp atomic number 18 to times of exponential increases in profits. My expected findings will be that coca plant booby will fill a minimal amount of free cash flow. There would be enough to remain liquid but also to remain co nciliative in starting new product lines or new confidements. coca plant cola already operates in over 200 countries and should seek to spread advertising efforts in recently adopted countries. I anticipate that the fraternity has endured over 125 years of economical, governmental and social upheavals.Financial StatementsI hope to give over that although in that location could be unpredicted unprecedented environmental events that coca poop will be able to continue operate. Table of Contents A preview of slap-up building issues 4 Business and financial risks link to keen anatomical structure.. 5 Modigliani and moth millers MM hood structure theory . 6 Criticisms of the MM exemplification and assumptions6 roof structure evidence and implications7Estimating the firms optimal capital structure8 References9 A preview of capital structure issues Capital structures of companies argon based on the amount of debt and equity a company holds. When a company begins to increas e their debt the company requires more than of a risk to investors because the company now has a higher chance that it may not be able to re contain its debts. Although if there is more debt an organization taxes crowd out be reduced because the organization is able to take out what it must pay as enkindle to investors and holders from being taxed.The higher cost of capital translates into a lower fair look upon estimate, and vice versa furthermore, seemingly small changes in cost of capital can educate a significant passing in a stocks fair value (Kathman, 2002). The giant beverage maker, thats in a fairly stable environment does not obtain very much debt. The company in the non-alcoholic beverage intentness, coca plant sesss cost of equity of 8. 6% when the industry average is 11. 67% and is a large influence on the WACC of 8. 4%. Although the company incurs an 8. 6 % cost on the equity the company has averaged a return on equity for the past five years of 30. %. A Compa ny with a high weighted average cost of capital could be considered a risky company or a company in a risky industry that mainly uses equity for funding. coca Colas debt to equity ratio is 23% however the total debt to equity has been on average for the past five years at 51% video display that the company uses only if half debt to finance growth within the company which is accurate for a company that is not quite so capital intensive. Although the company finds itself in a sanitary established industry, it must tacit make investments and use 51% of debt to finance the new growth.WACC and Free notes Flows impact a companys value. FCF is what would come back to a company after the investment was made to raise the company. FCF can determine if it is worth to take on an investment. Coca Colas occurrent Free Cash Flow is -546. 8 (COCA COLA CO (NYSEKO ), 2011). Business and financial risks related to capital structure There be many factors that could play into the financial risk of Coca Cola. The company itself, affiliates, subsidiaries, licence distributers and bottlers argon a risk factor to Coca Cola.Bottlers generate a significant portion of degree centigrades net operating revenues by selling concentrates and syrups to independent bottling partners. In 2009, approximately 79 percent of our ecumenical unit case volume was produced and distributed by bottling partners in which the Company did not have a controlling interest (ITEM 1A. essay FACTORS, 2010). The company also operates outside(a)ly which is additional business and financial risk to the company. International economies and political environments become a risk to an American investor when considering purchasing securities.Some business risk of the company implys the availability in Coca Colas finical ingredient of extracted coca leaf, the sustainment of a network that spans 200 countries, wellness concerns that cause a reduction in market demands. For the company to manipulate that it has enough cash flows must be able to have the base of trading operations to handle the large amount of demands. Being that Coca Cola is an international company it has opened its doors to many more financial risks. Risks with their international counterparts include fluctuations in foreign currency and exchange rates effecting financial results (ITEM 1A. RISK FACTORS, 2010).If interest rates rise or new tax laws are forget me drug it would negatively impact net income. Increase in costsdue to shortages of supplies or materials to produce products or changes in accounting standards can all rival the risks of the company. Coca Cola monitors exposure to financial market risks using several(prenominal) objective measurement systems, including value-at-risk models. Value-at-risk calculations use a historical simulation model to estimate potential future losses in the fair value of our derivatives and other financial instruments that could occur as a result of perverse movements in foreign currency and interest rates (ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES active MARKET RISK, 2011). Modigliani and Millers MM capital structure theory The cardinal and basic assumption of the Modigliani and Miller Capital Structure guess is that there is no major difference if a company were to fund its operations with the use of debt or using equity. The 1958 Modigliani-Miller Theorem was initially designed to show that the corporations capital structure decisions are not value increasing or diminish it has, however, become apparent that the theorem is far more general (MacMinn, 2011).The theory rests on assumptions that there are no brokers or bankruptcy costs, no taxes and that investors can borrow at the alike rate as the corporations and that EBIT is not moved(p) by the use of debt. In 1991 Miller explained that the theory any throw out from using more of what might seem to be cheaper debt is offset by the higher cost of now riskier equity and given a head y amount of total capital, the allocation of capital between debt and equity is irrelevant because the weighted average of the two costs of capital to the firm is the same for all possible combinations of the two (Villamil, 2010).Criticisms of the MM model and assumptions The same assumptions that the Modigliani and Miller Capital Structure Theory is based on have been