Introduction
International Financial Management (IFM) is an integral part of any company that has positioned its operations on the global market (Madura, 2020). This may explain why Coca-Cola is interested in the concept of the IFM to manage international finances and maximize shareholder wealth. Furthermore, the idea is of value since it connects the company with international dealings in the form of business partners, customers, and suppliers. By and large, the dividend distribution policy, net profit value, and profitability index have to be efficient so that Coca-Cola can thrive and compete in the global market.
Critical analysis
Coca-Cola’s Dividend Distribution Policy
Coca-Cola is in strong collaboration with its shareholders, who own its shares and, therefore, receive revenue for their investments. According to the Dividend Irrelevance theory, the company’s dividend payment should not add value to the stock price; however, Coca-Cola has done it for a long time and still seems to maintain high growth. This is due to the fact that the company pays dividends to reduce managerial excess cash consumption (Sulaimon, 2014). The fact that the brand can stay afloat and return the financial contributions to the company’s growth, no matter the setbacks that may happen within the organization, shows Coca-Cola’s imposing financial abilities (Macro Trends, 2022). To elaborate, the company is mainly focused on increasing the stock price by balancing the future growth and current shares owned by the shareholders. By and large, the company’s dividend policy is sustainable as it continues to rise annually because of the constantly increasing revenues of the company.
As stated, the company is consistent in paying dividends to its shareholders, which indicates the efficiency of Coca-Cola’s strategy. Therefore, Coca-Cola claims that it recompenses the dividends to the stock owners on a quarterly basis. Furthermore, it is visible that the price for the share has increased from 0.37$ to 0.42$ since 2017, meaning that it has increased by 13% over five years (The Coca-Cola Company, 2022; Macro Trends, 2022; CNBC, 2022). As a matter of fact, 44% of the company’s ownership is in free float, owned by different people that invest in the company’s success (Coca-Cola Europacific Partners, 2022). On the contrary, only 19.5% is owned by Coca-Cola itself, which means that the other 80% share people who do not directly relate to the company and its products (Coca-Cola Europacific Partners, 2022). All in all, the shareholders’ shares, which accumulate approximately 80%, are investments that are then returned with additional monetary bonuses.
Therefore, having analyzed Coca-Cola’s dividend distribution policy, it is reasonable to claim that this strategy is efficient within this business model because it allows sustaining and even maximizes the revenues. Furthermore, the investments can be used to adjust the design to any situations that may unexpectedly happen in the company. The funds that flow into the company from the shareholders can also be used to expand the company’s operations worldwide, open new branches, and deliver the items to the many countries in cities. In other words, considering that the company always has investments, it is able to maximize its revenues by adjusting its strategy and, as a result, paying dividends from the earnings. Overall, it means that the company can thrive with the financial help of the shareholders and simultaneously return their investments with additional bonuses for their contribution to the company’s success.
Efficient Market Hypothesis Theory in context of Coca-Cola
Coca-Cola’s collaboration accomplishments with the shareholders may relatively undermine the efficient market hypothesis (EMH). However, to prove that this investment theory does not apply to Coca-Cola, it is vital to research its market share (Teall, 2018; Thune, 2021). To be more exact, the EMH primarily focuses on the impossibility of the market being wrong about a company’s stock worth (Teall, 2018). In other words, it concludes that market prices accurately reflect the true value of shares (Thune, 2021). However, it might not always be the case due to many visible and hidden factors affecting the stock market and the company itself.
Naturally, to understand how Coca-Cola can support or undermine the EMH, a thorough market stock analysis is essential. A perfect example of both Coca-Cola’s outstanding accomplishments on the stock market and EMH’s possible contradictions is the professional history of investor Warren Buffett. In fact, Buffett is a prominent opponent of the EMH and proved its unreasonableness both practically and theoretically with the help of Coca-Cola’s case (Reiff, 2018). His conclusions stem from the stock market crash that happened in 1987 when he bought more than $1 billion of stock in the Coca-Cola company (Reiff, 2018). The prices during such problems with stock markets drop to a minimum, so many people opt for purchasing the stocks, but they do not always earn from such decisions.
Therefore, the risk that Buffett took could have turned out either exceptionally or dreadfully, and the fact that he, as a promising investor, decided to support Coca-Cola financially. Fortunately, such a decision granted huge revenues to Buffett, considering that Coca-Cola’s shares increased in price almost by 20 times (Reiff, 2018). As a matter of fact, a year after the stock market crash, one share of the company cost 2.45$, and in 30 years, it grew to 42.7$ (Reiff, 2018). Not only did Buffett earn a massive amount of money from his investments, but he also now holds more than 10% of all the shares of the company (Reiff, 2018). Overall, it supports the fact that Coca-Cola was worth more than estimated by its stock price, despite lacking attractive valuations at the time of the market crash, leading investors to earn substantial money from their financial contributions to the corporation.
