Coca Cola is considered to have one of the most valuable brand names in the world. The firm has an after-tax operating margin of 20% on revenues of $25 billion. The capital invested in the firm is $10 billion. In addition, Coca Cola reinvests 50% of its after-tax operating earnings.
a. Estimate the expected growth in operating earnings, assuming Coca Cola can sustain these values for the foreseeable future.
b. Assume generic soft drink manufacturers have after-tax operating margins of only 7.5%. If Coca Cola maintains its existing reinvestment rate but loses its brand name value, estimate the expected growth rate in operating earning. (You can assume that, with the loss in brand name value, Coca Cola’s operating margins would drop to 7.5%, as well.)
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