Economic Value Added Analysis of Coca Cola

This report evaluates Coca Cola using Economic Value Added (EVA) analysis and discusses the VBM enterprise management system. It explains the advantages of EVA analysis and discusses Coca Cola's segments. The report also provides a summary of the company's background and strategic advantages.

Running head: VALUE ANALYSIS
Economic Value Added
Name:
Institution:
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Executive summary
The paper gives a report on the evaluation and the analysis of Coca cola using the
Economic Value Added (EVA), which is a primary tool for analysis in the paper. The true
and fair value of coca cola is determined by the company’s ability to liquid cash returns that
exceed the cost of capital for the company. The report objective is to identify the company
and its worth if it were broken into pieces and then using the EVA analysis. On the basis of
the EVA indicator, the VBM enterprise management system (Value Based Management) is
built.
This enterprise management system is based on maximizing the economic value
added. The goal of all management decisions in an enterprise is to increase value for
shareholders and owners. Finance serves to create a positive income from investing over
invested capital. In this system, corporate governance serves to develop a system for
measuring the contribution of managers to the growth of a company’s value and the system
of their material motivation and encouragement.
With such classic indicators as ROA and ROE. In addition, the report explains significant
advantages that could possibly be attained by the analysis and the break up report for
Economic Value Added (EVA) analysis. There are also other methods used in analysis and
valuation of the company including Ratio analysis, financial statement analysis and the trend
analysis over a series of latest years the company has been in operation. According to the
results Economic Value Added (EVA) analysis, Coca-Cola has three main segments; the
retail segment, the manufacturing segment and the productivity segment. Each of the segment
has been discussed in some sections of the paper. The limitation of this method is that it is
only suitable for manufacturing companies that are asset intensive and may not be
appropriate in other companies structured differently.

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Company Background
The coca cola company, is a world renowned American corporation, manufacturer
and marketer of nonalcoholic beverages and sometimes syrups. The company is known for its
flagship product which is coca cola a world renowned brand that was discovered by
pharmacist John smith in 1886. The company is listed on the NYSE and is part of various
indices which include; the S&P 500, DJIA, the Russell 1000 index and the much south after
Russell 1000 Growth Stock Index (Blum, & Dacorogna, 2014).. Notable figures in the
organization include James Quincy as the Chief Executive Officer and Muhtar Kent as the
chairman of the board. Some of the famous investors who have bought shares from the
company are the billionaire investor warren Buffet. It operates in the beverage industry and
its headquarters are located in Atlanta Georgia in the United States of America.
In the year 1886, John Pemberton who was a pharmacist invented the original coca
cola drink (Chetty, Friedman, & Rockoff, 2014). He sold it as a medicinal beverage although
the product was named and the logo set by Pemberton bookkeeper, Frank m. Robinson from
its main ingredient which are the kola leaves and coca nuts. In 1894, businessman Asa
Candler bought the product form Pemberton heirs with the intention to mass produce and
increase the customer base of the product. By the end of 1895, coca cola was being sold to
every state in the country due to the advertisement strategy he undertook (Easton, &
Sommers, 2018).
The company has over the years expanded through acquisitions (David, & Reder,
2014). . In 1960, it acquired minute maid. In 1982, the company acquired the Columbia
picture movie studio for $ 692 million but later sold it in 1989 for $ 3 billion. It acquired the
Indian beverage company Thums up in the year 1993 and the odwalla brand of fruit juices in

