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Chapter 6 Problem 14 -- Avon Products Using the financial statements provided below and any other information you find relevant, answer the following questions: a.
| Chapter 6 Problem 14 -- Avon Products | ||||||||||||
| Using the financial statements provided below and any other information you find relevant, answer the following questions: | ||||||||||||
| a. | What was the book value of Avons shareholders equity from 2001 to 2003? What were Avons liabilities-to-assets and times-interest-earned ratios in these years? (Use Pretax Income plus Interest Expense as EBIT.) What do these figures suggest about Avons use of financial leverage? Consulting Table 6-5 in the text, what bond rating would Avon have in 2002 if the rating were based solely on the firms coverage ratio? | |||||||||||
| b. | What percentage decline in EBIT could Avon have suffered in each year before Avon would have been unable to make its interest payments out of operating income? | |||||||||||
| c. | Assuming a 35 percent corporate tax rate, and 2002 earnings before interest and taxes of $895 million, by how much did Avons $60 million interest expense reduce taxes? | |||||||||||
| d. | Answer question (a) and (b) again for 2002 assuming the company had borrowed an additional $3 billion in debt at 8 percent interest at the start of the year and distributed the proceeds to shareholders as a special dividend. You may ignore the effect of added interest expense on Avons balance sheet. Might shareholders benefit from such an increase in financial leverage? Explain. | |||||||||||
| e. | How would you assess Avons business risk? Setting aside the way the company is financed, how significant are the marketplace risks Avon faces; how uncertain are the companys future operating cash flows? What does your assessment of Avons business risk suggest about the level of financial leverage the company can prudently support? | |||||||||||
| f. | How big a threat would it be to Avon if the company took on too much debt and had difficulty servicing it? How costly would financial distress be to Avon? Explain. | |||||||||||
| g. | Based on your analysis and any other considerations you think relevant, is Avon heavily or modestly indebted? Should the company acquire more debt, or shed existing debt? Why? | |||||||||||
| AVON PRODUCTS | ||||||||||||
| 1345 Avenue Of The Americas | ANNUAL INCOME STATEMENT | |||||||||||
| New York, NY 10105 | (MILLIONS, EXCEPT PER SHARE) | |||||||||||
| Ticker: AVP | ||||||||||||
| 2001 | 2002 | 2003 | ||||||||||
| Sales | 5,957.8 | 6,228.3 | 6,876.0 | |||||||||
| Cost of Goods Sold | 2,156.9 | 2,217.6 | 2,481.8 | |||||||||
| Gross Profit | 3,800.9 | 4,010.7 | 4,394.2 | |||||||||
| Selling, General, & Administrative Exp. | 2,889.5 | 2,979.6 | 3,213.6 | |||||||||
| Operating Income Before Deprec. | 911.4 | 1,031.1 | 1,180.6 | |||||||||
| Depreciation,Depletion,& Amortization | 109.0 | 124.8 | 123.5 | |||||||||
| Operating Profit | 802.4 | 906.3 | 1,057.1 | |||||||||
| Interest Expense | 71.1 | 59.7 | 49.0 | |||||||||