Therefore, Coca-Cola appears to be a successful company as it not only financially benefits its shareholders but also approves the longevity of the investments. The so-called Berkshire’s portfolio, which Buffett filled with his investments cases, included only two longest-standing leading companies, one of which remained to be Coca-Cola (Reiff, 2018). As mentioned earlier, Buffett was focused on proving EMH wrong, and the fact that he invested 1 billion dollars in Coca-Cola proves the corporation to be an outstanding option for investments. The negative repercussions of the stock market share in 1987 did not severely affect Coca-Cola but, on the contrary, helped it grow to be even more successful. The company’s brand name is powerful nowadays as the company manages to support twenty different brands, “bringing in a total of over $1 billion in sales per year a piece” (Reiff, 2018, para. 5). Furthermore, Coca-Cola’s shares continue to grow, accumulating approximately 60.1$ now, which is 7$ more compared to the last-year prices (Google Finances, 2022). By and large, Coca-Cola seems indeed a surefire investment as it partially opposes EMH, meaning it can increase shareholders’ investments despite the theory.
Methods of Appraising Projects which Coca-Cola Use
Coca-Cola being on the worldwide market is open to investments in other promising brands and focuses on encouraging shareholders to own the stocks of their corporation (Coca-Cola Investments, 2022). Naturally, both aspects require investment appraisal, which shows the profitability of financially contributing to any corporation (Schmidt, 2017). To be more exact, Coca-Cola primarily concentrates on collecting contractual cash flows and the sales of financial assets (Coca-Cola Consolidated, 2022; Coca-Cola Investments, 2022). Apart from analyzing the exchange rate fluctuations and the impairment, Coca-Cola also uses the Internal Rate of Return (IRR) method of appraising projects (Coca-Cola HBC, 2022). The IRR is essential to calculating the profitability of the possible investment opportunities to increase the revenues of the company considerably (Schmidt, 2021; Coca-Cola HBC, 2022). Theoretically speaking, as the discount rate, the IRR value turns the net present value (NTP) into zero, which eventually concludes the expected annual rate of return on a project (Schmidt, 2021). Coca-Cola opts for this method to calculate the financial benefits for their company after investing in specific projects or brands.
The IRR metric can sometimes prove to be unreliable; however, there are ways to avoid that. IRR may be misinterpreted outside of the typical capital budgeting scenario (Schmidt, 2017). However, it is feasible to determine the estimated projects’ annual return accuracy by combining this metric with a company’s Weight Average cost of Capital (WACC) (Schmidt, 2017). Therefore, the IRR method is helpful in investigating the scale of financial flows and their timing. In other words, Coca-Cola is more interested in evaluating the time value of money for investment opportunities (Coca-Cola FEMSA, 2021). In addition, the company focuses on the basic acceptance rule of the IRR, which relies on the cost of capital (Coca-Cola FEMSA, 2021). The cost of capital should never be higher than IRR; otherwise, the company may suffer from financial losses (Coca-Cola FEMSA, 2021). By and large, the following of the rules and a thorough analysis of investment opportunities help Coca-Cola increase its revenues and sometimes build new bonds for future collaborations.
Furthermore, Coca-Cola tends to use the IRR method because of its numerous advantages and the simplicity of the whole calculation process. The simple measurement techniques are probably one of the main reasons why Coca-Cola uses the IRR approach and not other methods of investment appraising (Coca-Cola FEMSA, 2021). Consequently, the corporation can easily convey a rank project to choose the investment opportunity that is the most profitable for Coca-Cola (Carmichael, 2021). In fact, as the measurement of the expected annual rate of return is beyond easy, Coca-Cola can analyze numerous projects in short periods of time (Carmichael, 2021). Another benefit for the company is that this approach measures the time value of money to evaluate the profitability of the project, which allows Coca-Cola to understand what revenue they can expect and after what time.
Conclusion
To sum up, Coca-Cola appears to be a top-tier corporation in its market nowadays. The fact that the financial contributions of shareholders benefit not only the company itself but them directly in the form of increased revenues says a lot about Coca-Cola as a company. Moreover, its outstanding stocks and market rates are sometimes higher than the average among Coca-Cola’s competitors, which contradicts the efficient market hypothesis and once again proves the brand’s success. The company’s focus on investment projects deserves respect, as Coca-Cola is beyond careful about choosing the projects to support financially, which shows the company’s experience in the global market. Using the IRR approach in conjunction with WACC, the corporation can analyze numerous projects simultaneously and then select one to pursue to increase its revenues for future projects or expansion on the market accurately.
Reference List
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