Discounted Cash Flow Valuation

Coca-Cola

&

Home Depot
Group 5 (FSAV 2012 Quarter 2) : Anand Srinivasan Anjan Kumar Dash Ramkumar Venkatesan Vinod Balaji Vijey Kumar

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

Coca-Cola & Home Depot Valuation

Free cash flow calculation

Free cash flows calculations(Coca Cola)
Net Free CashFlow Calc Reported CashFlow from Operations (A) After Tax net interest payments (B) Cashflow from operations (C = A + B) 2001 4110 -13.44 4096.56 -1188 -1 -1187 2909.56 2000 3585 72.32 3657.32 -1165 -218 -947 2710.32 1999 3883 -39.04 3844 -3421 -342 -3079 765

Reported cash flow from investments

Net Investment in Interest bearing securities Cash Investments in Operations (I) Net Free CashFloiw

Free cash flows calculations(Home Depot)

Net Free CashFlow Calc 2002 2001 2000 Reported CashFlow from Operations (A) 5963 -21.35 5941.65 -3466 -60 -3406 2535.65 2996 -18.91 2977.09 -3530 -9 -3521 -543.91 2446 -6.71 2439.29 -2622 -2 -2620 -180.71

After Tax net interest payments (B)

Cashflow from operations (C = A + B)

Reported cashflow from investments

Net Investment in Interest bearing securities Cash Investments in Operations (I) Net Free CashFloiw

Coca-Cola & Home Depot Valuation

Valuation calculation
Coca
Valuation Calculation Cash From Operations Cash investments

Cola
2001 2000 4096.56 3657.32 -1187 -947 1999 3844 -3079
765 1.09 702 3% 2%

Home
Valuation Calculation Cash From Operations Cash investments

Depot
2002 5941.65 -3406 2001 2000 2977.09 2439.29 -3521 -2620

Free Cash Flow 2909.56 2710.32 Discount Rate(1.09) 1.29503 1.1881 PV of Free Cash Flows 2,247 2,281 Total Present Value in 2001 5,230 5% 4% Assumed Growth rate (g) Continuing Value(CV) Present Value(CV) 76,376 58,976

Free Cash Flow

2535.65 1.295029 1,958 1,334 5%

-543.91 -180.71 1.1881 -458 1.09 -166

1% Discount Rate(1.09) 36,73 PV of Free Cash Flows 60,519 49,947 42,396 3 NPV of Cashflows 28,36 Assumed Growth rate 46,732 38,569 32,738 5 (g)

4%

3%

2%

1%

Enterprise Value Book Value of Debt Value of Equity Number of Outstanding Shares Share Value

64,206 -1,427 62,779 2465 25.47

Continuing Value(CV) 33,59 51,961 43,798 37,968 5 Present Value(CV) -1,427 -1,427 -1,427 -1,427 32,16 Enterprise Value 50,534 42,371 36,541 8 Book Value of Debt 2465 2465 Value of Equity
20.50 17.19 Number of Outstanding Shares Share Value

66,561
51,397 52,732 -1,499 51,233 1475 34.73

52,742
40,726 42,061 -1,499 40,562 1475 27.50

43,529 36,948 32,013

33,612 28,531 24,720 34,947 29,865 26,054 -1,499 -1,499 -1,499 33,448 28,366 24,555 1475 22.68

Coca-Cola & Home Depot Valuation

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 in valuation

Coca-Cola & Home Depot Valuation

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 you make 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 in a 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 the pattern of investments is uneven Continuing value is hard to establish in this scenario

Coca-Cola & Home Depot Valuation

Coca-Colas FCF Trends

Free cash flow for Coca-Cola

8000 7000 6000 5000 4000 3000 2000 1000 0 2004 2005 2006 2007 Cash flow from Operations

Cash investments

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, the price is derived to be $34.76 The DCF model proves to be unreliable in valuing equity using free cash flows that are forecast over a period with uneven investment pattern

Coca-Cola & Home Depot Valuation

Current Situation of Coca-Cola

Current Price : 38.26
Change of directors on 14 Sep and stock price crashed from 80 to 38

Coca-Cola Stock Prices

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Coca-Cola & Home Depot Valuation

Current Situation of Home Depot

Current Price : 60.12

Home Depot stock prices

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Coca-Cola & Home Depot Valuation

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Q&A

Coca-Cola & Home Depot Valuation

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