Question

Abridged balance sheets and income statements along with relevant note disclosures from Revlon Inc.’s 2011 annual report are presented below.


Required:
a. Compute the following key financial ratios for Revlon in 2010 and 2011: (1) return on equity, (2) return on assets, (3) total liability to equity, (4) long-term debt to equity, (5) times interest earned, and (6) current ratio.
Comment on Revlon's financial performance, financial position, and riskiness.
b. Revlon has chosen to primarily fund its asset base using debt in place of equity. Do you agree with this decision? Why would Revlon pursue this financial structure in place of an all-equity structure? What are the pros and cons of Revlon's extreme emphasis on debt in its capital structure?
c. The notes describe four principal types of debt taken by Revlon. Create a table that details the following for each type of debt: (1) interest rates; (2) total term and remaining term; (3) payment details, if any; (4) protections in terms of (a) seniority, (b) security, and (c) covenants. Comment on the relative terms of these types of debt, especially related to the protections. Which of these debts are higher in the "pecking order" and therefore safer than the rest because of their contractual provisions?
d. As part of the analysis in (c) answer the following questions:
(1) The covenants placed on Revlon by its lenders generally focus on decisions that are outside of Revlon's nor mal operations, such as financing decisions, asset sales, and merger and acquisition activity. Why do the covenants not focus more closely on decisions related to Revlon's day-to-day operations? How do you think these covenants will affect the manner in which Revlon operates its business? (2) How is the amount Revlon is allowed to borrow under its 2011 Revolving Credit Facility determined? How much does it appear that Revlon is eligible to borrow in 2011? (3) What happens if Revlon fails to repay or refinance its 93/4% Senior Secured Notes by August, 2015?
e. Analyze Revlon's margin of safety or covenant slack by determining to the best of your ability the ratios used in the covenants. If you cannot exactly determine the ratio used in the covenant, make your best attempt to calculate a ratio that most closely resembles the ratio used in the covenant.
f. Answer the following with respect to the redeemable preferred stock:
(1) Why is the redeemable preference stock classified as debt? (2) How does Revlon's redeemable preferred stock differ from the remaining long-term debt issued by Revlon? How are these differences reflected in the interest/dividend rates for each security? (3) What is the effective interest rate on Revlon's redeemable preferred stock, assuming the company expects to pay dividends consistently at the end of each year? What is the annual interest expense that Revlon will recognize for this redeemable preferred stock? How much of this interest expense went toward amortizing the discount on redeemable preferred stock in the first year after the company issued the stock?
g. Why does Revlon recognize losses in its income statement related to early extinguishment ofdebt?


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  • CreatedJanuary 22, 2015
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