Analysis of the Coca-Cola Company

Report by Valanium Analysts: Theresa Lagos (tlagos@sloan.mit.edu), Lisa Schirf (lschirf@sloan.mit.edu), and Vicente Smith (vsmith@sloan.mit.edu) Investment Recommendation: SELL
KO NYSE (11/29/01) 52 week range Revenue (2001 Est.) Market Capitalization Share Outstanding Dividend Yield Avg Daily Trading Volume $ 46.96 $ 42.37 - $ 63.38 $ 21,188,000,000 $ 116,800,000,000 2.49B 1.53% 3.58M EPS Forecast FYE 12/30 EPS Ratios Forward P/E Forward PEG M/B

November 29, 2001

2000A 2001E 2002E 2003E $1.43 $1.56 $1.74 $1.92 Firm 26.5 2.34 10.5 Average of Competitors 25.7 1.99 8.7 $ 46.96 $ 40.08 $ 49.60 $ 41.33 $ 38.92 $ 22.07 $ 29.98

Book Value per Share (9/00) $ 4.46 Return of Equity 32.64% Return on Assets 14.86% Est. 5 Years EPS Growth Rate -5.66% Industry BEVERAGES - SOFT DRINIKS

Valuation Predictions Actual Current Price Forward P/E Valuation Trailing P/E Valuation PEG Valuation M/B Valuation EBO (Abnormal Earnings) Valuation DCF Valuation Performance of KO Trailing Return on Coke Return on S&P 500 Return on Competitors

3 mo 6 mo 12 mo -3.5% -1.8% -24.5% -0.1% -10.3% -13.7% -0.6% 1.3% -11.4%

Coca Cola: Growth Targets Are Too Aggressive for this Transitioning Beverage Company Assigning a rating of sell on Coca Cola Company at its current price of $46.96 and a 12-month target price of $41.33 (based on PEG valuation) In a 12 month period stock has depreciated 24.5% compared to direct competitors which depreciated only 11.4% over the same period Despite increased demand, Coca Colas flagship Classic Coke has been steadily losing market share to other leading brands while company is trying to expand into the lower margin non-carbonated sector Trading prices are near its 52 week low of $42.37 and company has been unable to reach conservative growth targets for the past few years Growth is estimated at 4% over the next five years lower than Coca Colas internally forecasted 6%
Rating System: BUY: A strong purchase recommendation with above average long-term growth potential. MARKET OUTPERFORM: A purchase recommendation that is expected to marginally outperform the return of the market. MARKET PERFORMER: A recommendation to maintain current positions with returns to match that of the market. SELL: A recommendation to sell the security (or short the security) as it is expected to decrease in price in the medium term.

