Universidad Anáhuac Campus Sur

Risk Management

Strategic Assessment and Risk Management for The

Coca Cola Company (KO)

María Fernanda Celis ID: 00419955

Víctor Manuel Contreras Aponte ID: 00313792

Nicole Manzo Hernández ID: 00403923

Samantha Trujillo Rubio ID: 00408955

November 30, 2023

 Index

Introduction: ............................................................................................................. 3
Coca Cola (KO): an international top-notch beverage company. ..................................... 3

Coca Cola’s core business: creators of the original formula, distribution visionaries. ...... 3

Enduring industry, with unleashing innovative potential. .................................................. 4

Unprecedented Challenges: A Pivotal Moment for the Coca-Cola Company in the

Financial Landscape ......................................................................................................... 4

Financial Solvency Situation Analysis: ..................................................................... 6

Solvency Modeling and Financial Ratio Assessment ....................................................... 6

Solvency Analysis: Interpreting Results and Model Comparison ..................................... 7

Comparison of Altman and Fulmer to EE(Standardized) and FIRB models under Basel 2
criteria. .............................................................................................................................. 8

Market Risk Analysis: Estimation of Beta and Stock Price Simulation for The Coca-
Cola Company ....................................................................................................... 10

Estimation of Coca Cola’s Beta as a Measure of Sensitivity to the Market Portfolio ...... 10

Simulation of Coca Cola Company's Stock Target Price in 5 years using the Monte Carlo
methodology. .................................................................................................................. 12

Firm Specific Risk Analysis: Risk Matrix and Exposure to Modern Global Risks..... 1

Risk Matrix for the Coca Cola Company according to firm specific conditions and
industry concerns.............................................................................................................. 1

The Coca Cola Company’s exposure to contemporary global risks. ................................ 1

References: .............................................................................................................. 3
Introduction

Coca Cola (KO): an international top-notch beverage company.

As a multinational American beverage enterprise headquartered in Atlanta, Georgia,

The Coca-Cola Company traces its origins back to May 8, 1886. Since its inception,
the company has undergone a dynamic transformation, evolving into a globally
renowned beverage giant with a presence in over 200 countries. Presently, it delivers
an impressive daily total of more than 2.2 billion servings of its beverages, featuring
an extensive and diversified branding portfolio that has fostered a resonant corporate
culture on a global scale.

Listed on both the NYSE (KO) and NASDAQ (COKE), the company is deeply
entrenched in beverage manufacturing, retail, and marketing. Specializing in
concentrates and syrups for a wide array of non-alcoholic beverages, the company
aligns seamlessly with its corporate vision and distinctive business profile. The
enduring success of The Coca-Cola Company finds its anchor in a robust franchise
distribution system, a legacy expertly upheld since 1889. Throughout its history, the
company's core operations have revolved around the substantial production of
concentrates, strategically distributed to bottlers worldwide. Despite its exceptional
success, the company faces environmental challenges, notably as the largest
contributor to plastic pollution, within a complex macroeconomic landscape.

Coca Cola’s core business: creators of the original formula,

distribution visionaries.

The company's operational strategy heavily relies on a complex system involving

multiple local channels, prioritizing strategic planning at the local level executed in
partnership with bottling allies. Such global alliances facilitate the manufacturing,
packaging, merchandising, and distribution of final branded beverages, representing
a cornerstone of the company's revenue streams critical for its competitive
advantage. Various products, including soft drinks, water, sports drinks, coffee & tea,
juice, value-added dairy & plant-based beverages, can thus reach consumers
through carefully selected outlets worldwide.

In this manner, The Coca-Cola Company, in conjunction with its bottling partners,
collectively forms the renowned Coca-Cola System. This is achieved through a
decentralized approach where the company does not own or control the majority of
local bottling entities, ensuring a seamless journey of its products from production to
the hands of consumers globally.
Enduring industry, with unleashing innovative potential.

