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

ReplacingCoca-Cola’sreturnoncapitalwithCott’sreturnon
capitalchangesthecurrentoperating income, growthrates,
and value, and the new brand name value that we get is:

The difference between this value and the one from the
operatingmarginapproachderivesfromthefactthatCotthas
a higher sales-to-capital ratio than Coca-Cola, which
increasesitsreturnoncapitalto11.20%;itwouldhavebeen
7.06% if the sales-to-capital ratios had been identical.

Finally,wevalueCoca-Cola’sbrandnameusingtheexcess
returnapproach.Withitsreturnoncapitalof20.84%andcost
of capital of 7.65%, Coca-Cola earns an excess return of
13.19%.Cotthasareturnoncapitalof11.20%anditscostof
capital is 10%, yielding an excess return of 1.20%. We
replace Coca-Cola’sreturn and cost of capital with Cott’s
return and cost of capital, holding capital invested at
Coca-Cola’scurrentlevels,andvaluethebrandnameinthe
following table:

Value of Coca-Cola

With Current

Excess Return

With Cott’s

Excess Return

Capital invested $16,406 million $16,406 million

High-Growth Period

Length of high-growth

period (n)

10 years 10 years

Reinvestmentrate,as%

of EBIT(1 −t)

50% 50%