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Category > Business & Finance Posted 06 Aug 2017 My Price 7.00

Chapter 6 Problem 14 Avon Products

                             
  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 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   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                  

Answers

SmartExpert
(118)
Status NEW Posted 06 Aug 2017 10:08 PM My Price 7.00

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