In a risk analysis of Abbott Labs, most analysts will calculate Abbott’s debt-to-equity ratio. In this case, the debt-to-equity ratio may not capture an important element of Abbott’s risk. What is that risk, and why doesn’t Abbott’s balance sheet capture it?

Transcribed Image Text:

At 31 December 2005, Abbott Laboratories, Inc. owned 50% of TAP Pharmaceutical Products Inc. under a joint venture agree- ment with Takeda Pharmaceutical Company, Limited of Japan. TAP develops and markets pharmaceutical products for the US and Canada, and is an important strategic investee for Abbott Labs. Abbott appropriately accounts for the investment in TAP using the equity method. The Investment in affiliate account is reported by Abbott Labs in its 31 December 2005 balance sheet at $167 million. Abbott received $343, $638, and $606 million dividends from TAP in 2005, 2004, and 2003, respectively. TAP declared income of $883, $1,290, and $1,303 million in 2005, 2004, and 2003 respec- tively. At 31 December 2005, TAP's balance sheet reports assets of $1,470 million, liabilities of $1,136 million, and shareholders' equity of $334 million. At 31 December 2005, Abbott Laboratories, Inc. owned 50% of TAP Pharmaceutical Products Inc. under a joint venture agree- ment with Takeda Pharmaceutical Company, Limited of Japan. TAP develops and markets pharmaceutical products for the US and Canada, and is an important strategic investee for Abbott Labs. Abbott appropriately accounts for the investment in TAP using the equity method. The Investment in affiliate account is reported by Abbott Labs in its 31 December 2005 balance sheet at $167 million. Abbott received $343, $638, and $606 million dividends from TAP in 2005, 2004, and 2003, respectively. TAP declared income of $883, $1,290, and $1,303 million in 2005, 2004, and 2003 respec- tively. At 31 December 2005, TAP's balance sheet reports assets of $1,470 million, liabilities of $1,136 million, and shareholders' equity of $334 million.

Answer rating: 100% (QA)

Lets calculate Abbotts debttoequity ratio using the figures provided Liabilities from ... View the full answer