Copyright

Coca-Cola: Residual Income Valuation Exercise & Coca-Cola: Residual Income Valuation Exercise (TN)
Harvard Business School Case 9-113-056 & 5-113-065
Courseware 9-113-707

This courseware was prepared solely as the basis for class discussion. Cases are not intended to
serve as endorsements, sources of primary data, or illustrations of effective or ineffective
management. Copyright © 2013 President and Fellows of Harvard College. No part of this product
may be reproduced, stored in a retrieval system, used in a spreadsheet or transmitted in any form or
by any means—electronic, mechanical, photocopying, recording or otherwise—without the permission
of Harvard Business School.

1
 Coca-Cola (ticker symbol KO on NYSE)

STANDARDIZED BALANCE SHEET AND INCOME STATEMENT (millions)

BALANCE SHEET 12/31/2006 12/31/2007 12/31/2008

ASSETS
Cash and Marketable Securities 2,590.00 4,308.00 4,979.00
+ Accounts Receivable 2,587.00 3,317.00 3,090.00
+ Inventory 1,641.00 2,220.00 2,187.00
+ Other Current Assets 1,623.00 2,260.00 1,920.00
= Total Current Assets 8,441.00 12,105.00 12,176.00

Long-Term Tangible Assets 9,436.00 11,102.00 9,976.00

+ Long-Term Intangible Assets 5,135.00 12,219.00 12,505.00
+ Other Long-Term Assets 6,783.00 7,777.00 5,779.00
= Total Long-Term Assets 21,354.00 31,098.00 28,260.00
TOTAL ASSETS 29,795.00 43,203.00 40,436.00

LIABILITIES
Accounts Payable 929.00 1,380.00 1,370.00
+ Short-Term Debt 3,268.00 6,052.00 6,531.00
+ Other Current Liabilities 4,693.00 5,793.00 5,087.00
= Total Current Liabilities 8,890.00 13,225.00 12,988.00

Long Term Debt 1,314.00 3,277.00 2,781.00

+ Deferred Taxes 440.00 1,824.00 794.00
+ Other Long-Term Liabilities 2,231.00 3,133.00 3,401.00
= Total Long-Term Liabilities 3,985.00 8,234.00 6,976.00
TOTAL LIABILITIES 12,875.00 21,459.00 19,964.00

Minority Interest (NOTE A) 0.00 0.00 0.00

SHAREHOLDERS' EQUITY
Preferred Stock 0.00 0.00 0.00
+ Common Shareholder's Equity 16,920.00 21,744.00 20,472.00
= Total Shareholder's Equity 16,920.00 21,744.00 20,472.00
TOTAL LIABILITIES & EQUITY 29,795.00 43,203.00 40,436.00

Common Shares Outstanding at Fiscal Year End 2,318.00 2,318.00 2,312.00

INCOME STATEMENT 12/31/2006 12/31/2007 12/31/2008

 Sales 24,088.00 28,857.00 31,944.00
- Cost of Goods Sold 7,222.00 9,229.00 10,146.00
= Gross Profit 16,866.00 19,628.00 21,798.00
- SG&A 9,431.00 10,945.00 11,774.00
- Other Operating Expenses 938.00 1,163.00 1,283.00
= Operating Income 6,497.00 7,520.00 8,741.00
Investment Income 0.00 0.00 0.00
Other Income, net of Other Expense 6.00 -95.00 -1,923.00
Other Income 195.00 173.00 53.00
Other Expense 189.00 268.00 1,976.00
- Net Interest Expense (Income) 27.00 220.00 105.00
Interest Income 193.00 236.00 333.00
Interest Expense 220.00 456.00 438.00
- Minority Interest (NOTE A) 0.00 0.00 0.00
= Pretax Income 6,476.00 7,205.00 6,713.00
- Tax Expense 1,498.00 1,892.00 1,632.00
+ Unusual Gains, Net of Unusual Losses 102.00 668.00 726.00
= Net Income 5,080.00 5,981.00 5,807.00
- Preferred Dividends 0.00 0.00 0.00
= Net Income to Common 5,080.00 5,981.00 5,807.00

NOTE A: "Minority interest" is now called "non-controlling interest."