Company Background and Business Summary The Coca-Cola company is the world's leading manufacturer, distributor and marketer of non-alcoholic beverage concentrates and syrups and, to a lesser degree, finished beverages which it sells to bottling and canning operations and authorized wholesalers. Coca-Cola produces more than 230 beverage brands and markets four of the world's top five soft drink brands, including Coke, diet Coke, Fanta, and Sprite. Coca-Cola's finished beverage products bearing the Coca-Cola Company's trademarks are sold in over 200 countries. In 2000, 72% of Coca-Cola's Operating Income was generated outside the United States. Coca-Cola also maintains ownership interest in many bottling and canning operations. Fundamental to Coke's investment and long-term growth strategy are its marketing expertise, brands and bottling system. To support its brands and increase consumer awareness of its products, Coke makes significant investments in sales and marketing (hovering around $7B or 35% of sales and 77% of total SG&A for the last two years with a $300M marketing increase in 2000). To develop its brand strategy Coke's global marketing force heavily invests in product and packaging research, developing targeted consumer advertisements and promotions and soliciting customer feedback. Coca-Cola also leverages its relationships with bottlers and local vendors, to create and implement local marketing campaigns. A strong force behind Coke's global success is its ownership interest in and partnering with bottling and canning operations world-wide (bottling ownership assets are 28% of Total Assets). The company maintains business relationships with three types of bottlers (percentage depicts worldwide unit case volume sales breakdown by bottling partners): Independently owned bottlers, in which the Company has no ownership interest (25%) Anchor bottlers, in which the Company has invested and has a non-controlling ownership interest (59%) Bottlers in which the Company has invested and has a controlling ownership interest (16%) Coke's bottling companies / partners are large, geographically diverse, with strong financial resources for long term investment - providing Coke with strong strategic business partners and local access on every major continent. Coke needs its bottling partners to be committed to individual, profitable growth in order to help Coke meet its worldwide production, distribution, and marketing goals. Despite Coca-Cola's dominant global position, Coca-Cola's bottom line has been declining since the passing of its last CEO Roberto Giozueta in 1987 and macroeconomic factors such as the Asian crisis and a product recall and anti-trust lawsuit in Europe - reversing a 10 year trend of rising growth from $43B 1981 to $143B in 1987. Coke's stock price has fallen from a high of $90 in mid-1998 to its current price of $47. To improve its position, for the past year and a half, Coca-Cola has been undergoing a strategic transformation. It has been broadening its focus from the slower growth carbonated soft drink segment to the higher growing non-alcoholic/noncarbonated beverage segment. Coke currently has 60% of its current global volume in carbonated beverages, which is declining at -2% compared to the non-carbonated beverages which is growing at 5% and represents over 45% of the global soft drink industry. To hasten this transition, Coca Cola has made many recent acquisitions in this segments such as Planet Java (maker of coffee drinks), Mad River Traders (distributor of new age teas and juices) and a recent tender offer for Odwalla (maker of Fresh Samantha drinks). Coca-Cola is also attempting to transition from a centralized, inward-looking carbonated soft-drink company to an entrepreneurial, consumer needs driven non-alcoholic beverage company with its "Think Local, Act Local" business strategy. Coke has introduced new beverages in almost every non-alcoholic ready-to-drink category (water, sports drinks, fruit drinks, teas, coffee) through internal development or external acquisitions and has been shaping products and marketing initiatives to meet local needs.
2

Initial results of this new strategy seem to be positive as growth in 2001 has come primarily from new local product initiatives that exploit local opportunities (e.g. the Dasani water line - the largest bottled water market share in North America - and Green Tea in Japan). In addition, "system incentives" to move these new products are increased as Coke's global bottlers are seeking new ways to utilize extra production and distribution. However, some of Coke's major challenges in ensuring sustainable volume will to be effectively manage its resource allocation (i.e. marketing and capital expenditures) behind these new, varied beverage segments and its "core" brands. Competitors Coke has a 50% share of the global carbonated soft-drink industry and over 80% in many markets. Coke appears to have a sustainable scale advantages over its competition - it's reatest competitive advantage is the scale of its global bottling system, even more than the predominance of the Coke brand. Coke should be able to used these scale advantages outside the US to leverage its distribution pipeline expanding into other beverage segments. However, as Coke has seen its stock nearly half since 1998, its main competitor, PepsiCo (PEP) has seen its stock climb from $35 to a high of $50 (now currently at $47) with a 52-week rise of 14% vs. Coca-Cola's fall of 24% - reversing the 10 year trend of consistently lagging behind Coca-Cola. Pepsi internationally manufactures concentrates of brand Pepsi, Mountain Dew, and other brands for sale to franchised bottlers in the US and international markets. Pepsi also markets, sells, and distributes juices under several Tropicana trademarks in the US and internationally. In addition to the soft drink and juice business, PepsiCo is engaged in the snack food segment through its domestic and international Frito Lay business. Like Coca-Cola, Pepsi has also been attempting to move into the faster growing non-carbonated beverage segment with its recent acquisitions of South Beach Beverage Co. and its popular SoBe line of herbspiked fruit, energy, and tea drinks, as well as the prized Gatorade sports drink through a $13-billion acquisition of Quaker Oats Co. Pepsi also makes and markets North America's best selling brands of ready-to-drink coffees and teas through joint ventures with Lipton and Starbucks. Another competitor to Coca-Cola is National Beverage Co. (FIZ). FIZ is a holding company for various subsidiaries that develop, manufacture, market, and distribute a complete portfolio of beverage products throughout the United States. The Company's brands emphasize distinctive flavor variety, including its flagship brands, Shasta and Faygo, complete lines of multi-flavored and cola soft drinks. In addition, the Company offers an assortment of premium beverages geared toward the health-conscious consumer. The Company also produces specialty products, including VooDoo Rain, a line of alternative beverages geared toward young consumers, Ohana fruit-flavored drinks, and St. Nick's holiday soft drinks. The Company develops and produces soft drinks for retail grocery chains, warehouse clubs, massmerchandisers and wholesalers (allied brands) as well as soft drinks for other beverage companies. Cadbury Schweppes plc and its subsidiary and associated undertakings (the Group) are principally engaged in the manufacture and distribution of branded beverages and confectionery, and related foods, supplied through wholesale and retail outlets of the confectionery, licensed, catering and grocery trades in almost 200 countries throughout the world. The Group is focused on the beverages and confectionery businesses, two closely related consumer markets, and manages an extensive portfolio of brands. Cott Corporation is a supplier of premium quality retailer brand carbonated soft drinks. The Company's product line also includes clear, sparkling flavored beverages, juices and juice-based products, bottled water, organic and high-energy beverages and iced teas. The Company's products are principally sold under customer controlled private labels, but also under its own control brands and licensed brand names. The Company operates its United States business through its indirect, wholly owned significant subsidiary BCB USA Corp.; its Canadian business through its Cott Beverages Canada division; and its United Kingdom business through its wholly owned significant subsidiary Cott Beverages Ltd.