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2001. These are just a number of acquisitions that the company has undertaken over a number
of years it has been operating.
Analysis of Microsoft’s Shares and Stocks
Coca cola rapid growth and exploitation in its products had attracted investors in its
stocks since the beginning of the 20th century. It competes mainly with Pepsi that is also a
beverage company but does not appear in the beverage industry stocks. However, coca- cola
is the most popular among the investment companies having been positioned in the first
position with pepsi coming in a distant second (Gepp, & Kumar, 2015). Coca cola expects to
expand more and grow its retail and manufacturing globally through acquisitions and more
innovation of its products.
It commands more than 60% of the total market of beverages while the rest share the
remaining forty percent although the market share has significantly fallen over the years
(Grant, 2016). Increase of profitability / profitability of the enterprise due to the increase in
sales. This can be achieved by developing marketing strategies to promote products (Harris,
Ingle, & Rutledge, 2014). The second direction is the reduction of costs in the production of
products through the use of new technologies, materials, raw materials, highly qualified
personnel, etc .
Summary for a sustainable development of a company / enterprise, a single criterion
for assessing value for owners is required, which allows us to link the strategic level of
management and operational. The economic value added indicator (EVA) is one of the most
common indicators for the owner in assessing the value of his business (Johnson, 2014). On
the basis of the EVA indicator, a model of enterprise management VBM (Value Based
Management) is built, where all the indicators of the enterprise influence the changes in value

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added. To stimulate managers in actions aimed at growth of value, on the basis of this model,
various systems for assessing the contribution and monetary incentives are developed.
Individual Segments or Elements in Microsoft Corporation
a) Retail
The concept of the cost approach is based on the assumption that the main goal of all
enterprises is to maximize its value in the long run. The concept of economic value added
(EVA, Economic Value Added) is equivalent to the concept of economic profit, which was
proposed by A. Marshall in 1890. He determined that the normal profit is the profit necessary
to keep the enterprise in the business in the long run (or the minimum return on the
investment of shareholders), and the economic profit is any income in excess of the normal
profit.
The concept of economic value added (EVA) and the methodology for its use were
developed by the consulting company Stem-Steward. The EVA model helps to assess the
growth of shareholder wealth and represents a consistent approach to setting goals and
measuring performance indicators used by investors; evaluation of capital management
strategies, evaluation of the effectiveness of innovation; the definition of material incentives
for managers to take into account motivational factors and to bring their interests closer to the
interests of owners.
b) Manufacturing
Economic Value Added (Economic Value, EVA) is an estimate of the actual economic
benefits of a business for the year and it differs significantly from the accounting profit.
Economic value added is the residual income remaining after the cost of servicing the entire
capital, including its own, while the accounting profit is determined without taking into

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account the cost of equity. The EVA indicator should be defined as the difference between
net operating profit and the value of capital invested in an enterprise. The price of capital is
determined by the minimum expected rate of return on all sources of financing. The accuracy
of estimating the cost of using equity capital is used to determine and rank the profitability of
business units, the unprofitable of which are funded by the rest (Johnson, 2014).
Evaluation of the effectiveness of the enterprise according to the concept of EVA is as
follows: if the value of EVA is positive, therefore, the PSP increases and vice versa. The
EVA model, which reveals cost factors, is presented as follows:
As follows from this equation, a firm creates a positive economic value added if the return on
its invested capital is greater than its weighted average cost required by investors. If the
weighted average cost of capital exceeds its profitability, then new investments reduce the
value of the firm.
c) productivity
The return on invested capital is valuable in that it can be analyzed along with the WACC
and include opportunity costs of financing and real expenses on interest payments. This is
expressed, in particular, in the calculation of NOPAT (net operating profit after taxes),
interest expenses are added to net operating profit. Therefore, it is possible to compare the
return (benefit) from the capital used with its value, that is, to control the difference between
them {ROIC - WACC ^ spread. The resulting positive difference is the new economic value
created by the invested capital. Thus, the positive dynamics of the trend of ROIC and {ROIC-
WACC ^ spread indicates an increase in the competitive advantages of the enterprise and
detachment from competitors. A downward trend indicates increased competition. You
should also study the dynamics of the WACC, and the benefits of finance Leverage. Current

