The tollowing exercise is trom Coca Cola Company\'s 2014 annual report tiled wit

Question

The tollowing exercise is trom Coca Cola Company's 2014 annual report tiled with the SEC: Manogement evaluates the performance of our operating segments separately to individually monitor the different factors affecting financial performance. Our Company manages income taxes and certain treasury-related items, such as interest income and expense, on a global basis within the Corporate operating sement. We evaluate segment performance based on income or loss before income taxes. The following are selected segment data for Coca-Cola Company for the 2014 and 2013 fiscal years. Dollar amounts are in the millions. Eurasisa & Africa Latin North Europe America Pacific 2014 Fiscal Year Net operating revenues Income before taxes Identifiable operating assets $2,730$5,536 $4,657 $21,479 $5,746 2,316 1,084 1,298 2,852 2,447 2,448 2013 Fiscal Year Net operating revenues Income before taxes Identifiable operating assets assets 108 $5.34 3,731 $2,763 1,087 1,273 $4,939 2,908 2,918 $21,590 2,432 33,964 $5,869 2,478 1,922 2,859 Required: Compute the ROI for each of Coke's geographical segments for each fiscal year. Which segment appears to have the best performance during 2014 based on their ROls? Which segment showed the most improvement from 2013 to 2014? Assuming Coke's management expects a minimum return of 30 percent, calculate the residual income for each segment for each fiscal year. Which segment appears to have the best performance based on residual income? Which segment showed the most improvement from 2013 to 2014? a. b. Explain why the segment with the highest ROI in 2013 was not the segment with the highest residual income. Assume the management of Coke is considering a major expansion effort for the next five years. On which geographic segment would you recommend Coke focus its expansion efforts? Explain the c. d.

Explanation / Answer

Part 1)

The formula for calculating ROI is given as below:

ROI = Income before Taxes/Identifiable Operating Assets

The ROI for each segment for each fiscal year is calculated with the use of following table:

Pacific segment appears to have the best performance during 2014 based on ROI calculations.

In percentage terms, Europe segment [(84.93% - 76.63%)/76.63%*100 = 10.84%] showed the most improvement from 2013 to 2014.

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Part 2)

The formula for calculating residual income is given as below:

Residual Income = Income before Taxes - (Identifiable Operating Assets*Desired Rate of Return)

The value of residual income for each segment for each fiscal year is calculated with the use of following table:

Pacific segment appears to have the best performance during 2014 based on residual income.

In percentage terms, Europe segment [(1,844.60 - 1,739.70)/1,739.70*100 = 6.03%] showed the most improvement from 2013 to 2014.

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Part 3)

The highest residual income for the year 2013 was provided by the Latin America Segment. It is because this segment has generated higher operating income than the segment with the highest ROI for 2013 (which is Pacific). The difference in the value of operating income for two segments is more than the difference in the value of operating assets for the same segments. This factor has contributed to higher residual income for the Latin America Segment.

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Part 4)

In my opinion, the company should focus on expanding pacific segment as it has shown improvement in performance over the two year period (2013 to 2014) both in the terms of ROI and Residual Income.

Euraasia and Africa Europe Latin America North America Pacific 2014 Fiscal Year Income before Taxes 1,084 2,852 2,316 2,447 2,448 Identifiable Operating Assets 1,298 3,358 2,426 33,066 1,793 ROI 83.51% 84.93% 95.47% 7.40% 136.53% 2013 Fiscal Year Income before Taxes 1,087 2,859 2,908 2,432 2,478 Identifiable Operating Assets 1,273 3,731 2,918 33,964 1,922 ROI 85.39% 76.63% 99.66% 7.16% 128.93%

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