Question 1:

The following ratios were computed from Estee Lauders financial statements. A set of the complete statements are in a separate excel file. Please comment on the financial position of Estee Lauder. Be sure to reference the ratios in your discussion and to be as complete as possible. You do not need to do any research here.

	2010	2011	2012	2013	2014	2015	2016
Liquidity and Solvency
Current Ratio	1.99	1.90	1.81	2.22	2.35	2.09	1.58
Quick Ratio	1.46	1.38	1.35	1.65	1.72	1.52	1.10
NWC	1548.80	1743.20	1729.30	2362.60	2768.50	2332.90	1544.60
Cash/CL	0.71	0.64	0.63	0.77	0.79	0.71	0.52
Asset Management
Short-Term
Days Sales Outstanding	34.87	39.16	39.83	42.00	45.90	39.77	40.78
Days Inventory Held	193.33	222.53	212.00	241.66	267.19	263.07	261.43
Days in Payables	99.45	99.84	106.43	104.51	108.30	137.48	148.31
Operating Cycle	228.20	261.69	251.83	283.66	313.09	302.83	302.21
Cash Conversion Cycle	128.75	161.84	145.40	179.15	204.79	165.35	153.90
Long-term
Sales/Assets	1.46	1.40	1.47	1.43	1.39	1.31	1.22
Capital Utilization	0.68	0.71	0.68	0.70	0.72	0.76	0.82
Profitability
Profit Margin	0.06	0.08	0.09	0.10	0.11	0.10	0.10
Return on Assets	0.09	0.11	0.13	0.14	0.15	0.13	0.12
Return on Equity	0.24	0.26	0.31	0.31	0.31	0.30	0.31
Debt Management
Coverage Ratio	0.08	0.05	0.04	0.04	0.03	0.04	0.04
Long-term Debt/Assets	0.23	0.17	0.16	0.19	0.17	0.20	0.21
Market Value
P/E	23.03	29.55	24.60	25.01	23.80	30.20	30.24
Market-Book	5.61	7.83	7.66	7.72	7.41	8.99	9.39

Question 2.

Estee Lauder is a company that consists of multiple divisions with different risks. When evaluating managerial performance in each division, should the Board of Directors apply the firm-wide cost of capital, or should divisional costs of capital be computed? Why? Please be sure to explain your answer.

Question 3.

You would like to estimate the beta of a private company that manufactures home appliances. You have collected the following information about similar companies:

Equity Beta Debt MV Equity

Black&Decker 1.40 $2500 $3000

Fedders 1.20 $5 $200

Maytag 1.20 $540 $2250

The private company and the publicly traded companies all have a tax rate of 40. The private company has a debt/equity ratio of .25.

Estimate the asset beta and equity beta for the private firm.

Question 4.

Monsanto, producer of seeds and Bayer AG, a German pharmaceutical company are in the process of executing a merger.

The following was published in the WSJ on December 13, 2016:

The chief executive of U.S. seed giantMonsanto Co. remains confident in the companys planned sale to German pharmaceutical conglomerate Bayer AG, which he said would help boost U.S. investment in agricultural technology.

The article also stated, Combining Monsantos prowess in engineering seeds with Bayers much broader pesticide portfolio will intensify the companies research and development operations, Mr. Grant said, benefiting farmers and adding jobs. The resources will increase over time. This isnt about skinnying down, he said.

Please discuss: the type of merger proposed, and possible sources of synergy. You can feel free to look up additional information in the financial press.

Question 5.

Please discuss the benefits and costs of issuing debt. Why do you think some valuable companies have no long-term debt, while others maintain a stable debt equity ratio?

Question 6

You have been asked by JJ Corporation, a California- based firm that manufacturers and services digital satellite TV systems, to evaluate its capital structure. They currently have 70 million shares outstanding trading at $10 per share. In addition, the company has 500,000 bonds, with a coupon rate of 8%, trading at $1000 per bond. JJ is rated BBB and the interest rate on BBB straight bonds is currently 10%. The beta for the company is 1.2, and the current risk-free rate is 6%, the market risk premium is 5%. The tax rate is 40%.

a. What is the firms current debt/equity ratio?

b. What is the firms current weighted average cost of capital?

JJ Corporation is proposing to borrow $250 million and use it for the following purposes:

Buy back $100 million worth of stock.

c. What will the firms cost of equity be after this additional borrowing?

d. What will the firms weighted average cost of capital be after this additional borrowing?

e. What will the value of the firm be after this additional borrowing? (assuming zero growth, and that the debt is perpetual)