Procter & Gamble Analysis
David Hatfield East Carolina University FINA 474 Dr! "aclyn #eierlein
Table of Contents Introd$ction
%
Financial tatement Analysis
'
Cost of Ca(ital
)
*(timal Ca(ital tr$ct$re
%+
Dividend Policy
'
#an,r$(tcy Analysis
')
Cor(orate Governance
-
Concl$sion
.or,s Cited
4
2
Introduction
/0e ($r(ose of t0is analytical (a(er is to (rovide estimations1 inter(retations1 and concl$sions fo$nd 20ile e3aminin t0e com(any co m(any Procter & Gamble! Procter & Gamble Ga mble is listed $nder t0e 0o$se0old (rod$cts ind$stry and is t0e larest firm in its ind$stry! ind$stry! /0e firm 0as five main b$siness sements5 bea$ty1 roomin1 0ealt0 care1 fabric care & 0ome care1 and baby1 feminine & family care! /0e (rod$ct list is e3tensive and contains many familiar name brands s$c0 as *lay1 Gillette1 Crest1 Febre6e1 and Pam(ers! ey ind$stry com(etitors of t0e firm incl$de "o0nson & "o0nson1 imberly8Clar, Holdins1 Colate8 Palmolive Co!1 and Cloro3 Co! Procter & Gamble (rovides (rod$cts in over %+co$ntries1 99: of its total mar,et bein t0e United tates and E$ro(e! /0e firm 0as settled in t0e mat$re ro2t0 stae of its total lifecycle! Dr! As2at0 As2at0 Damodaran1 t0e a$t0or of Applied Corporate Finance1 is a finance (rofessor at t0e tern c0ool c0ool of #$siness at Ne2 ;or, ;or, University! University! Dr! Damodaranesearc0 Center 2ere also $sed for researc0 and data at0erin! /0e follo2in (aes of t0is analysis 2ill cover many areas of cor(orate finance! /0e sections of t0is (a(er1 financial statement analysis1 cost of ca(ital1 o(timal ca(ital str$ct$re1 dividend (olicy1 ban,r$(tcy analysis1 and cor(orate overnance1 are titled to re(resent t0e researc0 and findins for eac0 section!
3
Financial Statement Analysis Introduction
/0e s$bse?$ent financial statement analysis of Procter & Gamble 2ill (rovide an eval$ation of t0e firme$ters!com! /0e ($r(ose of t0is financial statement analysis1 of Procter & Gamble1 Gamble1 is to analy6e its financial strent0s and 2ea,nesses to (rovide an eval$ation of its overall financial 0ealt0!
4
Liquidity and Turnover Ratios 2014 Current Ratio !uic" Ratio #et Current Assets$TA% Current Assets$TA% Current Asset T& Inventory$TA% Inventory T& ''($TA% ''($T& Total Asset T&
Procter & Gamble Co! Averae Procter & Gamble Co! Averae Procter & Gamble Co! Averae Procter & Gamble Co! Averae Procter & Gamble Co! Averae Procter & Gamble Co! Averae Procter & Gamble Co! Averae Procter & Gamble Co! Averae Procter & Gamble Co! Averae Procter & Gamble Co! Averae
-!)4 %!% -!% -!+' 8%!49 !7 '%!)' !%4 '!9) '!++ 4!9) +! 9!'% 9!%%!49 ''!% !7+ 4!) -!) -!)
Liquidity and Turnover Turnover 201 2012 2011
-!+%!4 -!4% -!) 84!4 +!7% %7!' !%) !9'!7 4!)9 +!%) 9!' 9!%% %!9 '%!' 4!-!%+ -!9' -!)%
-!++ %!4 -!4' -!++ 8'!'7 !9 %9!7 %!4!74 '!+4 !-+ 7!' 9!-% 9!%' %!4% %7!)4 4!-% !-7 -!9' -!+)
-!+%!) -! %!%8!+ %-!47 %!++ '! !)'!7 ! 7!4!)' !)' %!) %7!+ 4!-7 4!7) -!9' -!)-
2010
-!77 %! -!4 -!+) 84!') 9!+ %4!9 4!%+ 4!-) '!7 4!)+ +!'% !7' 9!'%!-% '-!) 4!-+ 4!) -!9%!-
/0e c$rrent ratio of t0e firm increases by '': from t0e year '-%- to '-%4 b$t remains belo2 t0e ind$stry averae over time! /0e ?$ic, ratio (rovides similar res$lts res$lts and is 2ell belo2 t0e ind$stry averae for t0e years of e3amination! /0e (ercentae increase for t0e ?$ic, ratio from year '-%- to '-%4 of -: indicates t0at t0e firm became m$c0 more li?$id over t0e years! /0ese li?$idity ratios s0o2 t0at Procter & Gamble 2o$ld not be able to (ay off its s0ort8term obliations 2it0 its c$rrent assets! /0e (rovided net c$rrent assets over total assets res$lted in neative (ercentaes s(annin t0e entire years of data! /0e ca$sation of t0ese neative (ercentaes is from t0e firm 0avin more c$rrent liabilities t0an c$rrent assets! /0e neative (ercentaes are diffic$lt to com(are aainst 5
t0e (ositive ind$stry averae! F$rt0er calc$lation of t0e net c$rrent asset t$rnover (rovided more conf$sin neative res$lts1 t0$s net c$rrent asset t$rnover 2as e3cl$ded! /o com(ensate1 more data from =erent online 2as $sed! C$rrent assets and total assets for eac0 com(any over t0e years 2ere added to a com(arison re(ort in order to (ro(erly calc$late c$rrent assets over total assets1 and c$rrent asset t$rnover! Procter & Gambleeinvestin t0eir cas0 into ot0er assets 2o$ld allo2 t0eir total assets to remain $nc0aned1 if sales 2ere to increase t0is 2o$ld increase t0eir total asset t$rnover! Distrib$tin Distrib$tin t0eir cas01 as dividends1 2o$ld also effectively increase total asset 6
t$rnover by decreasin total assets! /0e tradeoff bet2een li?$idity and t$rnover s0o2s t0at as Procter & Gamble increases t0eir assets1 effectively increasin li?$idity1 t0eir t0eir asset t$rnover decreases!
