Using the screen shot how would I do question 1 part a-c? Examine AHP's probability of financial distress. To do so, assess the variability of
Using the screen shot how would I do question 1 part a-c?
- Examine AHP's probability of financial distress. To do so, assess the variability of the firms cash flows.
A. For the period 1972-1981, determine the firms's average operating profit margin( OPM) assuming a tax rate of 48%. Assume payments are negligible during the period (debt is close to nil). Assume that an interest income of 8% is earned over the average cash balances of the year.
B. Are yearly OPMs stable or volatile? Is OPM very different than the average during the recessions of 1974-1975 and 1980-1981?
C. Based on this analysis and your reading of the case, is there a low or high probability of entering financial distress in the future due to variability of operating profits?
I posted all the exhibits just in case but I think you only use 1 &4.
Thank you
EXHIBIT 1 Sales ($ mill) Cash Total Debt Net Worth Total Assets ($ mill) Net income ($ mill) Earnings per share Dividends per share Annual Growth in Sales Annual Growth in EPS Dividend Payout Ratio After Tax Prot Margin Return on Equity Selected Financial Data for American Home Products Corporation 1972-1981 1981 1980 1979 1978 1977 $4,131.2 $3,798.5 $3,406.3 $3,062.6 $2,665.1 729.1 593.3 493.8 436.6 322.9 16.6 13.9 10.3 13.7 10.3 1654.5 1472.8 1322 1176 1035.3 2566.5 2370.3 2090.7 1862.2 161 1.3 497.3 445.9 396 346.4 306.2 3.16 2.64 2.51 2.21 1.94 $1.90 $1.70 $1.50 $1.33 $1.15 8.8% 11.7% 11.1% 14.1% 6.6% 12.0% 13.1% 13.6% 13.9% 10.9% 59.7% 60.0% 59.8% 60.0% 59.3% 12.0% 11.7% 11.6% 11.4% 11.4% 30.1% 30.3% 30.0% 29.6% 29.5% 1976 $2,471.7 $2,258.6 $2,048.7 $1,784.4 $1,587.1 358.8 7.8 991.5 1510.9 277.9 1.75 $1.00 9.4% 10.8% 57.1% 11.2% 28.0% 1 975 1390.7 250.7 1.58 $0.90 10.2% 11.3% 57.0% 11.1% 27.9% 1974 1241.6 225.6 1.42 $0.76 14.6% 13.6% 54.7% 11.0% 28.2% 1973 1126 199.2 1.25 $0.63 12.4% 15.7% 50.0% 11.2% 23.2% 1 972 EXHIBIT 2 Comparison Data for American Home Products and Warner-Lambert. 1980 ($ in million except for per share and ratio data) American Home WamerLambert Products Corp. Company Sales $3,798.5 $3.479.2 5-yr compound annual growth rate 11.0% 9.9% Prot after tax $445.9 $192.7 5-yr compound annual growth rate 12.2% 3.3% Cash and Equivalents $593.3 $360.3 Accounts Receivable 517.3 541.5 Inventory 557.3 645.8 Net Propert, plant and equipment 450.5 827.1 Other 251.9 582.5 Total Assets 2370.3 2957.2 Total Debt 13.9 710.1 Net Worth $1,472.8 $1,482.7 Earnings per share $2.84 $2.41 5yr compound annual growth rate 12.4% 3.0% Dividends per share $1.70 $1.32 5-yr compound annual growth rate 13.6% 8.0% Stock Price (end of 1980) $30 $20 Price/Earnings Ratio 10.6 8.3 Prot Margin (prot after tax/sales) 1 1.7% 5.5% Return on Equity 30.3% 13.0% Interest Coverage (times) 436.6 5 Ratio of Total Debt to Total Capital 0.9% 32.4% Bond Rating (a) AAA AAAIAA(a) (a) Warner-Lambert's debt was rated triple A but analysts felt the rm was close to being downgraded to double A. EXHIBIT 3 Pro Forma 1981 Results for Alternative Capital Structure ($ millions except per share data) Pro Forma 1981 for Actual 30% Debt to 50% Debt to 70% Debt to 1981 Total Capital Total Capital Total Capital Sales $4, 131.2 $4, 131.2 $4, 131.2 $4, 131.2 EBIT (a) 954.8 922.2 922.2 922.2 Interest 2.3 52.7 87.8 122.9 Profit before ta 952.5 869.5 834.4 799.3 Taxes 455.2 417.4 400.5 383.7 Profit after tax 497.3 452.1 433.9 415.6 Dividends on F 0.4 0.4 0.4 0.4 Earnings Avail 496.9 451.7 433.5 415.2 Common Shareholders Dividends on ( $295.3 $271.0 $260.1 $249.1 Average Common Shares Outstanding ( 155.5 135.7 127.3 118.9 Earnings per S $3.18 $3.33 $3.41 $3.49 Dividends per $1.90 $2.00 $2.04 $2. 10 BEGINNING OF YEAR: After recapitalization Cash and Eq $593.3 $360.3 $360.3 $360.3 Total Debt 13.9 376.1 626.8 877.6 Net Worth $1,472.8 $877.6 $626.9 $376.1 Common Sto $30 Aggregate Market Value of Common $4,665.0 (a) EBIT is reduced in pro forma results due to the loss of interest income from the $233 million in excess cash used to repurchase stock.EXHIBIT 4 Detailed Assumptions for Pro Forma Recapitalizations 1. Debt is assumed to be added to the capital structure by issuing debt and using the proceeds to repurchase common stock. All repurchases are assumed to be executed in January 1981. Stock is assumed to be repurchased at a price of $30 per share, which was the prevailing stock price in early January 1981. The minimum cash balance is assumed to be $360.3 million (equal to Warner-Lambert's 1980 cash balance); thus $233 million in excess cash is available for use in repurchasing stock. A tax rate of 48% is used. The common dividend payout ratio is 60%. Interest rate on all debt in all recapitalizations is assumed to be 14% before tax. Interest foregone on excess cash is assumed to be at a rate of 14% before tax, so with recapitalization, EBIT falls by .14 times excess cash of $233 million or $32.6 million. Thus, proforma EBIT is $922.2 million (actual EBIT of $954.8 million minus $32.6 reduction in interest from excess cash). 8. Details of Recapitalizations (millions of dollars): 30% Debt Ratio 50% Debt Ratio 70% Debt Ratio 9!" N991? Excess cash $233.0 $233.0 $233.0 Additional debt 362.2 612.9 863.7 Total repurchase $595.2 $845.9 $1,096] Reduction in common shares outstanding (million share 19.8 28.2 36.6