Snapshot of Competitors A series of key ratios from Coca-Colas most representative competitors is presented in the charts below.
Competitor PepsiCo, Inc. (PEP) Cadbury Schwepps plc (CSG) Cott Corporation (COTT) National Beverage Corp (FIZ)
P/E Ratios (Trailing & Forward) PepsiCo, Inc. (PEP) Cadbury Schwepps plc (CSG) Cott Corporation (COTT) National Beverage Corp (FIZ) Industry Average Coca-Cola (KO) - Price Estimate P/E (trailing) Estimate Current Price EPS(current) $48.63 $1.53 $25.25 $1.48 $17.03 $0.56 $11.20 $0.83 P/E (trailing) 31.80 17.10 30.40 13.50 31.00 EPS(next) $1.89 $1.57 $0.77 P/E (forward) 25.70 16.10 22.10 25.60

Market Cap 85B 12.6B 1B .203B

= Coke's EPS(current) * Industry Average P/E (trailing) $44.33 = $1.43 * 31.00 = Coke's EPS(current) * Industry Average P/E (forward) $39.94 = $1.56 * 25.60 $46.96 $1.43 35.51 $1.56 26.50

P/E (forward) Estimate

Coca-Cola (KO) - Actual

Price/Sales Ratios PepsiCo, Inc. (PEP) Cadbury Schwepps plc (CSG) Cott Corporation (COTT) National Beverage Corp (FIZ) Industry Coca-Cola (KO) - Price Estimate P/S Ratio Estimate Coca-Cola (KO) - Actual ROA PepsiCo, Inc. (PEP) Cadbury Schwepps plc (CSG) Cott Corporation (COTT) National Beverage Corp (FIZ) Average Coca-Cola (KO) Industry Average

Current Price Sales/Share P/S $48.63 $13.21 $25.25 $14.85 $17.03 $17.56 $11.20 $27.32

3.68 1.7 0.97 0.41 2.81

= Coke's Sales/Share * Industry average P/S $22.7 = $8.07 * 2.81 $46.96 ROE 10.40% 9.20% 4.90% 7.40% 7.17% 14.60% 7.40% 24.50% 20.20% 27.00% 13.40% 20.20% 29.80% 21.30% $8.07 5.82 Debt/Total Capital 20.00% 30.00% 70.00% 10.00% 36.67% 30.00% 50.00%

Market/Book Ratios Current Price BV/Share PepsiCo, Inc. (PEP) Cadbury Schwepps plc (CSG) Cott Corporation (COTT) National Beverage Corp (FIZ) Industry Coca-Cola (KO) - Price Estimate M/B Ratio Estimate $48.63 $25.25 $17.03 $11.20 $5.56 $8.31 $2.37 $6.40 M/B 8.74 3.04 7.18 1.75 7.03

= Coke's BV/Share * Industry average M/B $31.3 = $4.46 * 7.03 $46.96 $4.46 10.54

Coca-Cola (KO) - Actual

PEG Ratios P/E (forward)EPS Growth Rate Industry PepsiCo, Inc. (PEP) Cadbury Schwepps plc (CSG) Cott Corporation (COTT) National Beverage Corp (FIZ) Industry Average Coca-Cola (KO) - Price Estimate PEG Ratio Estimate 25.7 16.1 22.10 0.0 12.85 10.73 7.89 8.70 8.4 PEG 2.00 1.50 2.80 2.34