Levera)e and Covera)e Ratios Levera)e and Covera)e
Interest Covera)e
LT *ebt to (quity
Total Total *ebt to (quity
2014
201
2012
2011
2010
Procter & Gamble Co!
'!%-
'4!)7
%7!'+
%)!-
%9!)4
Averae
!-4
%!7-
+!7
')!44
'4!4'
Procter & Gamble Co!
-!')
-!'+
-!
-!
-!
Averae
!))
!%+
%!7
%!-'
4!94
Procter & Gamble Co!
-!%
-!49
-!47
-!47
-!4)
Averae
!-9
!%
%!47
%!%%
9!-7
/0e interest coverae ratio for Procter & Gamble increases by 4+: from t0e year '-%'-% - to '-%4! A closer loo, at eac0 individ$al com(etitor
to '-%4! /0is ratio fl$ct$ates as total liabilities and total e?$ity c0anes1 b$t overall increases d$e to liabilities liabilities increasin increasin more t0an e?$ity! /0e leverae and coverae ratios for t0e ind$stry averaes are very volatile1 as s0o2n in t0e table belo21 eac0 year t0e ratio c0anes s$bstantially! In com(arison 2it0 Procter & Gamble
'rofitability Ratios 'rofitability
+ross ,ar)in % &-eratin) ,ar)in #et 'rofit ,ar)in R&A % R&( % Total Asset T& Total *ebt to (quity
Procter & Gamble Co! Averae Procter & Gamble Co! Averae Procter & Gamble Co! Averae Procter & Gamble Co! Averae Procter & Gamble Co! Averae Procter & Gamble Co! Averae Procter & Gamble Co! Averae
2014
201
2012
2011
2010
4+!++ 47!-%+!4% %7!% %4!-' %-!)4 +!'% )!+ %9!)9 )-!%+ -!) -!) -!% !-9
4)!) 49!+ %7!'% %9!7% %!44 %-!99 +! )!4' %7!'%79-!'-!9' -!)% -!49 !%
4)!4 49!- %!++ %'!'+ %'!+ 9!)) 7!) 9!+ %9!7 %+!%) -!9' -!+) -!47 %!47
-!9' 4+!9%)!%9 %!+4 %4!') %-!% +!+ )!9+ %+!' ')!' -!9' -!)-!47 %!%%
%!)9 4)!4' '-!%+!9 %9!% %%!) )!9+ %%!+% '-!% -!9+ -!9%!- -!4) 9!-7
Gross marin (ercentae for Procter & Gamble e3ceeds t0e ind$stry averae eac0 year of t0e ratio analysis! /0e ross marin (ercentae decreases eac0 year e3ce(t '-% and decreases a total of 9: from '-%- to '-%4! /0e decrease in ross marin (ercentae can be e3amined on t0e firm
by ):! In total o(eratin income decreases by 4!9: 20ile total sales increases by !': ca$sin t0e firm*A1 (rofit marin and total asset t$rnover1 s0o2 $s t0e decline of t0e ratio! /otal asset t$rnover decreases or remains e?$al eac0 year drivin do2n t0e ret$rn on assets ratio! >*A increases only one year1 ca$sed by an increase of net (rofit marin1 and total asset t$rnover remainin constant! Procter & Gamble o$t(erforms t0e ind$stry averaes for net (rofit marin b$t 0as a lo2er total asset t$rnover t0an t0e ind$stry averaes ca$sin t0e firm to 0ave a lo2er ret$rn on assets t0an its com(etitors! /0e ret$rn on e?$ity (ercentaes s0o2s s0o2s a decline by %7: from '-%- to '-%4! /0e averae for ret$rn on e?$ity (rovides very lare (ercentaes! In '-% and '-%4 it*E (ercentae of %-14-- and 7' res(ectively! /0is ca$sed t0e averae to be s,e2ed (ositively! /0is is similar similar to t0e interest coverae ratios t0at 2ere s,e2ed (ositively by Cloro3! /0e firmet$rn on assets created t0e trend1 b$t t0e c0anes of t0e debt8e?$ity ratio ca$sed ret$rn on e?$ity e?$ ity to s0are a similar trend ca$sed by a se(arate factor! /0e /0e c0anes of >*A and >*E are driven (rimarily by t0e c0anes in (rofit marin!
