Module 3 SLP: Capital Budgeting and the Cost of Capital, WACC Calculation Example (Coca-Cola)
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Get it written →Module 3 SLP: Capital Budgeting and the Cost of Capital
Continue researching the company from Modules 1 and 2 and estimate its weighted average cost of capital (WACC). Present Steps 1–4 in a Word document, showing all steps and sources:
- Find the company’s credit rating, explain the reasons for it and use the Fidelity Fixed Income page to find the current 30-year corporate bond yield for that rating (cost of debt, RD).
- Estimate the cost of equity: RE = three-month Treasury bill yield + beta × equity premium (about 5%).
- From the balance sheet, compute D/V (total liabilities ÷ total liabilities and shareholders’ equity) and E/V (equity ÷ total).
- Compute WACC = (E/V) × RE + (D/V) × RD × (1 − 0.35), compare it with the industry average and, if it is too low, try a lower tax rate such as 25% or 10%.
Answer the questions directly, show your work for computations and cite sources with a bibliography and in-text citations.
A+ / A1 rating, RD = 5.56%
4.19% + 0.32 × 5% = 5.79%
D/V = 0.634, E/V = 0.366
4.41% at 35% tax, 4.90% at 21%
Download the Word version of this SLP (.docx)
Model SLP: WACC for The Coca-Cola Company
Original example for study purposes (about 750 words). It uses Coca-Cola as the example company; repeat the steps with your own company from Modules 1 and 2 and update every figure to the day you research it.
Introduction
This paper estimates the weighted average cost of capital (WACC) for The Coca-Cola Company (NYSE: KO), the company analyzed in the Module 1 and 2 SLPs. WACC is the blended rate of return a firm must earn to satisfy both its lenders and its shareholders, and it serves as the discount rate for capital budgeting decisions. The steps below follow the assignment’s method and show every input and calculation, using data available in early November 2026.
Step 1: Credit Rating and Cost of Debt (RD)
Coca-Cola holds strong investment-grade ratings: A+ from S&P Global Ratings, A1 from Moody’s and A (high) from Morningstar DBRS (Morningstar DBRS, 2024). These ratings sit in the upper-middle of the investment-grade scale, below AAA and AA but well above BBB. Rating agencies cite the company’s globally recognized brands, large scale, geographic diversification, efficient operations and steady cash flow as the main strengths, and Morningstar DBRS noted that debt-to-EBITDA of about 2.9 times was comfortably within its threshold for the rating. Factors that keep the rating from going higher include intense competition, mature core markets, shifting consumer preferences away from sugary drinks and a long-running tax dispute with the U.S. Internal Revenue Service that the company estimated could cost about $5.8 billion plus interest (Morningstar DBRS, 2024). Coca-Cola’s relatively high use of debt to fund dividends and share repurchases also limits the rating.
To estimate the cost of debt, I used the yield on long-term single-A corporate bonds. The ICE BofA Single-A US Corporate Index effective yield was 5.56% on November 6, 2026 (Federal Reserve Bank of St. Louis [FRED], 2026b). The Fidelity Fixed Income page lists current yields on 30-year bonds by rating, and an A-rated 30-year corporate yield there should be close to this figure.
RD = 5.56%
Step 2: Cost of Equity (RE)
The inputs for the capital asset pricing model are:
- Beta: 0.32 (five-year monthly beta reported by Yahoo Finance, 2026). Beta estimates vary by source and time period; Coca-Cola’s low beta reflects the stable demand for its products.
- Risk-free rate: 4.19%, the three-month Treasury bill yield on November 6, 2026 (FRED, 2026a).
- Equity risk premium: 5.0%, consistent with the typical estimate given in the assignment.
