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): 19921993199419951996199719981999Economic Profit13001549189622912718332524801128Free Cash Flow8731623214621022413353318762332Total Capital709576848744945610669111861355215740Return on Capital29.40%31.20%32.70%34.90%36.70%39.40%30.20%18.20%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 income methods?

Free cash flow (FCF) represents the cash generated by a company after accounting for cash outflows.…

Answered: At one time, the Coca-Cola Company…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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):

	1992	1993	1994	1995	1996	1997	1998	1999
Economic Profit	1300	1549	1896	2291	2718	3325	2480	1128
Free Cash Flow	873	1623	2146	2102	2413	3533	1876	2332
Total Capital	7095	7684	8744	9456	10669	11186	13552	15740
Return on Capital	29.40%	31.20%	32.70%	34.90%	36.70%	39.40%	30.20%	18.20%

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 income methods?

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