9
,ar"et .alue Ratios '( Ratio
Procter & Gamble Co! Averae "o0nson & "o0nson imberly8Clar, Holdins Colate8Palmolive Co! Ecolab1 Inc! ealed Air Cor(! Cloro3 Co /0e C0$rc0 & D2i0t Co!1 Inc! +rot Rates % @on term Dividend 8 ;r! ales 8 ;r! EP 8 ;r! Ca(ital (endin 8 ;r!
,ar"et .alue ,ar"et to /oo" '+!79 ! '!+9 !) %+!7+ !)79!9!+9 '!47 4)!9 '+!4 4!'7 %! 7!-+ '!+ %-!9+ '7!9 !''
'rocter +amble Co3 +!'7! 8-! 8'!49 4!-
Industry
1 r3 A)o
+!' %-!)!)7 %-! !%
/0e (rice8earnins ratio for Procter & Gamble e3ceeds t0e ind$stry averae! Procter & Gamble
Conclusion
In order to ive a (ro(er financial statement analysis1 five different ro$(s of financial ratios 2ere e3amined to determine t0e overall financial 0ealt0 of Procter & Gamble! /0e 10
firm co$ld $se more leverae to finance its assets1 debt is c0ea(er t0an e?$ity1 and t0e coverae ratios s0o2 t0at t0e firm can easily ma,e its interest (ayments! /0e li?$idity and t$rnover ratios s0o2 $s t0at t0e firm*A and >*E! /0ese res$lts co$ld strent0en t0e overall financial 0ealt0 o f t0e firm and ma3imi6e s0are0older 2ealt0!
Cost of Ca-ital Introduction
/0e 2ei0ted averae cost c ost of ca(ital is an estimate of t0e re?$ired ret$rn t0at is demanded by a firm
Cost of *ebt
/o bein t0e disc$ssion of t0e cost of ca(ital1 t0e cost of debt 2ill be analy6ed and disc$ssed! /0e t2o met0ods c0osen to estimate t0e cost of debt for Procter & Gamble 2ere t0e credit ratin met0od and t0e synt0etic ratin met0od! An ass$m(tion of a ris,8 free rate is re?$ired for bot0 met0ods $sed! /0e %-8year U /reas$ry #ond rate is $sed in t0e follo2in estimations! /0e %-8year /8bond rate of %!): is bein $sed from t0e 2ebsite ;a0oo Finance and t0e data 2as ta,en Febr$ary %1 '-%9! /0e %-8year U /reas$ry bond is t0e most ideal ris,8free rate beca$se Procter & Gamble is domestic to t0e United tates and a nd $ses t0e United Un ited tates dollar as its local c$rrency! Also1 Also1 an estimate of t0e lent0 of t0e firmatins1 Interest Coverae >atios1 and Defa$lt (reads tab le1 from 0is 2ebsite1 t0e defa$lt s(read for an AA ratin ratin is %!--:! /0is s(read (l$s t0e %-8year %- 8year U /reas$ry bond rate is t0e estimated cost of debt1 '!):! /o estimate t0e cost of debt $sin t0e synt0etic ratin met0od1 data from PGs '-%4 %-, 2as re?$ired! /0is data consisted of t0e o(eratin income and interest in terest e3(ense for '-%41 as 2ell as t0e o(eratin leases data! /0e synt0etic ratin adB$sts t0e times interest earned1 or interest coverae1 ratio for t0e 12
o(eratin leases of a firm in order to (rovide a ratin! It reclassifies t0e o(eratin leases as debt1 20ic0 (rovides for a more acc$rate re(resentation of t0e cost of debt! deb t! Prior to adB$stin for t0e firmatins >atins s0eet (rovided a ratin of AAA! After adB$stin for t0e o(eratin leases1 Damodarans >atins s0eet maintained t0e AAA ratin1 ratin1 2it0 an estimated defa$lt s(read of -!7:! - !7:! Addin t0is to t0e ris,8free rate1 %!):1 an estimated cost of debt de bt of '!9+: 2as fo$nd! Addition of t0e o(eratin leases only increased t0e interest coverae ratio1 $sed for calc$lation of t0e synt0etic ratin1 by a small (ercentae1 t0$s it did not affect t0e defa$lt s(read and estimated cost of debt! /0e t2o met0ods for estimatin cost of debt (rovided for similar res$lts! #ot0 met0ods (rovided for a lo2 defa$lt s(read1 Procter & Gambles 0i0 interest coverae ratio res$lted in t0e lo2est (ossible s(read! /0e res$lts s0o2 t0at Procter and Ga mble is 0i0ly credit 2ort0y and t0at t0e com(any 0as a lo2 cost of debt com(ared to t0e 0o$se0old (rod$cts ind$stry cost of debt1 4!-':1 4! -':1 (rovided on Dr! Damodaran
,ar"et .alues of *ebt and (quity
Ne3t1 t0e e3(lanation of t0e estimated mar,et val$es and 2ei0ts of debt and e?$ity $sed for t0e 2ei0ted averae cost co st of ca(ital com($tation! /0e (ercentae 2ei0t of e?$ity e?$ ity is sim(ly calc$lated by dividin t0e estimated mar,et val$e va l$e of e?$ity by t0e s$m of t0e estimated mar,et val$e of e?$ity and t0e estimated mar,et val$e of debt! /0e estimated mar,et val$e of e?$ity for Procter & Gamble is calc$lated by m$lti(lyin t0e stoc, (rice and t0e n$mber of s0ares o$tstandin! /0e common stoc, (rice of 79!% 2as (rovided as t0e (rice on "an$ary %'t01 '-%9 from =erent *nline! /0e n$mber of s0ares o$tstandin '17'-17'174 2as $sed from t0e ca(ital stoc, information do2nloaded from =erent *nline1 and re(resents t0e n$mber of s0ares c$rrently o$tstandin as of e(tember -t01 '-%! Usin t0is data t0e mar,et val$e of e?$ity can be b e estimated as '-+1%%1-'-199!)! /0e estimated mar,et val$e of debt for Procter & Gamble 2as calc$lated $sin fo$r variables5 total liabilities1 interest e3(ense1 estimated cost of debt1 and t0e 2ei0ted averae of t0e bonds time to mat$rity dates! In order to ma,e t0e best estimate of t0e mar,et val$e of debt deb t t0ese fo$r variables are $sed in t0e time val$e v al$e of 13