Cost of equity = risk-free rate + beta × equity premium
RE = 4.19% + 0.32 × 5.0% = 4.19% + 1.60% = 5.79%
Step 3: Capital Structure (D/V and E/V)
From Coca-Cola’s condensed consolidated balance sheet as of October 2, 2026 (The Coca-Cola Company, 2026), in millions of dollars:
| Item | Amount ($ millions) |
|---|---|
| Total current liabilities | 24,209 |
| Long-term debt | 36,623 |
| Other noncurrent liabilities | 4,678 |
| Deferred income tax liabilities | 2,907 |
| Total liabilities (D) | 68,417 |
| Total equity (E) | 39,533 |
| Total liabilities and equity (V) | 107,950 |
D/V = 68,417 ÷ 107,950 = 0.6338
E/V = 39,533 ÷ 107,950 = 0.3662
Check: 0.6338 + 0.3662 = 1.0000
Step 4: WACC
WACC = (E/V) × RE + (D/V) × RD × (1 − T)
With the assignment’s 35% tax rate:
WACC = 0.3662 × 5.79% + 0.6338 × 5.56% × (1 − 0.35)
WACC = 2.12% + 2.29% = 4.41%
Because 35% is above the current 21% federal statutory corporate rate and many companies pay lower effective rates, I also recalculated WACC with lower tax rates:
| Tax rate | After-tax cost of debt term | WACC |
|---|---|---|
| 35% | 2.29% | 4.41% |
| 25% | 2.64% | 4.76% |
| 21% | 2.78% | 4.90% |
| 10% | 3.17% | 5.29% |
Comparison with the industry. Damodaran’s January 2026 cost of capital data list an average WACC of 6.33% for the soft beverage industry (27 firms), with an average beta of 0.64 and cost of equity of 6.81% (Damodaran, 2026). My estimate of 4.41% to 5.29% is positive and in the single digits, as expected, but below the industry average. Two reasons explain the gap. First, the 0.32 beta used here is half the industry average, which lowers the cost of equity; a beta of 0.64 would raise RE to 7.39% and WACC to about 5.0% at a 35% tax rate. Second, the assignment’s method uses book values and treats all liabilities, including non-interest-bearing items such as accounts payable, as debt. Coca-Cola’s market capitalization is much larger than its book equity, so a market-value weighting would give equity a far larger weight and raise WACC toward the industry figure. Overall, the estimate suggests that Coca-Cola has a low cost of capital, consistent with its strong credit rating and stable business, which allows it to accept projects with relatively modest expected returns.
References
Damodaran, A. (2026). Cost of equity and capital (US) [Data set]. NYU Stern School of Business. https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/wacc.html
Federal Reserve Bank of St. Louis. (2026a). Market yield on U.S. Treasury securities at 3-month constant maturity (DGS3MO) [Data set]. FRED. https://fred.stlouisfed.org/series/DGS3MO
Federal Reserve Bank of St. Louis. (2026b). ICE BofA single-A US corporate index effective yield (BAMLC0A3CAEY) [Data set]. FRED. https://fred.stlouisfed.org/series/BAMLC0A3CAEY
Morningstar DBRS. (2024, March 21). Morningstar DBRS confirms The Coca-Cola Company’s issuer rating at A (high) with a Stable trend [Press release]. https://dbrs.morningstar.com/research/429968
The Coca-Cola Company. (2026). Form 10-Q for the quarterly period ended October 2, 2026. U.S. Securities and Exchange Commission. https://investors.coca-colacompany.com/filings-reports/all-sec-filings
Yahoo Finance. (2026). The Coca-Cola Company (KO) stock price, news, quote and history. https://finance.yahoo.com/quote/KO
Before you submit: yields and betas change daily, so record the date you collected each figure. If your Fidelity 30-year yield differs from the index yield used here, use Fidelity’s figure, as the assignment asks.
Frequently asked questions
Why is my WACC so low?
Low betas, low bond yields, book-value weights and treating all liabilities as debt all push WACC down. Try the lower tax rates the assignment suggests and explain the differences from the industry average.
Should I use book or market values for the weights?
Finance theory prefers market values, but this assignment asks for balance sheet figures. You can mention that market-value weights would change the result.
Why multiply the cost of debt by (1 − tax rate)?
Interest is tax-deductible, so the government effectively pays part of the firm’s interest cost. Equity returns receive no such deduction.
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