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assets and the net value of buildings and equipment purchased with funds specially provided
by investors, rather than the course of production.
Economic value added reflects the amount of net profit that can be divided among
shareholders after paying taxes and capital raising costs (Jorgenson, Gollop, & Fraumeni,
2016). . The most important advantage of evaluating a company on the basis of EVA is the
combination of financial and operating results in this indicator. The invested capital in the
EVA methodology is the capital invested in assets to ensure the operational activities of the
company. This value is calculated as the difference between the balance sheet value of total
assets (at the beginning of the period) and the amount of interest-free short-term liabilities, or
as the sum of equity and long-term liabilities.
This is the so-called operational approach to the calculation of EVA. There is also a
financial (economic) approach. The EVA is calculated according to the operational approach
formula by dividing NOPAT's profit into WACC. As a result, ROIC indicator of return on
invested capital appears: This principle of organization value is expressed in the following
representation of the economic value added (EVA) If Spred is positive, then the company has
earned a yield that exceeds the yield required by investors. In this case, the return on capital
invested in the company is higher than the alternative return on investment for the investor,
because all the alternatives are estimated and included in the weighted average cost of capital
WACC).
NOPAT calculation for Coca cola Corporation (in million Dollars):
The year ending Fiscal year 2017 Fiscal year 2016
Net operating income $1,248 $1 347
Deferred income tax expense (benefit) 662 403

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(Decrease) increase in allowance for doubtful accounts -20 89
Unearned revenue (Decrease) increase 8,570 9,591
Restructuring liability (Decrease) increase -163 -189
Equity equivalents (Decrease) increase 6,976 8,886
Interest expense 2,133 1,456
Lease obligations (Interest expense) 237 170
Interest expense (Adjusted) 2,459 1,413
Interest expense (Tax benefit) -681 -437
After taxes interest expense 1,599 919
Marketable securities loss (Gain) -2,583 -668
Dividends and interest income -1,387 -903
Before taxes, investment income -3,970 -1,571
Investment income from tax expense or income 1,390 550
After taxes, investment income -2,581 -1,021
Operating profit after taxes-Net (NOPAT) 27,198 25,581
The Weighted Average Cost of Capital (WACC) = 10.99%. Therefore, the Economic
Added Value (EVA) for the combined company is calculated as:

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EVA = $27,198 – ($77,231 * 10.99%)
= $18,710.31
Cocal cola Economic Value Added in the Value Based Management system. This
proves that the EVA indicator reflects the mood of shareholders better than traditional
measures. Economic Value Added = Net profit - WACC * (Capital and reserves + Long-term
liabilities. To calculate WACC, you can compare ROE (return on capital, profitability) for
similar values of the industry (Modarres, 2016). . In this example, the profitability of
managing the company's capital (both own and borrowed) in the amount of 10% per annum
was taken. Economic Value Added = B4-B3 * (B5 + B6) Example of EVA Calculation
Control levers in the EVA model levers and factors of economic value added management
(NOPLAT, WACC and CE):
The value of the value spread serves as the basis for measuring the profitability of capital
adjusted for risk. With this indicator, you can compare companies, different in: categories
(small / medium); capital-labor ratio; capital structure; degree of risk. It should be noted that
the EVA indicator for one period is not very informative in itself (Sass, Semykina, & Harris,
2014).. Therefore, it is necessary to consider it in time. For this purpose, the value added
value indicator is used, i.e. The company’s value is considered the sum of discounted value
added for all forecast periods.
Strategic advantages of Coca Cola Company
EVA is an indicator that is based on trying to overcome traditional accounting
problems. However, since the data for the calculation is taken from the financial statements,
data conversion problems may still arise in this method. In order for the indicator EM4 to
measure the net economic profit for the owners of the company, it is impossible to replace the

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operating profit after taxes of NOPAT with the result of production activity on the balance
sheet, and the invested capital with the sum of assets from the balance sheet. This leads to the
fact that the indicator EVA appear disadvantages inherent in classical indicators of
profitability. Therefore, it is recommended to use the EVA indicator to convert accounting
data into economic indicators.
EVA is one of the most popular and frequently used options in the framework of the
theory of value added. Other variations are market value added (Market Value Added, MBA),
shareholder value added (Shareholders Value Added, SVA), total value added (Total Value
Added, TVA).
Business valuation based on economic value added (eva)
One of the most well-known and proven practices of Western companies in business
valuation is the method based on economic added value (Economical Value Added, EVA),
which shows the value added over the period, taking into account opportunity costs and the
amount of investment in expansion that will add cost in the future (Kaplan, & Atkinson,
2015). .
Of all the existing indicators designed to assess the organization’s value creation
process, the EVA indicator is the most well-known and common. The reason for this lies in
the fact that EVA combines the simplicity and the ability to determine the value of a
company, and also makes it possible to evaluate the effectiveness of both the organization as
a whole and individual divisions (Koopman, Wang, & Wei, 2014)..