money e?$ation to find t0e (resent val$e of liabilities! /0e total liabilities $sed in t0is estimation 2as ta,en from t0e '-%4 balance ba lance s0eet1 t0e interest e3(ense 2as ta,en from t0e '-%4 income statement1 bot0 financial statements derived from =erent *nline! /0e estimated cost of debt1 '!9+:1 is s0o2n (revio$sly calc$lated in t0e above section $sin t0e synt0etic met0od! It is $sed as t0e re?$ired ret$rn in t0is /= estimation! /0e 2ei0ted averae of t0e time to mat$rity dates1 for t0e bonds 0eld by b y Procter & Gamble1 (rovides an estimated averae n$mber of (eriods for t0e (resent val$e e?$ation! /0e data $sed for t0is calc$lation 2as ta,en from Procter & Gamble
Cost of (quity
/0e cost of e?$ity is t0e rate of ret$rn t0at is re?$ired by investors to invest in t0e e?$ity of t0e firm! Damodaran P! ++ /0e ca(ital ca( ital asset (ricin model is t0e model t0at 2as $sed for t0e calc$lation of Procter & Gamble
/0e CAP= e?$ation t0at a((lies to t0e met0od $sed in estimatin t0is reression beta is in terms of ra2 ret$rns! /0e CAP= ra2 ret$rn e?$ation1 R j =α + β j R m 1 and t0e ra2 ret$rns1 earned by Procter & Gamble and t0e &P -- inde3 from t0e (ast years1 2ere $sed in t0e estimation of t0is reression beta! >eression of t0e ra2 ret$rns of Procter & 14
Gamble aainst t0e ra2 ret$rns of t0e &P -- inde3 (rovides t0e reression beta! /0e (ro(ortion of Procter & Gamble '1 is estimated bein %+!%):! /0e (ro(ortion of o f firm8s(ecific ris, % > ' is estimated bein +%!+%:! /0e lent0 of t0e estimation (eriod offers a trade8off1 a loner estimation (eriod (rovides more data1 b$t t0e firm itself mi0t 0ave c0aned in its ris, c0aracteristics over t0e time time (eriod! Procter & Gamble is t0e larest com(any in its ind$stry and seems to 0ave not n ot c0aned its b$siness str$ct$re or leverae (olicies recently1 and 2it0 t0e financial stability of t0is firm a loner estimation (eriod co$ld be $sed to (rovide a more acc$rate reression! /0ere is advantae to $sin mont0ly ret$rns rat0er t0an daily ret$rns t0at arises 2it0 t0e non8tradin bias and t0e bid8as, bo$nce! D$rin a non8tradin (eriod of a firm1 if t0ere is still movement in t0e mar,et for t0ose (eriods t0is creates a bias1 20ic0 red$ces t0e firm
15
A bottom $( beta is an estimation (rocess to find t0e levered beta of a firm! It $ses a 2ei0ted averae of individ$al firmates by ector table! /0e (rod$ct of t0e $nlevered asset beta and t0e ta3 adB$sted debt ratio (rod$ce Procter & Gamble
16
to -!-'1 20en t0e averae of %-- firms is $sed! /0e n$mber of firms in t0e 0o$se0old (rod$cts ind$stry1 %41 reatly red$ces t0e standard error of t0e bottom $( beta! ,ar"et Ris" 'remium5
/0e 0istorical mar,et ris, (remi$m is t0e averae of t0e ris, (remi$ms over a time (eriod! /0ree c0oices m$st be made 20en $sin 0istorical data to estimate t0e e?$ity ris, ris, (remi$m5 time (eriod $sed1 ris,8free sec$rity1 sec$rity1 and t0e c0oice of $sin t0e arit0metic averaes vers$s eometric averaes! /0e o(tion to adB$st t0e 0istorical ris, (remi$m based on t0ese factors (rovides fle3ibility for t0e CAP= estimation! estimation! For t0is analysis t0e 0istorical ris, (remi$m c0osen $ses t0e eometric averae1 %-8year U /8bond /8bond rate1 and t0e lonest time 0ori6on available! /0e eometric averae aver ae (rovides a better estimate of lon r$n ret$rn com(ared to t0e arit0metic averae! /0e ris, (remi$m t0at $ses t0e %-8 year /8bond /8bond rate is $sed beca$se it is t0e lon8term sec$rity consistent 2it0 t0e ty(ical t y(ical (roBect lent0 for lon8term investments! /0e lonest time time (eriod available1 %)'+ to '-%1 (rovides less standard error com(ared to t0e s0ort8term time (eriods! /0e 0istorical ris, (remi$m t0at meets t0ese criteria is 4!4:1 t0is information 2as $sed from Dr! Damodaranet$rns on toc,s1 #onds1 and #ills 2eb(ae! /0e im(lied ris, (remi$m model1 similar to t0e dividend ro2t0 model1 is estimated $sin 2it0 t0e c$rrent mar,et inde31 t0e e3(ected dividends1 and t0e e3(ected ro2t0 rate of earnins!
