# Coca-Cola Case

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## Essay title: Coca-Cola Case

Coca-Cola Case 2008

Summary

Recommending any securities in an attempt to improve a clientвЂ™s portfolio requires estimating a fair value of the security in question. Currently, the security in question is Coca-Cola at a stock price of \$58.19. Estimating the fair value can be assessed in various ways using security pricing models. After conducting an analysis of the securityвЂ™s fair market price, it is possible to compare the actual price with the estimate determining whether the security is overpriced or underpriced. If neither, the security is decided to be a fair price. Assuming the stock is underpriced or fair, it would be a considered investment recommended to clients. However, if the price is determined to be overpriced, it would be an ill-advised asset at this time. The analysis will determine whether to propose the security to the client.

After much consideration of the Coca-Cola stock, it can be concluded that the current price of the stock is overpriced using two different models; the dividend growth model and the price-earnings ratio. It has come to attention that the estimated dividend growth model valued the stock at \$50.99 per share, overpricing the model approximately \$7.00. The price-earnings ratio analysis has appraised the current stock price to be \$53.25 per share which gives an overpricing of approximately \$5.00. Both models have assessed the Coca-Cola stock to be overpriced given its current state. Therefore, it is not recommended to purchase the Coca-Cola stock presently.

Analysis

In finding the stock price using the dividend growth model, it was necessary to first use the capital asset pricing model (CAPM). The CAPM is a model that describes the relationship between risk and expected return, a model regularly used in the pricing of risky securities. Finding the CAPM gives the required return needed in using the dividend growth model. The formula for the CAPM is:

R= Rf + ОІ(Rm-Rf)

That is, the Expected Security Return = Riskless Return + Beta x (Expected Market Risk Premium). The given risk free rate was taken from the U.S. 5-year treasury bond (frequently considered risk free as being offered by the government) because the valuation was projected for 3-5 years. Any outlook past 5 years generally gives a potential inaccurate statement meaning there is additional risk involved. The treasury bond risk free rate is 5.79%. The adjusted beta was used because it is the estimated future outlook beta which is 1.24. The market risk premium is historically 6%. Given these numbers, the CAPM is 13.35% (appendix 2).

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