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Beverages – Soft Drinks Industry Module 8: Valuation Using Abnormal Enterprise Income Growth

Beverages – Soft Drinks Industry Module 8: Valuation Using Abnormal Enterprise Income Growth. Megan Morava. Background. World’s largest beverage company License and market 500 nonalcoholic beverage brands Primarily sparkling beverages Coca-Cola, Diet Coke, Fanta , Sprite

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Beverages – Soft Drinks Industry Module 8: Valuation Using Abnormal Enterprise Income Growth

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  1. Beverages – Soft Drinks Industry Module 8: Valuation Using Abnormal Enterprise Income Growth Megan Morava

  2. Background • World’s largest beverage company • License and market 500 nonalcoholic beverage brands • Primarily sparkling beverages • Coca-Cola, Diet Coke, Fanta, Sprite • Strong brand loyalty and diversified geographical operations offer competitive advantage • Revenues in 2012: $48 billion, 3.17% increase • Acquired CCE’s North American operations in 2010

  3. WACC rEnt = [1.22% x (8,181/181,757)] + [8.65% x (173,576/181,757)] rEnt= 8.32%

  4. Sales Growth Rate • Adjusted sales growth estimate based on best prediction of company & industry in the future • Sales growth was positive, but inconsistent from 2009-2012 • Negative sales growth of -2.05% in 2013 • Industry sales growth expected to decline at -1.5% over the next few years • Assume sales growth will decline at -1% until 2016, increase to market rate of 2.25% by 2018

  5. Discounted Cash Flow Model

  6. Residual Enterprise Income Model

  7. Abnormal Enterprise Income Growth Model • Continuing value equals the expected difference between intrinsic value and capitalized earnings of enterprise operations at the horizon • Assumption that growth rate in sales and abnormal enterprise income growth will eventually equal

  8. Abnormal Enterprise Income Growth Model

  9. Value Captured

  10. Takeaways • Used WACC estimate based on Beta from regression • rEnt= 8.32% • Adjusted sales growth estimate based on best prediction of company & industry in the future • Extended models out to the year 2021 • Growing at sales growth rate of 2.25% two years after steady state is reached

  11. Takeaways • Equity value (Enterprise Value – NFL) = $ $137,260million • Market Cap = $173,576 million • The percentage of value captured indicates that the abnormal enterprise income growth model should be chosen • 86.9% of value based on forecasts within horizon • 13.1% of value based on continuing value

  12. Questions?

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