The food and beverage industry operates in a manufacturing production

environment with unique demands for hygiene and safe food handling. This
encompasses everything from rigorous equipment cleaning requirements to strict
controls and potential allergen management. It is a highly regulated industry that
must ensure production practices comply meticulously with established codes.
Additionally, it tends towards price-sensitive products where every margin is crucial.
Improved performance in both packaging and processing equipment holds genuine
commercial value for companies in the food and beverage sector.

Despite a challenging post-pandemic environment, the industry has successfully

rebounded from significant declines in consumption and negative consequences
resulting from disrupted global supply chains. Inevitably, competitiveness levels are
high, manifesting at different operational levels and influencing pricing, driving the
invention of new flavors and additional functions, and making marketing strategies
and other distribution plans crucial. The industry faces an inevitable increase in costs
due to inflated raw materials, ingredients, and other production expenses. Similarly,
complying with increasingly stringent restrictions aiming to minimize significant
environmental impacts characteristic of the sector is a priority. Investments in waste
treatment technologies ensure efficient and hygienic beverage production, primarily
influencing water consumption and treatment. The limited availability of natural
resources and constant price fluctuations also pose a significant threat to the
operational efficiency of the sector.

In terms of the market, growth trends are expected to emerge in response to the
demand for auxiliary beverages in human hydration. Cutting-edge technological
advancements aligned with emerging trends in virtual purchasing are anticipated, as
sustainable trends should not be overlooked either.

Unprecedented Challenges: A Pivotal Moment for the Coca-Cola

Company in the Financial Landscape

Coca-Cola (KO) and other leading consumer food brands have adeptly navigated
the challenges posed by the post-pandemic surge in prices by leveraging their
pricing authority, increasing them, and thus maintaining steady revenues. However,
the company's market influence is gradually diminishing.
 o Volume Slowdown:
In the latest quarterly report from Coca-Cola Company, the company posted a robust
8% growth in net revenues, reaching a total of $12 billion. Isolating the impact of
exchange rate fluctuations and other acquisitions, a genuine 11% increase in
revenues was registered. However, gross sales only saw a modest 2% uptick. It is
concerning that net incomes have been sustained primarily through the effects of
price hikes and other sales mix strategies. If volumes continue a downward trend, a
dependence on price increases may ensue, particularly critical considering the
challenges faced by traditional consumers amid inflation and limited consumption
choices resulting from reductions in their spending plans.

o PepsiCo Competition:
For the first time in the last 20 years, PepsiCo could surpass Coca-Cola as the
largest beverage company in the U.S. on market value terms for 2024. Analysts have
identified PepsiCo as the sector's "most enduring business," projecting around a
20% increase in its stock. Such a shift in the dynamics of the beverage industry
poses a significant challenge to Coca-Cola's strategic positioning.

o ESG Concerns, Trends, and Technology:

As the world's leading plastic polluter, the Coca-Cola Company must urgently
implement measures to establish sustainable practices aligned with evolving needs.
While the beverage industry remains profitable and resilient, its high competitiveness
necessitates constant exploration of ways to enhance operational efficiency and
profitability. Investing in technology is crucial for the company's adaptation to new
global requirements.

In essence, while Coca-Cola has adeptly managed pricing challenges in the face of
post-pandemic dynamics, the company faces formidable headwinds related to
volume trends, intensified competition, and the imperative to address environmental,
social, and governance (ESG) concerns through technological innovation and
sustainable practices.
Financial Solvency Situation Analysis

Solvency Modeling and Financial Ratio Assessment

Solvency for the Coca Cola Company (KO) was assessed through statistic
methodologies such as Altman’s discriminant functions commonly used in
measuring bankruptcy risks, among others. Results generated are presented below,
along with other conclusions.

