At one time, the Coca-Cola Company reported a number called" economic profit" that is very similar to residual operating income. It also reported free cash flow in its annual summary of selected financial data. The respective numbers for 1992-1999 are given below (in millions of dollars), along with what Coke calls total capital (similar to net operating assets) and return on total capital (similar to return on net operating assets):

a. Economic profit and free cash flow are similar, in most years, and their growth patterns are similar. Why?
b. Based on this past history, would you be indifferent in valuing Coke using discounted cash flow methods or residual operating incomemethods?

1992 1993 1994 1995 1996 1997 1998 1999 Economac profit 300 1549 1896 2,29 2,718 3,325 2,480 1,128 Free cash flow 873 1,623 2,146 2.102 2,413 3,533 82.332 Total capital 7,095 7,684 8,744 9,456 10,669 1,186 13,552 5,740 Return on capital 29.4% 31.2% 32.7% 34.9% 36.7% 39.4% 30.2% 18.2%