| Non-Operating Income/Expense | 36.3 | 25.3 | (0.3) | |||||||||
| Special Items | (77.9) | (36.3) | (14.3) | |||||||||
| Pretax Income | 689.7 | 835.6 | 993.5 | |||||||||
| Total Income Taxes | 240.3 | 292.3 | 318.9 | |||||||||
| Minority Interest | 4.5 | 8.7 | 9.8 | |||||||||
| Income Before Extra. Items & Disc. Oper. | 444.9 | 534.6 | 664.8 | |||||||||
| Extraordinary Items | (0.3) | 0.0 | 0.0 | |||||||||
| Discontinued Operations | 0.0 | 0.0 | 0.0 | |||||||||
| Adjusted Net Income | 444.6 | 534.6 | 664.8 | |||||||||
| Earnings Per Share Basic - | ||||||||||||
| Including Extra Items & Disc Op | 0.9 | 1.1 | 1.4 | |||||||||
| Earnings Per Share Diluted - | ||||||||||||
| Including Extra Items & Disc Op | 0.9 | 1.1 | 1.4 | |||||||||
| EPS Basic from Operations | 1.1 | 1.2 | 1.4 | |||||||||
| EPS Diluted from Operations | 1.0 | 1.2 | 1.4 | |||||||||
| Dividends Per Share | 0.4 | 0.4 | 0.4 | |||||||||
| Com Shares for Basic EPS | 473.7 | 472.1 | 471.1 | |||||||||
| Com Shares for Diluted EPS | 492.1 | 490.9 | 483.1 | |||||||||
| ANNUAL BALANCE SHEET | ||||||||||||
| ($ MILLIONS) | ||||||||||||
| 2001 | 2002 | 2003 | ||||||||||
| ASSETS | ||||||||||||
| Cash & Short-Term Investments | 508.5 | 606.8 | 694.0 | |||||||||
| Net Receivables | 519.5 | 555.4 | 599.8 | |||||||||
| Inventories | 612.5 | 614.7 | 653.4 | |||||||||
| Other Current Assets | 248.6 | 271.3 | 278.9 | |||||||||
| Total Current Assets | 1,889.1 | 2,048.2 | 2,226.1 | |||||||||
| Gross Plant, Property & Equipment | 1,552.4 | 1,548.4 | 1,728.9 | |||||||||
| Accumulated Depreciation | 779.7 | 779.3 | 873.3 | |||||||||
| Net Plant, Property & Equipment | 772.7 | 769.1 | 855.6 | |||||||||
| Intangibles | 0.0 | 20.6 | 46.2 | |||||||||
| Deferred Charges | 0.0 | 0.0 | 0.0 | |||||||||
| Other Assets | 530.8 | 489.6 | 434.4 | |||||||||
| TOTAL ASSETS | 3,192.6 | 3,327.5 | 3,562.3 | |||||||||
| LIABILITIES | ||||||||||||
| Long Term Debt Due In One Year | 1.2 | 3.1 | 4.4 | |||||||||
| Notes Payable | 87.6 | 602.1 | 239.7 | |||||||||
| Accounts Payable | 404.1 | 379.9 | 400.1 | |||||||||
| Taxes Payable | 375.9 | 353.0 | 321.9 | |||||||||
| Other Current Liabilities | 592.2 | 637.4 | 621.6 | |||||||||
| Total Current Liabilities | 1,461.0 | 1,975.5 | 1,587.7 | |||||||||
| Long Term Debt | 1,236.3 | 767.0 | 877.7 | |||||||||
| Deferred Taxes | 30.6 | 35.4 | 50.6 | |||||||||
| Investment Tax Credit | 0.0 | 0.0 | 0.0 | |||||||||
| Minority Interest | 29.0 | 37.0 | 46.0 | |||||||||
| Other Liabilities | 510.8 | 640.3 | 629.0 | |||||||||
| TOTAL LIABILITIES | 3,267.7 | 3,455.2 | 3,191.0 | |||||||||
| EQUITY | ||||||||||||
| Common Stock | 89.1 | 89.6 | 90.3 | |||||||||
| Capital Surplus | 938.0 | 1,019.5 | 1,188.4 | |||||||||
| Retained Earnings | 899.9 | 943.9 | 1,473.0 | |||||||||
| Less: Treasury Stock | 2,002.1 | 2,180.7 | 2,380.4 | |||||||||
| TOTAL EQUITY | (75.1) | (127.7) | 371.3 | |||||||||
| TOTAL LIABILITIES & EQUITY | 3,192.6 | 3,327.5 | 3,562.3 | |||||||||
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Handbook Of The Equity Risk Premium
Authors: Rajnish Mehra
1st Edition
0444508996, 978-0444508997
