Effect of intercorporate investment policies on financial statements. Coca-Cola Company (Coke) and PepsiCo (Pepsi) dominate the soft drink industry in the United States and maintain leading market positions in many other countries. Coke has followed a policy of holding a 49 percent ownership interest in its bottlers, whereas Pepsi wholly owns its bottling operations. Exhibit 11.20 presents selected balance sheet data for Coke and Pepsi for Year 11.

The first column shows amounts for Coke as reported, with Coke using the equity method to account for investments in its bottlers. The second column shows amounts for Coke's bottlers as reflected in a note to Coke's financial statements. The third column shows consolidated amounts for Coke and its bottlers. The 51 percent external interest in these bottlers appears on a line between liabilities and shareholders' equity. The fourth column shows amounts for Pepsi as reported, with its bottlers consolidated.

a. Compute the rate of return on assets for Year 11 under each of the four treatments in Exhibit 11.20. Assume an income tax rate of 34 percent. Also assume that the amounts shown for total assets in Exhibit 11.20 approximate the average assets for Year 11 .

b. Compute the ratio of total liabilities to total assets at the end of Year 11 under each of the four treatments in Exhibit 11.20.

c. Evaluate the operating profitability and risk of Coke versus Pepsi using the ratios computed in questions a and \(\mathbf{b}\).

d. Suggest reasons why Coke might choose to own 49 percent of its bottlers whereas Pepsi holds 100 percent of its bottlers.

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COKE and PEPSI EXHIBIT 11.20 Financial Statement Data for Year 11 (all dollar amounts in millions) (Problem 53) Coke as Reported (1) Coke's Bottlers (2) Coke as Consolidated with Bottlers (3) Pepsi as Reported (4) ASSETS Current Assets. $4,143 $ 2,153 $ 6,296 $ 4,081 Investment in Bottlers 2,025 Property, Plant, and Equipment 3,112 8,957 Goodwill 12,069 310 5,711 5,845 Total Assets. $9,280 $11,110 $18,675 $15,637 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liability ... $4,296 $ 2,752 $ 7,048 $ 3,264 Long-term Liabilities 1,133 4,858 5.991 7,469 External Interest in Bottlers 1,785 Shareholders' Equity 3,851 3,500 3,851 4,904 Total Liabilities and Shareholders' Equity $9,280 $11,110 $18,675 $15,637 Net Income for Year 11 $1,364 $ 290 $ 1,364 $ 1,091 Interest Expense for Year 11 $ 231 $ 452 $ 683 $ 689