Table 1. The ratios shown below were estimated, considering figures for the end of
2022 stipulated in the respective income statements, financial positions, and cash
flows:

Ratio Formula Item 1 Item 2 Value

Working Capital / Total Assets =

X1 WK = 2,867 0.030906
Total Assets 92, 763
Retained Earns. / Retained E. = Total Assets =
X2 0.765596
Total Assets 71,019 92, 763
EBIT / Total Total Assets =
X3 EBIT = 10,909 0.117600
Assets 92, 763
MV of Equity / MV of Equity = Total Liab. =
X4 4.110982
Total Liabilities $275,176.86 66,937
Sales / Total Total Assets =
X5 Sales = 43,004 0.463590
Assets 92, 763

Altman Z = 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 + 0.99 X5 = 4.4225

Altman Z1 = 0.717 X1 + 0.847 X2 + 3.107 X3 + 0.420 X4 + 0.998 X5 = 3.2252
Altman Z2 = 5.56 X1 + 3.26 X2 + 6.72 X3 + 1.05 X4 = 7.8054

The ratios considered in Altman's formulas help measure various key aspects in the
assessment of corporate solvency. However, the proposed models assign different
weights to these ratios, leading to diverse interpretations.

Table 2. The Fulmer model was also considered to enhance the interpretation by
estimating the ratios shown below:
 Ratio Formula Item 1 Item 2 Value
Retained Earns. / Retained E. = Total Assets =
X1 0.765596197
Total Assets 71,019 92, 763
Total Assets =
X2 Sales / Total Assets Sales = 43,004 0.463590009
92, 763
Pre-Tax Earns. / Pre-Tax E. = Stockholder’s
X3 0.484795686
Stockholder’s. Equity 11,686 Equity= 24,105
Cash Flow / Total Cash Flow = Total Liabilities =
X4 0.164602537
Liabilities 11,018 66,937
Total Assets =
X5 Debt / Total Assets Debt = 39,149 0.422032491
92, 763
Current Liabilities / Curr. Liab.= Total Assets =
X6 0.21262788
Total Assets 19,724 92, 763
Log (Tangible Assets / Tangible Assets Total Assets =
X7 4.7718226
Total Assets) =59,132 92, 763
Working Capital / Total Liabilities =
X8 WK = 2,867 0.042831319
Total Liabilities 66,937
Log (Operating Profit / Operating Profit = Fin. Exp. =
X9 2.430903484
Financial Expenses) 10,909 2.33%

H = 5.528 X1 + 0.212 X2 + 0.073 X3 + 1.270 X4 – 0.120 X5 + 2.335 X6 + 0.575 X7 +

1.083 X8 + 0.894 X9 – 6.075 = 3.909186375

Solvency Analysis: Interpreting Results and Model Comparison

Table 3. All tests conducted indicate a sound solvency position for The Coca-Cola
Company. For a clearer interpretation of the obtained results, a comparative table is
presented below.

Model Value Conclusiones Differences and Interpretation

The base model weighs measures of liquidity,
profitability, leverage, solvency, and activity. For The
Z > 2.99
Altman Z 4.4225 Coca-Cola Company, its high market capitalization
Healthy
and elevated earnings retention rate keep the
indicator high.
 The Altman Z1 model is better suited for
manufacturing companies, assigning higher weights
Z > 2.99 to turnover and total asset ratios. By penalizing both
Altman Z1 3.2252
Healthy categories and prioritizing sales efficiency, the
outcome, while optimistic, remains more conservative
compared to the original model.
Building upon the Z1 model, the elimination of the
Z > 2.60 sales ratio and a high weighting on profits and
Altman Z2 7.8054
Healthy reinvestment significantly inflates the company's
score according to the model's criteria.
The model proposed by Fulmer aligns with the
outcomes derived from the previous models, despite
its dichotomous simplification and the inclusion of
H>0
Fulmer 3.9091 additional financial ratios in its discriminant function.
Healthy
The result is primarily influenced by the company's
high profitability levels, tangible assets, and profit
retention policies.

Comparison of Altman and Fulmer to EE(Standardized) and FIRB

models under Basel 2 criteria.

The Basel 2 criteria primarily focus on establishing regulatory standards for banks
and financial institutions, particularly in the context of capital adequacy
requirements. The EE (Standardized) and FIRB (Internal Ratings-based) models
under Basel 2 are specific approaches to assess credit risk and determine the
amount of regulatory capital that financial institutions need to hold. In contrast, the
Altman and Fulmer models are not directly aligned with Basel 2, as they are primarily
used for assessing solvency and financial distress in non-financial corporations.

