Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

Value of Coca-Cola

With Current

Margin

With Cott’s

Margin

Return on capital

(after-tax)

20.84% 7.06%

Growthrateduring period

(g)

10.42% 3.53%

Cost of capital during

period

7.65% 7.65%

Stable-Growth Period

Growth rate in steady state 4.00% 4.00%

Returnoncapitalinsteady

state

7.65% 7.65%

Reinvestmentrateinstable

growth

52.28% 52.28%

Cost of capital in steady

state

7.65% 7.65%

Value of firm

$79,611.25

million

$15,371.24

million

Return on capital = Operating margin × Sales/capital

Notethattheloweroperatingmarginsaffectcurrentoperating
income(.0528×21,962)andalsotranslateintolowerreturns
oncapitalandlower growthrates.ThevalueofCoca-Cola
withitscurrentmarginsis$79,611million,whereasitisonly
$15,371 million with generic margins (Cott).