Financial Analysis of Coca Cola Amatil: WACC, ROE, Cost of Debt and Gearing Ratio

This report explains about an Australian company, Coca Cola Amatil. Financial analysis has been done to evaluate the market and internal condition of the company, Coca Cola Amatil. The investment opportunity of the company has also been evaluated in the report. In this report, last 5 year’s stock price of company has been evaluated. And further, the WACC process has been conducted. This report also takes the concern of various cost of the company such as cost of equity and cost of debt. Gearing ratio calculations have also been done to identify the performance of the company. Lastly, conclusion has been given about the performance of the company.

Running Head: Financial Management 1
Project Report: Financial Management

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Executive Summary
This report explains about an Australian company, Coca Cola Amatil. Financial
analysis has been done to evaluate the market and internal condition of the company, Coca
Cola Amatil. The investment opportunity of the company has also been evaluated in the
report. In this report, last 5 year’s stock price of company has been evaluated. And further,
the WACC process has been conducted. This report also takes the concern of various cost of
the company such as cost of equity and cost of debt. Gearing ratio calculations have also been
done to identify the performance of the company. Lastly, conclusion has been given about the
performance of the company.

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Contents
Introduction.......................................................................................................................4
Company overview...........................................................................................................4
Calculation of WACC.......................................................................................................4
Return on equity (ROE)................................................................................................5
CAPM Model (Capital assets pricing model)...............................................................5
Cost of debt...................................................................................................................5
Weighted average cost of capital..................................................................................6
Calculation of gearing ratios and Difficulties in calculating the gearing ratios...............6
Findings............................................................................................................................7
Recommendation and conclusion.....................................................................................8
Reflection:.........................................................................................................................9
References.......................................................................................................................10

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Introduction:
Financial analysis is the examination over the financial statement and financial
information of an organization to make the business decisions. The financial analysis
typically explains the related parties about the performance and the position of the company.
It prepares a wide base to analyze the performance of the company and make a better
decision about the internal financial operations and the investment opportunity of the
company. The report has been prepared to evaluate and analyze the performance of the
company on the basis of cost of capital of the company, gearing ratios, capital structure etc of
the company. The report has been prepared to offer a base to the management of the company
to make a better decision about the position of the company and make required changes into
the capitals structure of the company so that the total cost of capital of the company could be
reduced.
Company overview:
Coca cola Amatil is among the largest bottlers companies of non-alcoholic beverages
which are ready to drink. Coca cola Amatil is operating its business in six countries which are
Australia, Indonesia, New Zealand, Fiji, Samoa and Papua New Guinea. Head office of the
company is New South Wales, Australia (Home, 2018). The main products of the comapny
are Coca cola, Coca cola zero, diet coke, Fanta, mother, Sprite zero, sprite, canned tomatoes,
spreads etc. The company is the subsidiary company of Coca cola. According to the annual
report, 2017 company has employed around 14,700 employees.
In the report, financial performance of the company has been evaluated and the annual
report (2017) of the company describes that the total revenue of the company in 2017 was $
4881 million. The annual report of the company explains about the various changes into the
capital structure and the financial statement of the company in last few years.
Calculation of WACC:
WACC is weighted average cost of capital. WACC is the average cost of capital of an
organization which is expected by the debt holder and equity holders of the company. WACC
process takes the concern over the various sources through which the company has raised the
long term funds. The cost of capital is calculated on the basis of fraction of every long term
fund sources which contributes in the total capital structure of the company.

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The WACC calculations of Coca Cola Amatil have been calculated on the basis of
total debt amount and the total equity amount (the sources through which the company has
raised long term funds). The calculations and the analysis of WACC of company are as
follows:
Return on equity (ROE):
ROE is a process to evaluate the total expected cost of equity of an organization. ROE
of an organization could be calculated on the basis of various tools such as dividend discount
model, capital assets pricing model etc. the main aim behind this evaluation is to identify the
total cost of the organization in concern with the total equity of the organization.
For calculating and evaluating the ROE of COCA COLA AMATIL, CAPM analysis
method has been used. Calculation of ROE of the company is as follows:
CAPM Model (Capital assets pricing model):
CAPM is an evaluation technique which is used by the companies, financial analysis
and the investors of the company to analyze the total cost of the company on equity. For
calculating, the cost of equity of the company, risk free rate, market risk premium and beta
factors have been calculated firstly.
The risk free rate of the company is 2.41% (Bloomberg, 2018). Further, the market
premium of the company has been evaluated on the basis of index return of the company
which is 6% and lastly, the beta calculations have been done on the basis of last 5 year stock
price of the company which is 0.721 (Yahoo finance, 2018). On the basis of the above data, it
has been found that the cost of equity of the company is 5% (Morningstar, 2018).
Risk free rate = 2.41%
Market premium = 6%
Beta = 0.721 (It has been measured on the basis of historical data of the company)
Cost of equity = 2.41% + (6%- 2.41%) *0.721
= 5%
Cost of debt:

