question archive 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
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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