Question: The Quality of Free Cash Flow and Residual Operating Income: Coca-Cola Company (Easy) At one time, the Coca-Cola Company reported a number called "economic profit" that is very similar to residual operating income. It also reported free cash flow in its annual summary of selected financial data. The respective numbers for I 992- 1999 are given below (in millions of dollars), along with what Coke calls total capital (similar to net operating assets) and return on total capital (similar to return on net operating assets):
a. Economic profit and free cash flow are similar, in most years, and their growth patterns are similar. Why?
b. Based on this past history, would you be indifferent in valuing Coke using discounted cash flow methods or residual operating income methods?