Purpose and Focus:

Altman and Fulmer Models: These models are designed to assess the solvency and
financial health of non-financial corporations. They focus on predicting the likelihood
of financial distress or bankruptcy.
Basel 2 EE and FIRB Models: These models are designed for banks and financial
institutions to evaluate credit risk and determine the regulatory capital required to
cover potential credit losses.
Scope of Application:

Altman and Fulmer Models: Applied to non-financial corporations across various

industries to assess their financial viability.
Basel 2 EE and FIRB Models: Applied to financial institutions to assess credit risk in
their lending portfolios.

Methodology:

Altman and Fulmer Models: Typically involve multivariate regression-based

approaches that analyze various financial ratios and metrics to predict financial
distress, along discriminant analysis.
Basel 2 EE and FIRB Models: Involve sophisticated frameworks incorporating
internal credit risk assessments, statistical models, and credit rating systems to
determine regulatory capital requirements.

Regulatory Framework:

Altman and Fulmer Models: Not directly associated with Basel 2 or its regulatory
framework, as they are more commonly used in financial analysis and corporate
finance.
Basel 2 EE and FIRB Models: Specifically developed to comply with Basel 2
regulatory requirements for banking institutions.
Market Risk Analysis: Estimation of Beta and Stock Price
Simulation for The Coca-Cola Company

Estimation of Coca Cola’s Beta as a Measure of Sensitivity to the

Market Portfolio

The shares of Coca-Cola Company are listed on the New York Stock Exchange
under the ticker KO, and on the NASDAQ under the ticker KO. Daily stock price
returns were considered from November 1, 2022, to November 1, 2023, within both
stock exchanges. Subsequently, two betas were estimated through linear
regressions against the analogous returns of the corresponding market indices, S&P
500 and Nasdaq Composite, respectively.

Figure 1. Beta of Coca Cola against S&P500:

Coca Cola vs S&P500

6.00%

y = 0.4891x + 0.0006
4.00%

2.00%

0.00%
-5.00% -4.00% -3.00% -2.00% -1.00% 0.00% 1.00% 2.00% 3.00% 4.00%
-2.00%

-4.00%

-6.00%

-8.00%
Figure 2. Beta of Coca Cola against Nasdaq Composite:

Coca Cola vs Nasdaq Composite

15.00%
y = 0.6398x + 0.0015
10.00%

5.00%

0.00%
-6.00% -4.00% -2.00% 0.00% 2.00% 4.00% 6.00%
-5.00%

-10.00%

-15.00%

-20.00%

-25.00%

-30.00%

Under the least squares methodology, linear regressions estimated sensitivity betas
to market movements equal to 0.489 and 0.640, respectively. Considering a risk-free
rate of 9% and Damodaran’s risk premium of 5% for the US equity market, cost of
equity for the Coca Cola Company was estimated through the CAPM model.

Index Rfr ERP Beta Cost of equity

S&P 500 9% 5% 0.489 11.445 %

Nasdaq
9% 5% 0.640 12.20 %
Composite
Simulation of Coca Cola Company's Stock Target Price in 5 years
using the Monte Carlo methodology.

For the simulation of stock price trajectories for the Coca Cola Company, Monte
Carlo methodology was employed to simulate 50 potential price paths over the next
5 years. Monthly stock returns from 2019 to 2023 were taken into consideration to
feed the proposed model. While a Kolmogorov-Smirnov test rejected normality in the
base returns, the Monte Carlo simulation still proves itself useful in predicting market
movements based on historical information. The results generated through coding
in Python software are presented below.

Figure 3. Monte Carlo Simulation in Python for 5-year Target Price.

Key findings for market risk analysis:

o 5-year Minimum Price: $16.94 USD

o 5-year Maximum Price: $134.45 USD
o 5-year Price Estimate: $65.93 USD
o Confidence Interval at 95%: $ [57.64, 74.21] USD
Firm Specific Risk Analysis: Risk Matrix and Exposure to Modern Global Risks.

Risk Matrix for the Coca Cola Company according to firm specific conditions and industry concerns.
The Coca Cola Company’s exposure to contemporary global risks.