(
Current Current Index Price Price =
Expected Expected dividends dividends next period ( Required Required Return − Expected Expected growthrate of earnings earnings )
)
Risk Free Free Rate = IRP
−
/0e above e?$ation1 t0at can be fo$nd in Dr! Damodaran
in($ts1 t0e re?$ired ret$rn on e?$ity can be solved for! $btractin t0e ris, free rate from t0e re?$ired ret$rn res$lts in t0e im(lied ris, (remi$m! Dr! Damodaran (rovided on Febr$ary %1 '-%9 an im(lied ris, (remi$m of !9%: at t0e bottom bo ttom of 0is 2ebsite
/0e ca(ital asset (ricin model is a f$nction of a firm
cost of e?$ity res$ltin from c0anes in t0e beta1 ris,8free rate1 or mar,et ris, (remi$m! /0e im(lied ris, (remi$m is $sed over t0e 0istorical ris, (remi$m beca$se it better reflects t0e ris, (remi$m t0at 2o$ld be demanded by an investor in c$rrent mar,et conditions!
Cost of (quity Sensitivity Analysis (stimates /ase Case5 /ottom 6-8 6- 8 IR'8 10 r3 r3 Can)e 15 Re)ression /eta Can)e 25 ;istorical Ris" 'remium Can)e 5 < r3 T7bond Rate
/eta %!-)74) -!4+4)%+-) %!-)74) %!-)74)
Ris"7free %!): %!): %!): %!:
Ris" 'remium !9%: !9%: 4!4: 9!+-:
Cost of (quity 93::% 4!9: 9!74: +!9:
/0e base case cost of e?$ity incl$des t0e bottom $( beta1 im(lied ris, (remi$m1 and %-8 year /8bond rate! /0e base case1 or best estimate1 res$lts an estimated cost of e?$ity of 7!++:1 s0o2n $nderlined above! /0e bottom $( beta is $sed in t0e ca(ital asset (ricin model beca$se it (rovides a beta t0at 0as sinificantly less standard error com(ared to t0e estimated reression beta! Usin t0e reression beta1 s0o2n in c0ane c0 ane % of t0e table1 decreases t0e cost of e?$ity by 4%:! $c0 a lo2er cost of e?$ity co$ld in t$rn allo2 manaers to a((rove (roBects t0at co$ld act$ally 0ave a neative net (resent val$e! /0e second c0ane in t0e table s0o2s t0e $se of t0e 0istorical 0 istorical ris, (remi$m1 t0e cost of e?$ity decreases as e3(ected 2it0 t0e decrease in t0e ris, (remi$m (ercentae! /0e t0ird c0ane c0a ne in t0e sensitivity analysis s0o2s t0e $se of t0e 8year /reas$ry bond rate %!:! /0e ris, (remi$m 0ad to be adB$sted for t0is c0ane as 2ell beca$se t0e im(lied ris, (remi$m is a f$nction of t0e ris,8free rate! /0e im(lied ris, (remi$m calc$lator (rovided by Dr! Damodaran s(reads0eet to com($te c$rrent E>P for c$rrent mont0J on 0is 2ebsites 0ome(ae 2as $sed to calc$late ca lc$late t0e ris, (remi$m $sin t0e 8year /reas$ry bond rate and t0e c$rrent inde3! An ass$m(tion is made t0at Procter & Gamble 0as (roBects t0at averae at or reater t0an %- years1 t0is bein t0e $ltimate reason t0e %-8year /8bond /8bond rate is $sed as t0e ris, free rate instead of t0e 8year /8bond /8bond rate!