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Marked ways to improve EVA implemented in specific activities carried out by
organizations. If the EVA indicator is chosen by the organization as a criterion for evaluating
the effectiveness of its activities, then the task is to increase the value of this criterion.
Evaluation of changes in the organization by the criterion of EVA growth
Main types of organizational transformations
1. Increase profits when using the same amount of capital
a) Development of new types of products (works, services)
b) Development of new markets (new market segments)
c) The development of more profitable adjacent parts of the production - technological chain
2. Reducing the amount of capital used while maintaining profits at the same level
Liquidation of unprofitable or insufficiently profitable fields of activity (including liquidation
of an organization)
3. Reducing the cost of raising capital
Financial Analysis of Microsoft Corporation
The task of planning profits, and with it planning the structure and price of capital is a
top priority for the management of the organization. The more professional the organization’s
management is, the more equal, the higher the EVA and the planning accuracy. This explains
the fact that at large Western companies, EVA values are the basis of premium managers who
become more interested in the growth of organization profitability and EVA growth. In this
regard, EVA is the basis of motivation.

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Managing the value of an organization is equally necessary for everyone:
shareholders, investors, top managers. It is this goal - the growth of the value of the
organization is common to all participants of the organization’s activities and coincides with
their diverse interests (Lin, Chiu, Huang, & Yen, 2015). Choosing an algorithm for analyzing
decisions on capital management, evaluating the effectiveness of the company and
investment projects, establishing communication with the owners of capital, managers
actually choose between two existing models of financial analysis: accounting (or
accounting) and financial (or cost).
For a full assessment of the effectiveness of the organization and to answer the two
main questions of the owner - how much is his capital really worth, and how much does it
bring in the income of generally accepted indicators is not enough. Accounting profit and
based on its performance indicators of the company have a number of significant drawbacks.
Such indicators can not be used to set the goals of the company. The indicator "Net profit" for
the owner is more virtual than real. The presence of profit is not a guarantee of the
availability of funds in current accounts, and usually even profitable organizations have a
shortage of funds.
Accounting indicators do not take into account market risks (the possibility of
disruption of supplies, falling sales or prices in the market), organizational risks (risks of
recognizing management incompetence, inefficient organizational structure), financial risks
(risks of reducing solvency, liquidity, profitability of the company). In addition, accounting
indicators are focused on the past (reporting for the previous period), while it is important for
the owner to represent the future and predict it. Accounting figures also do not take into
account the change in the value of money over time (discounting), inflation, various
qualitative parameters of the effectiveness of the company (Nesticò, & Pipolo, 2015)..

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Conclusion
The relationship between the market value of the organization and the EVA values
implies that the organization must plan future EVA values in order to direct the actions of the
owners to invest their funds. Waiting for future values of EVA has a significant impact on the
growth of the stock price of the organization. If expectations are contradictory, the stock price
will fluctuate, and in the short term it will be impossible to draw a clear relationship between
the EVA values and the price of the organization’s shares. The rate of return on an investor is
the barrier income rate set by the investor (shareholder, owner) required on the invested
capital, taking into account the company's respective investment risk. It is exactly the rate of
return that an investor could earn if he used the provided capital in alternative areas of
business, but with the same level of risk (Valickova, Havranek, & Horvath, 2015). The
economic meaning of this indicator is that the economic value added (EVA) occurs in an
organization if during a given period of time it was possible to create a return on invested
capital (ROCE) higher than the investor return rate (WACC). Investors (owners,
shareholders) will not consider themselves satisfied if the profitability of their capital created
by the organization has not reached the barrier rate of return established by them.

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