Using the financial statements provided below and any other information you find relevant, answer the following questions:
Question:
| 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 | ||||||||||
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Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
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