Question

The Coca-Cola Company, a beverage company, manufactures, markets, and sells various nonalcoholic beverages worldwide. The company provides sparkling soft drinks; water, enhanced water, and sports drinks; juice, dairy, and plant based beverages; tea and coffee; and energy drinks. Coca-Cola recently paid a year-end dividend of $2.00 a share. The growth rate in the dividend is expected to decrease by 5 percent a year, forever. The company's required rate of return is 15 percent.

Required:

Calculate the intrinsic value of Coca-Cola’s stock.

Answer 1

As per constant Growth formula

Intrinsic Value or Price = next year Dividend/ (required rate of return - constant growth rate)

Here, next year Dividend = $2* (1-0.05) = $1.90

Required rate of return = 0.15

constant growth rate= -0.05 (decrease of 5% every year)

So, Intrinsic value = 1.9/(0.15-(-0.05))

=$9.50

Intrinsic value of Coca-Cola’s stock is $9.50