= Coke's 5 year growth rate * Coke's EPSnext * Industry Average PEG $41.33 = 11.3 * 1.56 * 2.34 26.50 11.30 2.30

Coca-Cola (KO) - Actual

Financial Performance Coke reported 3Q01 operating EPS of $0.41 (excluding bottler transaction gains, but including mrketing investments and currency losses), $0.01 better than consensus. 3Q01 worldwide volume increased 4%, at the lower end of the 4-5% management guidance, and most of this growth came from new business indicating that there is significant work to be done in accelerating growth of core businesses such as Coke. Coca Colas spending growth is expected to be reduced as the firm has made significant investments in new businesses over the past few years. The stock has under performed the market and the industry substantially in the past year - in a 12 month period the stock has depreciated 24.5% compared to direct competitors which depreciated only 11.4% over the same period. Growth Prospects Taking FY 2000 as base scenario, we used an increasing revenue growth rate that reaches 4.0% on year 5, providing the high level of investments the company has incurred into during the last 3 years and the overall net operating segments the company is currently involved in:
North America 39% Asia Pacific 25%

Net Operating Revenues by Geographic Segment

Africa and Middle East 4%

Latin America 11% Europe 21%

Although Coke is forecasting sales growth at 6%, the company has not made expected sales growth targets in previous years and given the worldwide economic slowdown it seems unlikely that they will be able to deliver on that expectation this year. Risks We see three major risks for Coca Cola:

 Bottling Partners: Cokes crucial relationships with bottling partners are at risk because bottling partners are suffering from sub-par returns on capital. To alleviate tensions, Coke may need to increase the bottlers share of the return on capital. Economic Slowdown: The global economic slowdown may have considerable negative effects on Cokes sales and growth prospects. Our 5% growth estimate could even end up being too aggressive if the economy weakens considerably. Expansion Strategy: Cokes strategy to expand into non-carbonated markets follows industry growth trends. However, these markets are typically lower margin and may take profits away from Cokes core business. Summary of Valuation Techniques The valuation techniques used to estimate a fair market value of the Coca-Cola shares are outlined in the tables below. These methods take into account a number of assumptions in order to reach a stock price estimate of $41.33. For each of the techniques using comparable analysis, a robustness test was conducted, presenting Cokes three main competitors current share price and the valuation technique outcome. This analysis is included in the Competitor Snapshot section above. For the discounted cash flow model, the implied five-year growth rate is the slightly lower that the published analysts consensus range of 5-6%. Given the value of the portfolio of Coca-Cola brands, we believe a growing perpetuity is the model that best estimates the expected long-term value of the underlying Coca-Cola assets. Therefore, a 4% growth perpetuity was added to the free cash flow of year 5 to complement the free cash model. Given the relatively high weight of this value in the overall net present value of the assets (74%), a sensitivity analysis was performed showing the effect of the growth and discount rates on the overall value of the shares. Comparison Valuation Methods Forward P/E Valuation The first valuation technique we are using intents to estimate a share price using the ratio of current price of the stock / most recent earnings per share announcement. We estimated the industry average ratio (25.7) and multiplied it by Coca-Colas FY 2001 estimated EPS (1.56) to estimate a share price of $40. See comparative analysis on the next page.
Forward P/E ratio P/E ratios of comparables Coca - Cola Industry Average Price 26.5 25.6 25.6 $39.93 Price: $39.75 $40.10 Price: $39.93 $39.93 Sensitivity Analysis Growth Rate: 2% 6% Cost of Capital: 5.00% 15.00%

Trailing P/E Valuation This valuation technique is similar to the Forward P/E valuation except that it uses the trailing P/E ratios in the calculations. This can be used when past earnings are expected to be more representative of future performance than are estimates of future earnings.
Trailing P/E ratio P/E ratios of comparables Coca - Cola Industry Average Price 35.3 31.0 31.0 $48.35 Price: $48.14 $48.56 Price: $48.35 $48.35 Sensitivity Analysis Growth Rate: 2% 6% Cost of Capital: 5.00% 15.00%

