APPLYING THE FREE CASH FLOW TO EQUITY VALUATION MODEL TO COCA-COLA

In this paper we provide a detailed example of applying the free cash flow to equity valuation model proposed in Damodaran (2006). Damodaran (2006) argues that the value of a stock is the discounted present value of the future free cash flow to equity discounted at the cost of equity. We combine the free cash flow to equity model with the super-normal growth model to determine the current value of Coca-Cola. In addition to computing free cash flow to equity, we show how to calculate the sustainable growth rate, the long term growth rate, beta, and the cost of equity. Free Cash Flow to Equity In this paper, we combine the concept of the super-normal growth rate model of stock valuation with the Free Cash Flow to Equity model from Damodaran (2006, pp. 491-493) (See Damodaran, Aswath. “Applied Corporate Finance, ” Second Edition, John Wiley & Sons, Inc., 2006). The FCFE model defines FCFE as net income minus net capital expenditures minus the change is working capital and plus net changes in the long-term debt position. Net income is taken from the income statement. Net capital expenditure equals capital expenditures minus depreciation both taken from the statement of cash flows. The change in working capital is the difference of accounts receivable plus inventory from one year to the next less the difference in accounts payable from one year to the next. FCFE = NI – (CE-D) – (∆WC) + (NDI-DR) FCFE = Free Cash Flow to Equity (CE-D) = Net Capital Expenditure