Needing help with questions a-g attached in the spreadsheet

Chapter 6 Problem 15 Using the financial statements provided below and any other information you find relevant, answer the following questions: a. What was the book value of Avon's shareholders' equity from 2001 to 2003? What were Avon's 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 Avon's 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 firm's 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 Avon's $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 Avon's balance sheet. Might shareholders benefit from such an increase in financial leverage? Explain. e. How would you assess Avon's business risk? Setting aside the way the company is financed, how significant are the marketplace risks Avon faces; how uncertain are the company's future operating cash flows? What does your assessment of Avon's 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 Cost of Goods Sold Gross Profit 5,957.8 2,156.9 3,800.9 6,228.3 2,217.6 4,010.7 6,876.0 2,481.8 4,394.2 Selling, General, & Admi Operating Income Befor 2,889.5 911.4 2,979.6 1,031.1 3,213.6 1,180.6 Depreciation,Depletion, Operating Profit 109.0 802.4 124.8 906.3 123.5 1,057.1 Interest Expense Non-Operating Income/ Special Items Pretax Income 71.1 36.3 (77.9) 689.7 59.7 25.3 (36.3) 835.6 49.0 (0.3) (14.3) 993.5 Total Income Taxes Minority Interest Income Before Extra. It 240.3 4.5 444.9 292.3 8.7 534.6 318.9 9.8 664.8 Extraordinary Items Discontinued Operations Adjusted Net Income (0.3) 0.0 444.6 0.0 0.0 534.6 0.0 0.0 664.8 Earnings Per Share Basic Including Extra Items & 0.9 1.1 1.4 Earnings Per Share Diluted Including Extra Items & 0.9 1.1 1.4 EPS Basic from Operati EPS Diluted from Opera Dividends Per Share 1.1 1.0 0.4 1.2 1.2 0.4 1.4 1.4 0.4 Com Shares for Basic E Com Shares for Diluted 473.7 492.1 472.1 490.9 471.1 483.1 ANNUAL BALANCE SHEET ($ MILLIONS) 2001 2002 2003 ASSETS Cash & Short-Term Inve Net Receivables Inventories Other Current Assets Total Current Assets 508.5 519.5 612.5 248.6 1,889.1 606.8 555.4 614.7 271.3 2,048.2 694.0 599.8 653.4 278.9 2,226.1 Gross Plant, Property & Accumulated Depreciati Net Plant, Property & E 1,552.4 779.7 772.7 1,548.4 779.3 769.1 1,728.9 873.3 855.6 Intangibles Deferred Charges Other Assets 0.0 0.0 530.8 20.6 0.0 489.6 46.2 0.0 434.4 TOTAL ASSETS 3,192.6 3,327.5 3,562.3 LIABILITIES Long Term Debt Due In Notes Payable Accounts Payable Taxes Payable Other Current Liabilities Total Current Liabilities 1.2 87.6 404.1 375.9 592.2 1,461.0 3.1 602.1 379.9 353.0 637.4 1,975.5 4.4 239.7 400.1 321.9 621.6 1,587.7 Long Term Debt Deferred Taxes Investment Tax Credit Minority Interest Other Liabilities 1,236.3 30.6 0.0 29.0 510.8 767.0 35.4 0.0 37.0 640.3 877.7 50.6 0.0 46.0 629.0 TOTAL LIABILITIES 3,267.7 3,455.2 3,191.0 89.1 938.0 899.9 2,002.1 89.6 1,019.5 943.9 2,180.7 90.3 1,188.4 1,473.0 2,380.4 (75.1) (127.7) 371.3 3,192.6 3,327.5 3,562.3 EQUITY Common Stock Capital Surplus Retained Earnings Less: Treasury Stock TOTAL EQUITY TOTAL LIABILITIES