Coca-Cola's shareholders value sharply declined during the 1999-2000 period. For the 15 month starting from January 1999, Coca-Cola's stock price decreased from $70 to $47. Let's see if the Coca-Cola stock valuation estimates mirror the decline in its stock price.
(a) In mid-1998, Coca-Cola was considered to be a supernormal (non-constant) growth company. Coca-Cola estimated the annual growth rate of dividends for years 1 to 3 would be 35% and the annual growth rate in dividends for year 4 to infinity would be 10%. The required return would be 12% and the current dividend would be $0.76. What would be Coca-Cola's expected stock price based on these estimates?
(b) In late 1999, the financial staff of Coca-Cola estimated the annual growth rate of dividends for years 1 to 3 would be 30% and the annual growth rate in dividends for year 4 to infinity would be 8%. The required return would be 11% and the current dividend would be $0.64. What would be Coca-Cola's expected stock price based on these estimates?
(c) In May 2000, Coca-Cola's stock price was $50, and its dividend was still $0.64 per share. Now, let's assume that Coca-Cola is a constant growth stock with a required rate of return of 13%. What is Coca-Cola's expected constant annual growth rate given the $50 stock price?