Using the financial statements provided below and any other information you find

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 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 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?

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Using the financial statements provided below and any other information you find

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