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Inter-company Investments

Inter-company Investments - 5 Material inter-company...

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1 Investor Investee Intercompany investments with significant influence April 8, 2010 1
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2 Investor Investee 2 Significant Influence investments Strategic, long-term investments Investor typically owns between 20% and 50% of the investee.
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3 Significant Influence Significant Influence is indicated by one or more of the following: Investor company elects a director on to the board of the investee company. The two companies have a close business relationship ; the buy and sell from each other extensively. Technical dependence of the investee on the investor or vice versa. Investor influence over operating decisions Investor Influence over financing decision
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4 Example of Significant Influence Until recently, Coca-Cola Co. (KO) owned 35% of Coca-Cola Enterprises (CCE). KO sells syrup to CCE, which then bottles the drinks (technical dependency). KO CCE Sales 30 $ 21 $ Cost of Goods Sold (11) (13) Operating and other expenses (13) (7) Net Income 6 $ 1 $ Stock Market Value 120 $ 10 $ in billions
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Unformatted text preview: 5 Material inter-company transactions KO CCE in billions Sales $ 30 $ 21 Cost of Goods Sold (11) (13) Operating and other expenses (13) (7) Net Income $ 6 $ 1 Stock Market Value $ 120 $ 10 Annual syrup sales from KO to CCE $6 billion Percentage of KO sales that go to CCE 20% Percentage of CCE product cost from KO 46% 6 Equity Method: Accounting treatment by KO of its CCE investment • KO Income Statement – Equity Income from CCE, $350 million (35% of CCE’s Net Income of $1 billion) included in KO’s net income of $6 billion. • KO Balance Sheet – Asset: Investment in CCE , $1.6 billion • Calculation of Investment in CCE , $1.6 billion Original Cost of the CCE investment Plus: Accumulated Equity Income to date Minus: Accumulated Dividends paid by CCE to KO 7 Post-script • Late in 2009, PepsiCo bought its investee bottler outright. • Early 2010, Coke followed suit and acquired 100% of CCE...
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