Coca-Cola mini-case
Projected financial statements
Prospective analysis is the final step in the financial statement analysis process. It can only be
undertaken once the historical financial statements have been properly adjusted to accurately
reflect the economic performance of the company. As we will discuss in this course, these
adjustments may include, for example, eliminating transitory items in the income statement or
reallocating them to past or future years, capitalizing (expensing) items that have been expensed
(capitalized) by management, capitalizing operating leases and other forms of off-balance sheet
financing, and so forth. Prospective analysis includes forecasting of the balance sheet, income
statement and statement of cash flows.
Prospective analysis is central to security valuation. Both the free cash flow and residual
income valuation models require estimates of future financial statements. The residual income
model, for example, requires projections of future net profits and book values of equity in order
to estimate current stock price. Prospective analysis is also useful to examine the viability of
companies’ strategic plans. For this, we analyze whether a company will be able to generate
sufficient cash flows from operations to finance expected growth or whether it will be required to
seek debt or equity financing in the future. We are also interested in analyzing whether current
strategic plans will yield expected benefits. And finally, prospective analysis is useful to
creditors to assess a company’s ability to meet its debt service requirements.
Assignment:
1. Read WSH chapter 10 on projections.
2. Download the Coca-Cola data set (KO 10Y 10-K.xls). Using this data, and the projection
assumptions provided below, prepare a forecasted income statement and balance sheet for
2004.
Projection assumptions:
Sales growth .........................................................................................................
Gross profit margin ..............................................................................................
Selling, general & administrative expense/ Sales .................................................
NOPAT/ Sales ......................................................................................................
Depreciation rate (Depreciation expense/ Prior year gross PP&E) ......................
Interest rate (Interest expense/ Prior year long-term debt) ...................................
Tax rate (Income tax/ Pretax income) ..................................................................
Cash dividend per share .......................................................................................
Asset turnover—ATO (Sales/ Average net operating assets) ...............................
Accounts receivable turnover—ART (Sales/ Average accounts receivable) .......
Days sales outstanding—DSO .............................................................................
Inventory turnover—INVT (COGS/ Average inventory) ....................................
Days inventory outstanding ..................................................................................
PP&E turnover—PAT (Sales/ Average PP&E) ...................................................
Accounts payable turnover—APT (COGS/ Average accounts payable) .............
Days payables outstanding ...................................................................................
Working capital turnover—WCT (Sales/ Net operating working capital) ...........
Capital expenditures/ Sales ..................................................................................
Taxes paid rate (Tax payable/ Tax expense) ........................................................
© 2003 by Robert F. Halsey
7.56%
63.1%
31.5%
21.8%
9.4%
2.3%
20.9%
$0.89
1.01
10.05
36.32
6.10
59.86
1.17
2.00
182.22
7.16
3.4%
0.80