Coca Cola (KO) price is \$61/share. The company is expected to pay...

Question

# Coca Cola (KO) price is \$61/share. The company is expected to pay...

Coca Cola (KO) price is \$61/share. The company is expected to pay dividend
of \$1.7/share next year. (In reality, dividends are paid quarterly. In this question we will assume for
simplicity that all dividends are paid at year end). Coca Cola's discount rate is 7%.
a. Assuming that Coca Cola is expected to pay all its payout in the form of dividends and that it expects
to increase dividends at a constant rate forever, what is Coca Cola's expected dividend
growth rate?
b. Coca Cola's P/E ratio is 25.1x (E=expected earnings next year). Assuming that Coca Cola's
existing assets are expected to earn constant earnings forever, what portion of the firm
stock price is attributed to Coca Cola's growth opportunities (PVGO)?
c. You want to know whether Coca Cola is overvalued or not. You compare its P/E ratio to its
competitors. You observe that, on average, Coca Cola's competitors' P/E ratio is 26.0x. Should
you buy Coca Cola's stock or not? Explain.

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