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Further, cost of debt is a process to evaluate the total expected cost of debt of an
organization. Cost of debt of an organization could be calculated on the basis of the total
interest amount on which the debts have been generated by the company and the tax rate of
the corporation. The main aim behind this evaluation is to identify the total cost of the
organization in concern with the total debt of the organization.
For calculating and evaluating the cost of debt of COCA COLA AMATIL, after tax
costs of debt calculations have been done. Calculation of cost of debt of the company is as
follows:
Outstanding debt of Coca cola = $ 1930
Interest rate =7.5%
Tax % = 30%
Cost of debt = 7.5 * (1-30%)
= 5.25%
Weighted average cost of capital:
On the basis of the above evaluation, the WACC estimations of company, COCA
COLA AMATIL explains about Ke and Kd which stands for the cost of different capital
options of the company. In current scenario, the cost of debt of the company is 5.25% and the
total fraction of debt funds of the company is 55%. On the other hand, the cost of equity of
the company is 5% and the fraction of total equity amount is 45% in the company
(Morningstar, 2018).
On the basis of it, the WACC of COCA COLA AMATIL is 5.14% (Yahoo finance,
2017). It explains that currently, the company is paying 5.14% amount as the cost amount to
the equity holders and the debt holders of the company.
Gearing ratio calculations and analysis:
Gearing ratio is a fundamental analysis ratio which is used by the professionals and
financial managers of an organization to evaluate the long term debt of the organization in
comparison with the capital employed and equity capital of the company. It compares the

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assets and the liabilities of an organization to measure the capital structure of the company.
Gearing ratio formula is as follows:
Gearing ratio= Total Long term Liabilities of an
organization / capital employed of the organization
On the basis of the calculation of gearing ratio of COCA COLA AMATIL, it has been
recognized that the gearing ratio of the company is 55.43%. It explains that the debt and
equity of the company’s relation is 0.55:1.
Calculation of gearing ratio:
Long term liabilities = $ 2338
Current Liabilities = $ 1839
Total assets = $ 6057
Gearing ratio = 2338 /(6057- 1839)
= 55.43%
(Annual report, 2018)
At the time of evaluating the gearing ratio of the organization, not huge issues have
been faced. However, small issues such as which figures must be considered as long term
liabilities etc has been faced. The financial data of the company which includes the balance
sheet items are found from the annual report. And the gearing ratio formula was easily
available in books (Strebulaev, 2007). The calculations of gearing ratio were quite easy.
Findings:
Capital structure is a systematic approach which is quite useful for the organizations
to measure the total funds and the sources through which the funds have been generated by
the company. Capital structure theory explains that the capital structure decision could affect
the worth of an organization either through altering the expected earnings from the company
or through changing into the cost of capital or both. It explores the relationship among
various sources such as equity financing, debt financing etc.
In the report, the capital structure theory has been applied and the weighted average
cost of capital of the company has been calculated on the basis of cost of debt and the cost of

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equity of the organization. The application part explains that the cost of debt of the company
is 5.25% and the cost of equity of the company is 5%. It leads to the WACC of the company
to 5.14%. The capital structure theory explains that the debt and equity fraction of the
company is 55% and 45% respectively and the weighted cost of debt and weighted cost of
equity of the company is 2.91% and 2.22%. It explains that the current capital structure of the
company is quite better in term of risk as well as in terms of cost.
Figure 1: Capital structure
Recommendation and conclusion:
On the basis of the above application and analysis on the coca cola Amatil, it has been
recognized that the cost of capital of the company is 5.14% and the gearing ratio of the
company is 0.55:1. It explains that both the position of the company (risk and cost position) is
in the favour of the company. The company has managed the optimal capital structure as well
as the cost of the company is also lower. However, it has been found that the cost of debt is
higher than the cost of capital of the company. Company could make few changes into the
debt and equity level to reduce the cost of capital more.

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Reflection:
This study has been conducted on coca cola Amatil to recognize the capital structure
position of the company. The capital structure of the company has been evaluated on the
basis of risk position (gearing ratio) and on the basis of total cost of capital (WACC) of the
company. The study was quite interesting as various new things have been learnt while doing
the study. In case of WACC, the interest rate, beta, risk free rate, market premium etc has
been studied, identified and calculated to identify the total weighted average cost of capital of
the company.
For the calculations of WACC, book value amount has been taken into concern as t
becomes constant and the market amount changes quickly. The book value of debt amount
and equity amount has been found in the annual report of the company. However, I have also
calculated the WACC on the basis of market share as well and it has been found that the
WACC of the company is 5.05%, on the basis of market share which is lower than 5.14%
(book value).
Further, the risk free rate of 5 years has been taken into concern and the rate has been
identified at Bloomberg. The risk free rate of different time is different. The beta amount has
been calculated on the basis of historical data of the company. And the market premium has
been chosen 6% on the basis of requirements. The indicator rate has been taken from the
annual report of the company. In total, the assignment was quite interesting and it has
enhanced by knowledge about the capital structure.

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References:
Annual report. (2018). Coca cola Amatil. (Online). Retrieved on 12 May 2018 from:
https://www.ccamatil.com/-/media/Cca/Corporate/Files/Annual-Reports/2018/Annual-
Report-2017.ashx.
Bloomberg. (2018). Australian bonds and rates. (Online). Retrieved on 12 May 2018 from:
https://www.bloomberg.com/markets/rates-bonds/government-bonds/australia.
Home. (2018). Coca cola Amatil. (Online). Retrieved on 12 May 2018 from:
https://www.ccamatil.com/.
Morningstar. (2018). Coca cola Amatil. (Online). Retrieved on 12 May 2018 from:
http://financials.morningstar.com/income-statement/is.html?t=CCL&region=aus.
Reuters. (2018). Coca cola Amatil. (Online). Retrieved on 12 May 2018 from:
https://www.reuters.com/finance/stocks/overview/CCL.AX.
Strebulaev, I. A. (2007). Do tests of capital structure theory mean what they say?. The
Journal of Finance, 62(4), 1747-1787.
Yahoo Finance. (2018). Coca cola Amatil. (Online). Retrieved on 12 May 2018 from:
https://finance.yahoo.com/quote/CCL.AX?ltr=1.