18
=ei)ted Avera)e Avera)e Cost of Ca-ital
/0e 2ei0ted averae cost of ca(ital is an estimate of t0e re?$ired ret$rn demanded by a firm
=ei)ted Avera)e Cost of Ca-ital5 Sensitivity Analysis Estimates /ase Case5 Cost of (quity /ase8 Syntetic Ratin) Can)e 15 Cost of (quity /ase8 Credit Ratin) Can)e 25 Cost of (quity C)3 18 Syntetic Ratin) Can)e 5 Cost of (quity C)3 28 Syntetic Ratin) Can)e 45 Cost of (quity C)3 8 Syntetic Ratin) Can)e <5 Cost of (quity C)3 18 Credit Ratin) Can)e >5 Cost of (quity C)3 28 Credit Ratin) Can)e 95 Cost of (quity C)3 8 Credit Ratin)
:E 7!7' 79!-4 7!7' 7!7' 7!7' 79!-4 79!-4 79!-4
>e 7!++ 7!++ 4!9 9!74 +!9 4!9 9!74 +!9
:D '4!'+ '4!'+ '4!'+ '4!'+ '4!'+ '!)9 '!)9 '!)9
>d '!9+ '!) '!9+ '!9+ '!9+ '!) '!) '!)
%8t 99!++ 99!++ 99!++ 99!++ 99!++ 99!++ 99!++ 99!++
.ACC 9!4-: 9!49: !)9: !4: 9!)%: 4!-%: !9-: 9!)+:
/0e best case 2ei0ted averae cost of ca(ital consists of t0e (ercentae debt and e?$ity based on mar,et val$es1 t0e best case cost of e?$ity $sin t0e ca(ital asset (ricin model1 and cost of debt estimatin $sin t0e synt0etic ratin met0od! /0e ta3 rate1 !%':1 $sed in t0e .ACC .ACC estimation is bein $sed aain to maintain consistency and remains $nc0aned t0ro$0 o$t t0e sensitivity analysis! It is t0e marinal ta3 rate for money8 ma,in com(anies 2it0in t0e 0o$se0old (rod$cts ind$stry! A total of seven c0anes c 0anes 2ere cond$cted to t0e base case to create several different o$tcomes! /0e first c0ane is only a c0ane from t0e synt0etic ratin to t0e credit ratin1 b$t affects t0e cost of debt and t0e (ro(ortionate 2ei0ts of debt to e?$ity! C0anin t0e met0od from synt0etic to credit ratin increases t0e cost of debt1 t0$s increasin t0e .ACC .ACC for eac0 scenario! /0e (ercentae of total debt decreases 20enever t0is c0ane occ$rs beca$se t0e estimation of t0e mar,et val$e of debt is reliant on t0e estimated cost of debt! Increasin t0e cost of debt res$lted in a decrease in t0e estimated mar,et val$e of debt1 t0$s decreasin t0e (ercentae of debt in relation to t0e e?$ity! Eac0 Eac0 c0ane made in t0e cost of e?$ity sensitivity analysis 2as incl$ded to s0o2 t0e direct c0ane in t0e .ACC .ACC from c0anes in 19
t0e cost of e?$ity! /0e synt0etic ratin (rovides t0e best estimate of t0e cost of debt beca$se it incl$des o(eratin leases! As As (revio$sly mentioned t0e best estimate of t0e cost of e?$ity $ses t0e bottom $( beta1 im(lied ris, (remi$m1 and t0e %-8year /reas$ry bond rate! /0is best estimate of t0e cost of e?$ity and t0e synt0etic ratin ratin (rovide t0e best estimate of t0e 2ei0ted averae cost of ca(ital at 9!4-:! /0e .ACC estimations are 2it0in a reasonable rane of !4: to 9!)+:!
&-timal Ca-ital Structure Introduction
/0e o(timal ca(ital str$ct$re of a firm re(resents t0e best estimate of a ca(ital str$ct$re t0at a firm can $se based on its environment! For t0is analysis of Procter & Gamble t0e o(timal ca(ital str$ct$re 2as estimated $sin t0e cost of ca(ital a((roac01 in contrast to $sin t0e adB$sted (resent val$e a((roac0 or o(eratin income a((roac0! /0e cost of ca(ital a((roac0 2as $sed to find t0e o(timal ca(ital str$ct$re beca$se t0e in($ts t0at are $sed in estimation 0ave already been (revio$sly calc$lated in t0is analysis! Also1 t0is a((roac0 allo2s for sensitivity analysis to determine t0e o(timal ca(ital str$ct$re 2it0 t0e lo2est 2ei0ted averae cost of ca(ital! Dr! Damodaran states in 0is te3t1 Applied Corporate Finance, by alterin t0e 2ei0ts of debt and e?$ity in t0e 2ei0ted averae
cost of ca(ital e?$ation1 a firm mi0t be able to c0ane t0eir cost of ca(ital! As (revio$sly mentioned1 t0e (referred stoc, of Procter & Gamble 2as e3cl$ded from t0is analysis d$e to its small effect on t0e overall analysis! /0e table s0o2n belo2 ill$strates t0e (rocess and information $sed for t0is estimation! /0e s$bse?$ent (arara(0s 2ill describe t0e detailed ste(s ta,en in findin t0e o(timal ca(ital str$ct$re for Procter & Gamble! *ebt Ratio
-: %-: '-:
/e
Cost of
.alue of
Interest
(quity
*ebt
(?-ense
%--
ta -!+
: )-
7 -!)
