The Policy Committee of your company decides to change investment strategies. This change entails an increase in exposure to the
KO owns the brands included in its broad product line. Its marketing efforts center on worldwide advertising promoting these soft drinks. KO manufactures primarily soft drink extract. The production process requires only low-cost raw materials and relatively limited fixed asset investment. Extract is inexpensive to ship and requires limited numbers of production facilities throughout the world. KO's position as a leading soft drink extract producer is protected by the technical nature of its manufacturing process, the restricted formula for its product, and strong brand names established from over a century of operations. Competition is limited essentially to one competitor, PepsiCo. KO plays almost no direct role in domestic manufacturing and distribution beyond the output of soft drink extract.
CCE's business is also dominated by soft drinks. CCE purchases extract from KO and transforms it into completed products sold in a wide variety of retail outlets throughout the United States. This costly, complex production and distribution system requires hundreds of plants and warehouses, as well as thousands of vehicles. Marketing efforts emphasize local promotion. Competition consists of a large number of highly automated, similarly organized companies also manufacturing soft drinks from extract. Selected financial statements and notes for these two companies follow:
Data Extracted from Financial Statement Footnotes
Coca-Cola Company (KO)
1. Certain soft drink and citrus inventories are valued on the last-in first-out (LIFO) method. The excess of current costs over LIFO stated values amount to approximately S30 million at December 31, Year 8.
2. The market value of the company's investments in publicly traded equity investees exceed the company's carrying value at December 31, Year 8, by approximately $291 million.
3. The company is contingently liable for guarantees of indebtedness owed by some of its licensees and others, totaling approximately $133 million at December 31, Year 8.
4. Pension plan assets total $496 million. The projected benefit obligation for all plans totals $413 million.
Coca-Cola Enterprises (CCE)
1. Inventory cost is computed principally on the last-in first-out (UFO) method. At December 31, Year 8, the LIFO reserve is 52,077,000.
2. In December Year 8, the company repurchases for cash various outstanding bond issues. These transactions result in a pretax gain of approximately $8.5 million.
3. The company leases office and warehouse space and machinery and equipment under lease agreements At December 31, Year 8, future minimum lease payments under non-cancellable operating leases are as follows (S thousands):
Year 11................. 6,881
Later years 11.181
4. Pension plan assets total $197 million. Total projected benefit obligation for all plans is $151 million.
Use only the financial information reproduced here in answering requirements (a) and (b).
a. Your comparative analysis of these two soft drink companies requires using the ratios reported. You identify four key areas of comparison in your analysis:
(1) Short-term liquidity.
(2) Capital structure and solvency.
(3) Asset utilization.
Discuss differences between KO and CCE in each of these four areas. b. Using the financial statement information, identify five adjustments to the financial statements you feel would enhance their comparability and usefulness for financial analysis. For each of your five adjustments, discuss the effects of these adjustments on your answer to (a).
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