Question

# Making Business Decisions: Loaning Money to The Coca-Cola Company As chief lending officer for a bank,...

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 2015 and 2014 (included in the companiesâ€™ Form 10-Ks for the year ended December 31, 2015 for Coca-Cola and December 26, 2015 for PepsiCo; all amounts are in millions of dollars):

The Coca-Cola Company 12/31/15 12/31/14
Accounts payable and accrued expenses \$9,660 \$9,234
Accrued income taxes 331 400
Assets held for sale 3,900 679
Cash and cash equivalents 7,309 8,958
Current maturities of long-term debt 2,677 3,552
Inventories 2,902 3,100
Loans and notes payable 19,100 19,130
Liabilities held for sale 1,133 58
Marketable securities 4,269 3,665
Prepaid expenses and other assets 2,752 3,066
Short-term investments 8,322 9,052
Trade accounts receivable, less allowances
of \$352 and \$331, respectively
3,941 4,466
PepsiCo 12/26/15 12/27/14
Accounts and notes receivable, net \$6,437 \$6,651
Accounts payable and other current liabilities 13,507 13,016
Cash and cash equivalents 9,096 6,134
Inventories 2,720 3,143
Prepaid expenses and other current assets 1,865 2,143
Short-term investments 2,913 2,592
Short-term obligations 4,071 5,076

Required:

1. Compute working capital and the current ratio for both companies for 2015. Enter working capital amounts in millions of dollars. Round current ratio to two decimal places. If required, use the minus sign to indicate negative working capital.

 Item Coca-Cola PepsiCo Working capital \$ \$ Current ratio :1 :1

2. On the basis of your answers to (1), which company appears to be more liquid?

• Both are equally liquid
• PepsiCo
• Neither are liquid
• Coca-Cola

3. Which of these are measures of liquidity?

• Current ratio and Debt equity ratio
• Current ratio and Profitability ratio
• Current ratio and Working capital
• Debt equity ratio and Working cap

Working Capital = Current Assets - Current Liabilities

Current Ratio = Current Assets/ Current Liabilities

 Current Assets 3900+7309+2902+4269+2752+8322+3941 = 33,395 6437+9096+2720+1865+2913 = 23,031 Current Liabilities 9660+331+2677+19100+1133 = 32,901 13507+4071 = 17,578 Current Ratio 33395/32901 = 1.02 23031/17578 = 1.31 Working Capital 33395-32901 = 494 23031-17578 = 5,453 Company having higher Current Ratio is more liquid Pepsi Co. Measured of liquidity Current Ratio and working Capital

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