PEG Valuation
6

The PEG valuation has been provided to see if the stock has somehow been mispriced. To determine this potential arbitrage opportunity, we estimated the competitors average PEG ratio1 and multiplied it by Coca-Colas long term growth rate times estimated EPS for FY 2001. A PEG ratio of greater than 1 is considered overvalued; the opposite applies if the ratio comes out less than one.
PEG Valuation Coke Forward P/E Est EPS growth PEG EPS 5 year growth rate Share price 26.5 11.3 2.3451327 1.56 11.3% $41.33 Price: $41.15 $41.51 Price: $41.33 $41.33 Sensitivity Analysis Growth Rate: 2% 6% Cost of Capital: 5.00% 15.00%

M/B Valuation Comparable companys equity market to book valuation is calculated in order to see how companies in the same industry are trading. This value captures the expected average value of intangibles in the industry, so when we multiply this ratio by Coca-Colas book value per share, we can have another estimate of the actual share price based on industry comparables.
M/B valuation Industry Average Market value M/B Book value Price Equity Price per share 8.7 116.8 10.5 11.12381 96.777143 $38.92 Price: $38.92 $38.92 Price: $38.92 $38.92 Sensitivity Analysis Growth Rate: 2% 6% Cost of Capital: 5.00% 15.00%

P/S Valuation The price to sales valuation intends to provide a similar perspective to calculate the value of the stock based on industry comparables. Competitors P/S ratios were averaged and the result multiplied by Coca-Cola 2001 estimated sales. This ratio is mostly used to value high growth companies, were first mover advantage and customer base are key value drivers and also in industries where overall profits are yet to prove the viability of the business model. For Valuation details, please see Competitors section above.

Net Present Value Methods

Abnormal Earnings Abnormal Earnings Valuation is not particularly helpful when evaluating a firm like Coca Cola because it does not take into account intangible assets such as brand equity which is not valued on a companys books given the fact that Coca-Colas brands have been built over the years, not bought from a competitor (no goodwill for most of these brands). This is one of the reasons that explains the low valuation of $22.07 that this method gives us.

PEG = (P / E )* (1 / growth rate) 7

ABNORMAL EARNINGS VALUATION

Price = Book Value per Share + (NPV of Abnormal earnings over the next 10 years) AEt = Et - (r*BVt-1) BV1 = BV0 + (E1 - DIV1) R(equity) Coke (growth) Year 0 (2000) # shares 2000 Share holders equity BV/share Year Time Period Earnings(t) DIV(t) BV(t) AE(t) NPV of AE(t) Sum of NPV of AE(t) 10.75% 4.00%

2487 22609 9.09 2000 0 0.88 0.68 9.09 2001 1 1.56 $0.78 $9.87 $0.58 $0.53 2002 2 1.75 $0.88 $10.75 $0.69 $0.56 2003 3 1.95 $0.98 $11.72 $0.79 $0.59 2004 4 2.16 $1.08 $12.80 $0.90 $0.60 2005 5 2.4 $1.20 $14.00 $1.02 $0.61 Terminal Value (Growing Perpetuity) 2.64 $1.32 $15.32 $1.13 $10.09

Assume pay 50% of EPS for dividends

$12.98

Price =

$22.07
Cost of Equity Capital 10.75% 8.75% 12.75% $32.56 $22.07 $16.43

SENSITIVITY ANALYSIS 6.75% $58.56 14.75% $12.94

Price

Discounted Cash Flows The DCF technique is used to determine the value of the assets of the firm (tangible and intangible) using a series of assumptions to project the companys future earnings. Starting with the net income before interest and after taxes, the free cash flow is estimated for each year adding back the non-cash figures used to calculate it (depreciation, amortization, etc). Investments in PP&E as well as increases of net working capital are subtracted to account for the net outflows necessary to finance the Coca-Colas business model. Using a weighted average cost of capital (expected return to the agents who have stakes in the future cash flow of the company; shareholders, debt holders and government taxes), expected cash flows are discounted into present value. The computed value represents the expected monetary value of the assets of the company. Therefore, in order to estimate the value of each share, the current face value of the liabilities is subtracted from the value of the assets of the company, estimating the value of the equity. The price of each share is computed dividing this value by the shares outstanding.