criticized. period the three Modigliani and Miller propositions make good sense and have become widely known there has been disagreement. Capital Structures that are designed to enhance value, the majority of the value is from the decisions that are made by financial managers. The value in the company is from the strategy that makes and it is the duty of the financial manager to make sure that the capital structure supports the strategy that the company is trying to pursue.Further, Coca Cola, initial strategy was to sell Ice cold Coca Colas to its customers. The company was able to successfully change its strategy t o only produce the syrup, the process was able to be broken down and some(prenominal) are able to reap values and benefits. By leaving capital structures to be independently determined by the bottlers and distributors, the structure of Coca Cola Holland and Coca Cola Japan to be different. Other theories have been created in spite of the MM model such as the Trade-Off Theory which takes into consideration the costs of bankruptcy.Capital structure evidence and implications Because of the low debt that Coca Cola has it also carries a low rate for taxes. In the last 5 years, half of Cokes worldwide investments include almost $20 billion dollars in capital expenditures and achievements in the U. S. In addition, each year, we invest over $10 billion dollars in our supply chain in the U. S. including $208 gazillion dollars that was spent this past year on supplies (Kent, 2010). In 2010, The Coca Cola Company acquired Coca Cola Enterprises (CCE) assets and liabilities.Coca Cola by purc hasing CCE, Coke will have a $100 million net pre-tax income benefit, however after adjusting to the impact of the full value of the stand simply debt Coke will have acquired a $200 million interest expense reduction. However Coke stands to benefit from the overall transaction with a pre tax benefit in 2011 of an estimated $300 million (Investors Information, 2010). CCE is still set to acquire bottlers in Germany, Sweden and Norway as part of the deal. With Coke becoming a producer and now a larger owner in bottling, this has changed the capital structure of the company.Estimating the firms optimal capital structure During the acquisition of Coca Cola Enterprises (CCE) assets and liabilities, Coca Colas shares decreased while CCE increased. With this transaction, we are converting passive capital into active capital, giving us learn control over our investment in North America to drive growth and drive long-term profitability Coke said, with the transactions that are expected to generate operational cost savings of approximately $350 million over four years for Coca-Cola and will add to earnings by 2012 (Gelsi & Spain, 2010).The current estimate of Cokes cost of debt is 7% as well as the WACC. (Coca Cola (KO) Stock Research, Equity Ratings, News & abbreviation , 2911). If this amount were to increase it is possible that it could also increase the risk to investors. Cokes beta has been reported at . 59 and for the non-alcoholic beverage industry is average. With their current capital structure Coke has had a steady 6% in revenue growth. The company also recently acquired CCE their debts, liabilities as well as CCEs acquisitions which is why Cokes shares declined by 3. % (Gelsi & Spain, 2010). These changes were brought about due to economical conditions and felt the need to take over more operations. Although this acquisition effected their shares in the short term, the company has estimated that this change will save the company almost $350 million in oper ational costs in four years and will begin generating income by 2012. References Coca Cola (KO) Stock Research, Equity Ratings, News & Analysis . (2911). Retrieved lofty 23, 2011, from ValueInvesting 2. 0 http//www. wikiwealth. com/researchkoCOCA COLA CO (NYSEKO ). (2011, August). Retrieved August 23, 2011, from Forbes. Com http//finapps. forbes. com/finapps/jsp/finance/compinfo/Ratios. jsp? tkr=KO Ehrhardt, M. C. , & Brigham, E. F. (2009). Financial Management Theory and Practice. Mason South-Western. Freeland, K. , Gabruk, B. , Laidlaw, K. , Levine, J. , Michaels, M. , & Schramm, G. (1998, May 4). The Beverage manufacturing This Ones on the House Retrieved August 23, 2011, from Stern NYU. Edu http//people. stern. nyu. edu/adamodar/pdfiles/cfprojs/beverage. df Gelsi, S. , & Spain, W. (2010, Feb 25). Coca-Cola acquire CCE North American bottling business. Retrieved Aug 23, 2011, from The Wall Street Journal MarketWatch http//www. marketwatch. com/story/coca-cola-buying-north-amer ican-unit-of-cce-2010-02-25 Hines, J. J. (2007, March). Capital Structure with Risky Foreign Investment. Retrieved August 11, 2011, from Harvard Business School http//www. people. hbs. edu/ffoley/riskycap. pdf Investors Information. (2010, regrets 14). Retrieved Aug 23, 2011, from The Coca Cola Company ttp//www. thecoca-colacompany. com/investors/pdfs/modeling_2010. pdf ITEM 1A. RISK FACTORS. (2010). Retrieved August 23, 2011, from The Coca Cola Company. Com http//www. thecoca-colacompany. com/investors/pdfs/10-K_2009/04_Coca-Cola_Item1A-1B. pdf ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. (2011). Retrieved August 23, 2011, from The Coca Cola Company. Com http//www. thecoca-colacompany. com/investors/pdfs/10-K_2006/Coca-Cola_10-K_Item_07a. pdf Kale, J. R. , Noe, T. H. , & Ramirez, G. G. (Dec. , 1991).The Effect of Business Risk on bodily Capital Structure Theory and Evidence. The Journal of finance , 1693-1715. Kathman, D. (2002, December 20). why Discount Rates Matter. Retrieved August 23, 2011, from MorningStarNews. Com http//news. morningstar. com/articlenet/article. aspx? id=84699&_QSBPA=Y Kent, M. (2010, May 19). Enhancing our National Competitiveness. Retrieved August 23, 2011, from The Coca Cola Company http//www. thecoca-colacompany. com/dynamic/leadershipviewpoints/2010/05/enhancing-our-national-competitiveness-is-not-an-option. htmlMacMinn, R. (2011). Theorems in Corporate Finance . Retrieved August 23, 2011, from MacMinn. ORG http//macminn. org/Fin374/theorems/theorems. html The Coca Cola Company. (2011). Financial Statements. Retrieved August 9, 2011, from The Coca Cola Company. Com http//www. thecoca-colacompany. com/investors/financial_statements. html Villamil, A. P. (2010, March 10). The Modigliani-Miller Theorem. Retrieved August 9, 2011, from Econometrics at the University of Illinois http//www. econ. uiuc. edu/avillami/course-files/PalgraveRev_ModiglianiMiller_