Coca-Cola (Coke) [KO] is the largest
soft drink firm in the world. However, it is not clear how many bottles or cans
of soft drink it manufactures. Coke seems not to bottle and distribute most of
its beverages; that activity is carried out by affiliates in which Coke has a
equity interest. Coca-Cola Enterprises (Enterprises) [CCE] is the world’s
largest marketer and distributor of Coke products. The relationship between the
two firms is complex.
Review this relationship that is
detailed in the 2001 10K's of Coke and
Enterprises.
They are very long - running into thousands of pages. Please DO NOT print
them. The following information with respect to Coke's ownership
interest in its bottlers is useful
In the
Coke 10K look at the sections
• Significant Equity Investments And Company Bottling Operations
In Page 6
• Note 2: Bottling Investments
In the
Enterprises 10K look at the sections
• 2001 Management’s Financial Review - Relationship With The Coca-Cola Company
in page 20 of the 10K
• Note 16. Related Party Transactions
Required:
1a. Describe the
relationship between Coke and Enterprises.
1b. How inter-related are the two company's businesses? Give operational
and financial measures of the relationships.
1c. What accounting method does Coke to use to account for its ownership in
Enterprises?
1d. What is its long-term strategy regarding bottling operations?
1e. Given the relationship between Coke and Enterprises, discuss the
appropriateness of Coke’s use of the equity method to account for its investment
in Enterprises.
1f. Look at the attached article "Things Aren't Going
Better At Coke". Why did Coke and the then chairman Roberto C.
Goizueta spin off CCE?
2. Prepare a 2001 balance sheet, income statement, and cash flow statement for
Coke, with Enterprises fully consolidated.
3. Compute the following ratios for Coke (as reported), Enterprises, and Coke
after full consolidation of Enterprises :
(1) Current ratio (2) Return on sales (3) Gross margin (4) Return on Assets (5)
Return on equity
(6) Times interest earned (7) Debt-to-equity (8) Inventory turnover (9)
Receivable turnover
4. Discuss the differences in the ratios in part 3 between Coke as reported and
after the consolidation of Enterprises.
5. Repeat parts 2 through 4, but using proportionate consolidation for
Enterprises.
6. Coke’s 10-K "NOTE 2: BOTTLING INVESTMENTS" gives summary details about CCE
and later in the note there is section called "Other Equity Investments" - other
bottling affiliates (excluding Enterprises) accounted for using the equity
method. Discuss the expected effect of:
(1) Full consolidation of all "Other Equity Investments" on Coke’s financial
statements.
(2) Proportionate consolidation of all "Other Equity Investments" on Coke’s
financial statements.
Do not compute the consolidated ratios. Discuss only • Current ratio •
Debt-to-equity • Return on assets by computing the ratios for the "Other
Equity Investments".
7. After the scandals of Enron etc., the FASB issued FIN 46 (FASB Interpretation
No. 46) for Consolidation of Variable Interest Entities. You can
refer to
- the original statement
Fin-46-FASB and / or
- a guidebook from PriceWaterhouseCoopers
Fin-46-PriceWaterhouseCoopers
They are long, but
very important. Try to read at least the summaries. Based on
Fin-46, how should Coke treat its investment in CCE.
8. Coke states “In line with our long-term bottling strategy, we consider
alternatives for reducing our ownership interest in a bottler.” Discuss Coke’s
motivation to reduce such ownership interests.
9. As a financial analyst, discuss the advantages and disadvantages of viewing
Coke, with its bottling affiliates:
(1) On the equity method (2) Proportionately consolidated (3) Fully
consolidated
The following readings
trace the evolution of Coke's financical structure (Click for the article):
•
The Bottleneck At
Coca-Cola Enterprisee 1992
• Coke-Soda-Rebellion-2006
•
Things Aren't Going Better
At Coke Aug 2004 BW
• The Cost of Babying Bottlers
2002
•
