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 Avons shareholders equity from 2001 to 2003? What were Avons 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 Avons 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 firms 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 Avons $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 Avons balance sheet. Might shareholders benefit from such an increase in financial leverage? Explain.
e.	How would you assess Avons business risk? Setting aside the way the company is financed, how significant are the marketplace risks Avon faces; how uncertain are the companys future operating cash flows? What does your assessment of Avons 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