Interview Question I read from HL
I read an interview question on WSO for HLRX that was "What is the value of Coke's recipe? Whoever posted the question said: "I tried to answer this using a DCF but he had to help me a lot with my assumptions."
My question is: Why on gods earth would you try and answer this using a DCF? I get that you could make assumptions about the FCF/revenues you'd receive based upon the formula - but the amount of assumptions and intangibles you'd have to account for are immense.... Wouldn't a comp be easier to execute?
I'm not sure how in-depth the actual question would want you to go into, but assuming it's just a more finance-related version of the interview brain teaser questions such as "how many ping pong balls can you fit in an airplane", you would probably make a very general assumption of revenues, ebitda %, capex, and a very round wacc % (like 10%) to do this.
The issue I see with comps is that it doesn't fully allow you to demonstrate your ability to think through the question. Sure it might be easier in practice if you were allowed to use the internet, but otherwise, you'd need to know the valuation of the other comps anyways, like Pepsi, which is essentially the original question. Without knowing that, how are you going to know what multiple to use? And what financial metric of Coke to multiply that with? You'd end up making the same sort of assumptions, with a much less robust answer IMO.
i mean theoretically, everything comes down to a DCF - quantifying it would be whatever incremental fcf (volume, price you can increase beyond more commoditized producers). in the real world, probably looking at the multiple delta between this and someone like pepsi to quantify the intangible value.
I read an article a few weeks ago about the history of global sales of Coke vs. Pepsi. For the longest time, Pepsi dominated the space because consumers did (and tend to still) prefer the sweeter taste of Pepsi. Coke tried tweaking their formula and came out with New Coke, which was a complete disaster. Coke went back to their original recipe and decided that instead of competing with Pepsi on taste, Coke would compete with Pepsi using marketing. Coke launches a slew of campaigns that were meant to elicit emotion and like Coke to having a good time. The Coke Polar Bears, the idea of sharing a Coke with someone you love, etc. are some examples of these marketing campaigns. The result: Coke is now the market leader in the segment and is sold in many more restaurants and fast food place than Pepsi is.
So, you could make the argument that the Coke formula is worthless to anyone except Coca-Cola. Without Coca-Cola's marketing, all you have is an unbranded sugar water. I would personally have gone with comps, precedents, a DCF, and an LBO to check the "this kid knows how to read an interview guide" box, but then I would have expanded a bit. If all you mention are typical valuations techniques, you won't stand out and are really DOA.
Thank you, that makes sense. Im not sure how you would utilize an LBO but I agree it would be wise to use more than one.... When im being interviewed I always feel like brevity is the correct way to go but I guess that might be why I botched GS SSG. Ill start expanding on my answers.
LBOs are used to set a floor valuation and to see what PE firms might bid.
Brevity is key...but this is not one of those questions. This is a "can this kid think" type question.
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