The contemporary international landscape has been impacted by recent geopolitical

and environmental events, imposing challenges on the prospects of various
industries globally. Inevitably, The Coca-Cola Company must establish long-term
strategies to confront such challenges inherent to nowadays global concerns.
Undoubtedly, its financial performance and international reputation could be
adversely affected if its risk management policy is not appropriately tailored. The
following is a brief description of the potential impact on the company of the global
risks outlined in the latest report issued by the World Economic Forum in 2022:

Environmental Risks:

Short-Term Climate Action Failure: If materialized, the lack of effective measures to

address climate change could have significant consequences on the global supply
chain and operations, affecting primarily manufacturing companies.

Extreme Weather Conditions: Similarly, severe weather events could potentially

impact the company's production and distribution, a crucial element in its franchise
business model. Secondarily, increased operating costs and decreased demand
would follow in the wake of such a risk.

Environmental Damage from Human Activities: The ESG phenomenon remains

relevant and on the rise. Inevitable legal and financial consequences due to
environmental damage will be faced by the company if immediate sustainable and
transformative strategies are not implemented.

Natural Resource Crises: Supply interruptions are critical for Coca-Cola. Depletion
of essential natural resources logically affects various operational levels of the
company. The materialization of this risk is likely to be fatal.

Social Risks:

Erosion of Social Cohesion: Although not directly, a poorly structured social

environment could affect brand perception and consumer loyalty, a significant
differentiator for Coca-Cola, directly impacting revenue, especially considering the
entry of a strong and historically competitive rival, PepsiCo.
Health Risks:

Infectious Diseases: After experiencing the COVID-19 pandemic, the consequences

are evident. If another infectious disease outbreak occurs, a potentially severe
impact on employee health and operational continuity could burden the company's
financial health, creating an unprecedented and challenging scenario of uncertainty
in product demand.

Financial and Geo-economic Risks:

Debt Crises: Global financial issues could impact the borrowing capacity and
financial position of the company, especially considering its historical high levels of
corporate debt financing.

Geo-economic Confrontations: The current scenario of deglobalization is a reality.

Escalation of modern geopolitical tensions would seriously disrupt vital international
operations in Coca-Cola's diversified and far-reaching functioning, generating
uncertainty for the involved markets.

Recommendations:

o Developing and implementing sustainability strategies is critical to align with

modern corporate trends favoring climate action.
o Strengthening supply chains to mitigate impacts in the event of extreme
weather events is essential.
o Investing in social programs to counteract the erosion of social cohesion could
help prevent population polarization, especially considering the significant
cultural impact of the company’s brand.
o Establishing robust health protocols to address potential pandemics is crucial
to ensuring the health of employees and consumers.
o Evaluating and mitigating the environmental impact of operations requires
urgent and immediate action.
o Diversifying sources of supply to reduce vulnerability to natural resource
crises could assist in managing high levels of uncertainty from suppliers.
o Proactively monitoring and managing corporate debt and regularly advising
on capital structure to avoid insolvency problems in the future.
o Maintaining constant vigilance over geo-economic tensions and adjusting
strategies according to political developments of interest for smooth
international operations is essential to maintaining a market stronghold
globally.
References

Astorga Hillbert, A. (2022). MODELOS DE PREDICCION DE LA INSOLVENCIA

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market. CNN. https://edition.cnn.com/2022/04/25/investing/coca-cola-

earnings/index.html

CFI team. (2023, March 14). Altman’s Z-Score Model. Corporate Finance Institute.

https://corporatefinanceinstitute.com/resources/commercial-lending/altmans-

z-score-model/

Damodaran, A. (2023, July 14). Country Default Spreads and Risk Premiums.

Nyu.edu.

https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.

html

Paul H., K. (2006). Financial Stability and Basel II . FDIC Center for Financial

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https://www.fdic.gov/analysis/cfr/working-papers/2006/2006-10.pdf

The Coca Cola Company. (2023). Stock Information. The Coca-Cola Company.

https://investors.coca-colacompany.com/stock-information

World Economic Forum. (2022). The Global Risks Report 2022.

https://www3.weforum.org/docs/WEF_The_Global_Risks_Report_2022.pdf