9!+
8
8
: +-
4 %!-
:
'
=e
7!%) 7!94
'714)-17+'1) +7 41)+%191) 7
7917'1)+4
TI(
8 '-!7
%1471-1)
% %-!
9+
7
S-re
Cost of
=A
ad
*ebt
CC
-!7
'!9+
9!+
-!7
'!9+
9!9
-!7
'!9+
9!47 20
-: 40%
-: 9-: 7-: +-: )-: %--:
7-
%!%
: >0
' 132
% -
> %!4
: 4-
9 %!7
: -
'!'
: '-
!'
: %-
% 9!%
:
'
-:
8
+!' @301
%-!%%%!74 %4!49 %)!)' 9!') 8
+'147'14+1)
'14)+1)%'1%
9!%%
9' 10@8@>8118
74 84@>8:298<
+ 439
@<0 %7141)%41
@> 1-+1-41-
2 !-'
)7 %941)4419)71
7%+1-'+141
' -!+4
)' %)'1414+-1
4+ 41-19+%1
+ -!44
%9!-
)%' '%)1)'91'91
7'+ )14'177)1
-!+
%9!-
+)) '4714%71-491
%%7 4419%1+791
+ -!4
%9!-
++7 '741)-71+')1
-7 4)1')-1)71
-!%
%9!-
+74
+)9
-
-
%!%-
!-
9!7
132<
31:
>32>
%!7
!9+
9!'+
)!--
%-!)
)!-+
%7!)
%'!7
%7!)
%!+
%7!)
%4!4'
%7!)
8
/0e cost of ca(ital a((roac0 is an estimation of a firm
,ar"et .alue of *ebt ,ar"et .alue of (quity Current Firm .alue .alue *ebt(quityB Current *ebt Ratio ,.d$,.fB Ta? Rate Levered (quity /eta Ris" Free Rate Im-lied Ris" 'remium &-eratin) Income 2014B
991791+-)1-7 '-+1%%1-'-197 '741)-71+')1+74 '4!'+: !%': %!-9 %!): !9%: %1'++1---1---
Total Total Liabilities Liabil ities 2014B Interest (?-ense 2014B Interest Covera)e Ratio Current Cost of (quity *efault S-read Current Cost of *ebt =ei)t (quity =ei)t *ebt Current =ACC
741')-1---1-- 7-)1---1--'%!9'79449 7!++: -!7: '!9+: -!79 -!'4 9!4-:
21
Follo2in t0e 2ei0ts of debt is t0e accom(anyin (ercentae 2ei0ts of e?$ity! /0ese 2ei0ts 2ere calc$lated by s$btractin t0e corres(ondin debt 2ei0t by %1 rationally -: debt is e?$al to %--: e?$ity! /0e ne3t estimated com(onent of t0e cost of ca(ital e?$ation is t0e beta! /0e bottom $( beta (revio$sly estimated and $sed as (art of t0e base case for t0e .ACC .ACC is $sed for t0is a((roac0! /0e levered e?$ity beta1 %!-91 m$st be adB$sted to become $nlevered beta1 20ic0 is t0e startin (oint at -: debt! >emovin t0e ta38adB$sted mar,et val$e of debt to e?$ity ratio res$lts in an $nlevered beta of -!+7! /o find eac0 ne2 beta t0e corres(ondin ta38adB$sted ta38adB$sted debt to e?$ity ratio is is added bac,! /0e beta m$st be adB$sted for eac0 ne2 debt ratio1 as t0e debt ratio increases1 ris, also increases1 t0$s increasin t0e beta! /0e ne2 cost of e?$ity is t0e (rod$ct of t0e im(lied ris, (remi$m and t0e ne2 beta (l$s t0e ris, free rate! /0e im(lied ris, (remi$m1 from Dr! Damodaran
/0e total mar,et val$e of t0e firm is 0eld constant for t0e cost of ca(ital a((roac0 to add sim(licity to t0e estimation! /0e total mar,et val$e of t0e firm does not increase1 t0e mar,et val$e of debt increases b$t b$ t for eac0 increasin debt ratio an ass$m(tion is made t0at debt is $sed to b$y bac, t0e firmatin1 Interest Coverae >atio1 and Defa$lt (read table from 0is 2ebsite! /0e estimated interest coverae ratio falls into an interval t0at is $sed to determine t0e defa$lt s(read for eac0 debt ratio! /0e defa$lt s(read (l$s t0e ris,8free rate e?$als t0e ne2 cost of debt! /0e initial cost of debt consists of t0e ris,8free rate and t0e lo2est s(read1 t0eoretically since t0e firm 2o$ld 0ave no debt t0e cost of debt 2o$ld be 6ero! /0e interest coverae ratio is reliant on t0e (revio$s cost debt estimation1 im(licitly t0e (revio$s d efa$lt s(read since t0e ris,8free rate is constant! /0$s1 an ass$m(tion is made t0at t0e initial debt ratio of -: 22