DCF VALUATION EBIT EBIAT + Deprec. & Amort - CAPX - Change WC Free cash flow Terminal value FCF + Terminal Value NP Operations - Yrs 2001-2005 Cash & Marketable Securities Total value of Assets % TV / PV Value of Debt (BV of Int. Bearing) Value of Equity Shares outstanding Value per share $M $M $M % M$ M$ million units $ / share 75,834 1,892 77,726 74% 5,651 72,075 2,487 $28.98 4.0% 4,243 4,605 4,994 5,414 2000 5,134 3,594 465 10 4,049 2001 5,638 3,947 477 170 11 4,243 2002 6,178 4,324 490 198 11 4,605 2003 6,757 4,730 506 229 12 4,994 2004 7,380 5,166 524 263 13 5,414 2005 8,050 5,635 544 299 14 5,866 94,295 100,161 Medum growth, steady cash flow = Perpetuity Value Cash Flow Terminal Year * (1+g) WACC - g

30.0% from IS from estimates 1.5% % of sales

Assumed 30% tax rate Held stable at around 7% Estimated from change in PPE 1.5% of sales change

The following chart presents the sensitivity analysis conducted over the estimated price of the shares when changes in the discount and growth rate are applied to the DCF model shown above. From this analysis, we conclude that an increase of one percent in the long-term growth rate gives shareholders an average payoff of nearly 15%, as capital gain (increase in the share price). The exact payoff varies depending on the discount rate. At the same time, a one point decrease in the discount rate gives shareholders an average payoff of 20% in share price increase, suggesting a closer assessment of the companys long term capital structure could add value to shareholders.
DCF Sensitivity Ananlysis 3% 29.1 24.9 21.8 Growth rate 4% 34.5 28.9 24.7 5% 42.2 34.2 25.6 Discount rate

9.5% 10.5% 11.5%

Valuation Assumptions Discount Rate Using WACC & CAPM Techniques In order to estimate the fair discount rate on Coca-Colas cash flows, we used the two-factor CAPM model to calculate the relative risk of the stock. Computing the correlation of the 10-year monthly return of the stock with respect to the S&P 500 index2 (assuming the later represents a welldiversified portfolio), the regression showed us a highly significant beta of 0.689 for the companys stock. Using the 10-year T-bill yield as the risk free rate (4.7%) and a market premium of 8.8%, we estimated a risk adjusted equity return of 10.75%.
2

See Exhibit #1 for detailed analysis of regression output 9

The company also holds debt outstanding, for approximately 5.6 billion, representing a D/E3 of 4.8%, lowering the weighted average cost of capital. Given the yield on the interest baring loans came out to be 6.56%, using an effective tax rate of 30%, the after tax expected return of the debt was 4.6%.
CALCULATING THE WACC Rf = ten year tsy rate = Rm-Rf = Beta = Ke = Rf + Beta*(Rm - Rf) Kd (given) = Expected Tax Rate = Total Interest-bearing Debt Number of Shares Current Share Price Market Cap. %Debt %Equity WACC = (%D * (Kd(1-t)) + (%E * Ke) 4.70% 8.80% 0.69 See Exhibit I for calculations 10.75% 6.56% Weighted avg of rates on interest bearing debt in financials 30.00% Estimated from Financials 5,651,000,000 2,486,773 $46.960 116,778,860,080 5% 95% 10.47%

The most relevant assumptions used to estimate future cash flows are: Sales Growth: (see Growth discussion above) COGS: The restructuring process started in 2000 has already shown some cost saving payoffs, decreasing overall COGS. Those initiatives will payoff in the form of greater overall gross margins as shown in the table bellow. SG&A: We estimate advertising expenditures cutbacks as well as reduced worldwide staff personnel will payout in the form of lower SG&A charges bringing SG&A/sales ratio back to 1996 levels. Capital Expenditures: Given last two years high investments in some of the bottling companies as well as in new facilities (doubling the last two years depreciation expense) and considering the overall revenue growth rate, we have estimated a total of 1.2 billion capital expenditures over the next 5 years.

Using market capitalization as equity value in the D/E ratio 10

Quality of Earnings Analysis In order to assess Coca Colas quality of earnings we looked at a variety of ratios which could indicate the presence of earnings management in the companys financials. From our analysis we have concluded that Coca Cola does not seem to be managing its earnings. Below are various tables and graphs which summarize our findings.

