Problem 2-10 Making Business Decisions: Loaning Money to The Coca-Cola Company

As chief lending officer for a bank, you need to decide whether to make a loan to The Coca- Cola Company. The current items, listed in alphabetical order, are taken from the consolidated balance sheets of The Coca-Cola Company and its competitor PepsiCo at the end of 2011 and 2010 (included in the companies’ Form 10-Ks for the years ended December 31, 2011; all amounts are in millions of dollars):

 

 

 

 

 

The Coca-Cola Company	12/31/11	12/31/10
Accounts payable and accrued expenses	$  9,009	$  8,859
Accrued income taxes	362	273
Cash and cash equivalents	12,803	8,517
Current maturities of long-term debt	2,041	1,276
Inventories	3,092	2,650
Loans  and  notes payable	12,871	8,100
Marketable securities	144	138
Prepaid expenses and other assets	3,450	3,162
Short-term  investments	1,088	2,682
Trade accounts receivable, less allowances of $83 and $48, respectively	  4,920	  4,430
PepsiCo	12/31/11	12/25/10
Accounts and notes receivable,   net	$  6,912	$  6,323
Accounts payable and other current  liabilities	11,757	10,923
Cash and cash equivalents	4,067	5,943
Income taxes payable	192	71
Inventories	3,827	3,372
Prepaid expenses and other current   assets	2,277	1,505
Short-term  investments	358	426
Short-term obligations	6,205	4,898

Required

Part A. The Ratio Analysis  Model

A banker must be able to assess a company’s liquidity before loaning it money. Liquidity is the ability of a company to pay its debts as they come due. Replicate the five steps in the Ratio Anal- ysis Model on page 74 to analyze the current ratios for The Coca-Cola Company and PepsiCo:

(Continued )

 

 

 

 

 

1.        Formulate the Question

2.        Gather the Information from the Financial Statements

3.        Calculate the Ratio

4.        Compare the Ratio with Other Ratios

5.        Interpret the Ratios

Part B. The Business Decision Model

A banker must consider a variety of factors, including financial ratios, before making a loan. Rep- licate the five steps in the Business Decision Model on page 75 to decide whether to make a loan to The Coca-Cola Company.

1.        Formulate the Question

2.        Gather Information from the Financial Statements and Other Sources

3.        Analyze the Information Gathered

4.        Make the Decision

5.        Monitor Your Decision