 FORECAST ASSUMPTIONS

Cost of Capital Parameters

12/31/2009 12/31/2010
Market Risk Premium 5.00%
9,409.00 11,511.00 Risk Free Rate 3.00%
3,758.00 4,430.00 Tax Rate 35.00%
2,354.00 2,650.00 Cost of Debt 4.50%
2,030.00 2,988.00 Common Equity Beta 0.60
17,551.00 21,579.00

11,441.00 16,672.00
12,828.00 26,909.00

6,755.00 7,663.00 PRO FORMAS & VALUATION

31,024.00 51,244.00 HISTORICAL
48,575.00 72,823.00 2007
PRO FORMA - BEGINNING BALANCE SHEET

1,410.00 1,887.00 Beginning Net Working Capital 229.00

6,800.00 9,376.00 + Beginning Net Long Term Assets 18,683.00
5,511.00 7,245.00 = Beginning Net Operating Assets 18,912.00
13,721.00 18,508.00
Net Debt 1,992.00
5,059.00 14,041.00 + Preferred Stock 0.00
1,484.00 4,163.00 + Shareholder's Equity 16,920.00
2,965.00 4,794.00 = Net Capital 18,912.00
9,508.00 22,998.00
23,229.00 41,506.00

547.00 314.00
Sales Growth #DIV/0!
NOPAT / Sales 21.29%
0.00 0.00 Beg. Net Working Capital / Sales 0.79%
24,799.00 31,003.00 Beg. Net Operating Long Term Assets / Sales 64.74%
24,799.00 31,003.00
48,575.00 72,823.00 Net Debt / Book Value of Net Capital 10.53%
Preferred Equity / Book Value of Net Capital 0.00%
2,303.00 2,292.00 Shareholders' Equity / Book Value of Net Capital 89.47%

PRO FORMA - INCOME STATEMENT

12/31/2009 12/31/2010 Sales 28,857.00
 NOPAT (Net Operating Profits After Tax) 6,143.23
31,006.00 35,200.00 - Net Interest Expenses After Tax 162.23
9,864.00 11,234.00 = Net Income 5,981.00
21,142.00 23,966.00 - Preferred dividends 0.00
11,381.00 13,179.00 = Net Income to Common 5,981.00
1,343.00 1,703.00
8,418.00 9,084.00 Book Value on Common Equity Growth Rate
0.00 0.00
-161.00 4,425.00 RESIDUAL INCOME VALUATION
92.00 5,312.00 Cost of Common Equity
253.00 887.00 Net Income to Common
92.00 291.00 - Charge for Common Equity (Beg Book Value of Equity x Cost of Common Equity)
249.00 317.00 = Residual Income
341.00 608.00 Present Value of Residual Income
82.00 50.00 Present Value of Terminal Abnormal Earnings
8,083.00 13,168.00
2,040.00 2,384.00 Beg. Book Value of Equity
781.00 1,025.00 + PV of Residual Income (forecasted years 1-2)
6,824.00 11,809.00 + PV of Residual Income (terminal value, beginning year 3)
0.00 0.00 = Estimated Value of Equity
6,824.00 11,809.00
= Number of Shares Outstanding (MM)
Estimated Value Per Share
Financial Projections 2011 2012 2013 (Terminal)

Sales Growth Rate 10.00% 8.00% 3.00%

NOPAT / Sales 20.00% 20.00% 15.00%
Beg. Net Working Capital / Sales 3.00% 3.00%
Beg. Net Long-Term Assets / Sales 105.00% 100.00%

Net Debt / Book Value of Net Capital 27.75% 27.75% 27.75%

Preferred Equity / Book Value of Net Capital 0.00% 0.00% 0.00%
Shareholders' Equity / Book Value of Net Cap 72.25% 72.25% 72.25%

HISTORICAL FORECAST TERMINAL

2008 2009 2010 2011 2012 2013 2014

624.00 740.00 1,221.00 936.00

26,141.00 24,065.00 26,028.00 41,973.00
26,765.00 24,805.00 27,249.00 42,909.00

5,021.00 4,333.00 2,450.00 11,906.00

0.00 0.00 0.00 0.00
21,744.00 20,472.00 24,799.00 31,003.00
26,765.00 24,805.00 27,249.00 42,909.00

10.70% -2.94% 13.53%

18.43% 22.23% 34.23%
1.95% 2.39% 3.47%
81.83% 77.61% 73.94%

18.76% 17.47% 8.99% 27.75%

0.00% 0.00% 0.00% 0.00%
81.24% 82.53% 91.01% 72.25%

31,944.00 31,006.00 35,200.00

 5,886.47 6,892.78 12,047.32
79.47 68.78 238.32
5,807.00 6,824.00 11,809.00
0.00 0.00 0.00
5,807.00 6,824.00 11,809.00

x Cost of Common Equity)

31,003.00
0.00
0.00
31,003.00

2,292.00
13.53