Quality of Earnings Ratio If this ratio is > 0.06 : Low quality earnings If this ratio is < -0.14 : High quality earnings (Earnings - CFO) Average Total Assets 1995 NI CFO Total Assets Average Total Assets 1996 3492 3463 16161 15601 1996 0.001859 1997 1998 4129 3533 4033 3433 16940 191145 16550.5 104042.5 1997 1998 0.0058 0.000961 1999 2431 3883 21623 106384 1999 -0.01365 2000 2177 3585 20834 21228.5 2000 -0.06633

15041

Quality Ratio

Coca-Cola 5 year Quality Ratio Trend

Quality Ratio

0.02 Quality Ratio 0 1995 -0.02 -0.04 -0.06 -0.08 Year 1996 1997 1998 1999 2000 2001

Operating Income and CFO Volatility 1996 4741.5 3463 1997 5445 4033 1998 5421 3433 1999 5233 3883 2000 5599 3585

Op. Inc. before Depreciation CFO

11

NI and CFO over time

$4,500 $4,000 $3,500 $3,000 ($M) $2,500 $2,000 $1,500 $1,000 $500 $0 1996 1997 1998 1999 2000

NI CFO

Sales vs. A/R Growth 1995 Sales 18018 A/R 1750

1996 18546 1641 1996 2.93% -6.23%

1997 18868 1639 1997 1.74% -0.12%

1998 18813 1666 1998 -0.29% 1.65%

1999 19805 1798 1999 5.27% 7.92%

2000 (1996-2000) 20458 1757 2000 (1996-2000) 3.30% 10.31% -2.28% 7.07%

Sales Growth A/R Growth

Sales & A/R Growth 1996-2000

10.00% 5.00% 0.00% 1995 -5.00% -10.00% 1996 1997 1998 1999 2000

Sales Growth A/R Growth

2001

12

Operating Income and CFO Volatility 1996 4741.5 3463 1997 5445 4033 1998 5421 3433 1999 5233 3883 2000 Mean STD 5599 5287.9 331.94 3585 3679.4 265.96 6.28% 7.23% 86.84%

Op. Inc. before Deprec CFO

std(Op Inc)/ave(Op Inc std(CFO)/ave(CFO)

Percentage change in NI and EPS 1995 2986 2.37 1996 3492 16.95% 1.4 -40.93% 1997 4129 18.24% 1.67 19.29% 1998 3533 -14.43% 1.43 -14.37% 1999 2431 -31.19% 0.98 -31.47% 2000 2177 -10.45% 0.88 -10.20%

NI % NI change EPS % EPS change

Sales and Inventory Sales Inventory COGS Inventory Turn Days on Inventory

1995 1996 1997 1998 1999 2000 18018 18546 18868 18813 19805 20458 1117 952 959 890 1,076.00 1,066.00 6519 6296 5631 5181 5,571.00 5,739.00 5.836168 6.613445 5.871741 5.821348 5.177509 5.383677 62.54103 55.1906 62.16214 62.70025 70.49722 67.79753 1995 1996 1997 1998 1999 2000 2.93% 1.74% -0.29% 5.27% 3.30% -14.77% 0.74% -7.19% 20.90% -0.93% 1996 1997 1998 1999 2000 18546 18868 18813 19805 20458 55.1906 62.16214 62.70025 70.49722 67.79753

% Sales growth % Inventory growth Sales Days on Inventory 1995 18018 62.54103

Sales and Inventory growth

6% 5% Sales growth 4% 3% 2% 1% 0% -1% 1995 1996 1997 1998 1999

% Sales growth % Inventory growth 25% 20% 15% 10% 5% 0% -5% -10% -15% -20%

2000

13

Inventory gorwth

EXHIBIT I: Regression Output

Summary Output - 2 factor/10 years Regression Statistics

Multiple R R Square Adjusted R Square Standard Error Observations ANOVA

0.394418061 0.155565607 0.142473601 6.696913943 132

df

SS

MS

Significance F

Regression Residual Total

2 129 131
Coefficients

1065.827251 5785.47667 6851.303921

Standard Error

532.9136256 44.84865636

11.8824881

1.83443E-05

t Stat

P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept RF Mkt-RF Beta =

-1.129018858 5.770342019 0.688815515 0.689

2.309536899 5.462380827 0.142906858

-0.488850755 1.056378565 4.820031201

0.62577744 -5.69849274 0.29276962 -5.037108831 3.9672E-06 0.406070885

3.440455024 -5.69849274 16.57779287 -5.037108831 0.971560145 0.406070885

3.440455024 16.57779287 0.971560145

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EXHIBIT II: eAssignment 6

eAssignment 6 Step 1: Component Sales COGS SG&A Deprec EBIT Interest Expense Other: Non-Operating Income/Exp Special Items Net Income Before Taxes Taxes Net Income Please see 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 notes below 18,546 18,868 18,813 19,805 20,458 21,161 21,919 22,734 23,611 24,555 6,296 5,631 5,181 5,571 5,739 5,765 5,793 5,825 5,858 5,893 7,509 7,792 8,211 9,001 9,120 9,282 9,457 9,646 9,850 10,068 442 384 381 438 465 477 490 506 524 544 4,300 5,061 5,040 4,795 5,134 5,638 6,178 6,757 7,380 8,050 Note 1 286 258 277 337 447 310 280 264 264 264 536 46.5 4,596 1,104 3,492 441 811 6,055 1,926 4,129 290 145 5,198 1,665 3,533 174 -813 3,819 1,388 2,431 155 -1443 3,399 1,222 2,177 213 0 5,541 1,662 3,879 275 0 6,173 1,852 4,321 342 0 6,835 2,050 4,784 414 0 7,529 2,259 5,271 491 0 8,277 2,483 5,794

Step 2: Ratios Sales Growth COGS/Sales SG&A/Sales Depreciation/PPE Non-Operating Income/Sales Special Items/Sales Interest Expense/LT Debt Effective Avg Tax Rate

1996 2.93% 33.95% 40.49% 7.92% 2.89% 0.25% 25.42% 25.68%

1997 1.74% 29.84% 41.30% 6.65% 2.34% 4.30% 21.54% 38.06%

1998 -0.29% 27.54% 43.65% 6.70% 1.54% 0.77% 40.14% 33.04%

1999 5.27% 28.13% 45.45% 6.77% 0.88% -4.11% 30.22% 28.95%

2000 3.30% 28.05% 44.58% 7.03% 0.76% -7.05% 52.22% 23.80%

2001 3.44% 27.24% 43.86% 7.02% 1.01% 0.00% 32.63% 30.00%

2002 3.58% 26.43% 43.15% 7.02% 1.25% 0.00% 29.47% 30.00%

2003 3.72% 25.62% 42.43% 7.01% 1.50% 0.00% 27.79% 30.00%

2004 3.86% 24.81% 41.72% 7.01% 1.75% 0.00% 27.79% 30.00%

2005 4.00% 24.00% 41.00% 7.00% 2.00% 0.00% 27.79% 30.00%

Note 2 Note 3 Note 4 Note 5 Note 6 Note 7 Note 8 Note 9

Notes: PPE CAPEX LT Debt due in 1 year LT Debt Total LT Debt

5,581

5,771 5,685 6,471 3.40% -1.49% 13.83% 397 801 1,198 3 687 690 261 854 1,115

6,614 2.21% 21 835 856

9 1,116 1,125

6,784 2.57% 170 100 850 950

6,982 2.93% 198 100 850 950

7,212 3.28% 229 100 850 950

7,474 3.64% 263 100 850 950

7,773 4.00% 299 100 850 950

Note 10

Note 11

Note 1 Note 2 Note 3 Note 4 Note 5 Note 6 Note 7 Note 8 Note 9 Note 10

Continue with interest payments, no additional principal repayments Coke expects 6% but has not been meeting growth targets, we feel 6% is too aggressive, assumed due to increased growth in non-carbonated/health beverage sector and Coke's expansion in that area (Odwalla, etc.); in line with industry expected growth Recent restructuring, new management team determined to control costs, investments made up front should start to pay off more in future without cost increases, also expected to further leverage distribution network Mgt expected to get this lower, expected to cut back on advertising which is big part of SG&A Hold stable around 7% due to historical data - also current investments similar to past so the depreciation patterns should be similar Disregard most recent years because of writeoffs, 2% is close to historical averages Assume to be zero in the future Calculated using estimated int exp and lt debt Assumed 30% flat avg expected tax rate Assumed conservative level of investment in PPE because we think coke has already done the majority of investing that they need to do for the next five years; also in last five years capex has been at least 2x depreciation so they are investing more than they are depreciating Long term we expect coke to maintain a similar LT debt structure

Note 11

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