still 0as a cost of debt of '!9+:! /0is beins a cyclical (rocess bet2een t0e mar,et val$e v al$e of debt1 interest coverae ratio1 defa$lt s(read1 and cost of debt! /0e cost of debt for t0e (revio$s debt ratio is $sed 2it0 t0e ne2 mar,et val$e of debt to estimate a ne2 interest e3(ense1 20ic0 is t0en $sed to com($te a ne2 interest coverae ratio t0at co$ld fall in bet2een a ne2 interest coverae interval c0anin t0e defa$lt s(read1 res$ltin in a ne2 cost of debt! /0e cyclical (rocess contin$ed for eac0 debt ratio and t0e s(read increased eac0 time t0e interest coverae decreased eno$0! As t0e debt ratio increased1 nat$rally t0e mar,et val$e of debt corres(ondinly increased as 2ell as t0e interest e3(ense! Eac0 increase in interest e3(ense decreased t0e interest coverae ratio beca$se t0e o(eratin income is ass$med to be constant! /0e steady stead y decrease in t0e interest coverae ratio ca$sed an increase in t0e defa$lt s(read $( to %9:1 almost t0e data table
After t0e (revio$s adB$stment 2as made to correct t0e cyclical estimation (rocess1 t0e ne2 2ei0ted averae cost of ca(ital 2as estimated for eac0 debt ratio and its res(ective in($ts! /0e lo2est estimated 2ei0ted averae cost of ca(ital1 9!'9:1 is t0e cost of ca(ital t0at ma3imi6es t0e firm val$e! /0e lo2est .ACC .ACC (rod$ces t0e 0i0est net (resent val$e of f$t$re cas0 flo2s1 t0$s ma3imi6in t0e firm
A sensitivity sensitivity analysis 2as (erformed for t0e cost of ca(ital a((roac0 in order to (rovide additional estimations $sin different variables! /0e bottom $( beta 2as initially $sed as t0e base case for t0e estimation! For t0e sensitivity analysis1 t0e reression beta (revio$sly com($ted at -!4+ 2it0 -!% standard error 2as $nlevered and t0en re8levered 23
at eac0 debt ratio! Nat$rally1 t0is smaller beta decreased t0e cost of e?$ity and 2ei0ted averae cost of ca(ital for eac0 debt ratio! /0e decrease in bot0 t0e cost of e?$ity and .ACC .ACC 2as (ro(ortionate 2it0 t0e c0ane in beta! /0erefore t0e estimated o(timal ca(ital str$ct$re did not c0ane1 t0e cost of ca(ital a((roac0 $sin t0e reression beta (rovided a ca(ital str$ct$re of 4-: debt and 9-: e?$ity! /0e /0e second variable t0at 2as c0aned for t0e sensitivity analysis 2as t0e ta3 rate $sed for t0e estimation! /0e ta3 rate1 !%':1 $sed for t0e initial estimation 2as one t0at t0a t 2as $sed for t0e (revio$s cost of ca(ital estimation! *n Dr! Damodaranates by ector table1 it is t0e averae ta3 rate for only money ma,in com(anies in t0e 0o$se0old (rod$cts ind$stry! /0e /0e ta3 rate $sed for t0e sensitivity analysis is from Procter & Gambleed$cin t0e ta3 rate red$ces t0e ta38ded$ctible benefit of $sin debt! In t0is case1 decreasin t0e ta3 rate from !%': to '%!4-: is not a sinificant eno$0 decrease to alter t0e estimated o(timal ca(ital str$ct$re! /0e cost of ca(ital a((roac0 $sin t0e ta3 rate from Procter & Gamble
/o f$rt0er f$rt0er t0e ca(ital str$ct$re analysis and to find a more (recise o(timal ca(ital str$ct$re t0e (rocess 2as recom($ted! /0e estimations 2ere fo$nd $sin an increasin debt ratio in intervals of one (ercent! Usin an interval of one (ercent (rovides a more acc$rate re(resentation of t0e o(timal ca(ital str$ct$re! /o accelerate t0e iterative (rocess E3celatin1 Interest Coverae >atio1 and Defa$lt (read table! Allo2in e3cel to (erform iterative (rocesses a$tomated 24
t0e estimation of all %-% 2ei0ted averae cost of ca(ital val$es! /0e estimated o(timal ca(ital str$ct$re 2it0 t0e lo2est 2ei0ted averae cost of ca(ital 2as ): e?$ity and 4%: debt1 very v ery similar to t0e oriinal estimation! A sensitivity analysis 2as t0en (erformed aain $sin t0e reression beta1 and ta3 rate from Procter & Gamble
Conclusion
/0e first estimations s0o2 t0at t0e o(timal ca(ital str$ct$re for Procter & Gamble is 4-: debt and 9-: e?$ity! /0e ca(ital str$ct$re t0at 2as com($ted $sin t0e c$rrent mar,et val$es of debt and e?$ity of Procter & Gamble s$ested t0e $se of 79: e?$ity and '4: debt! After adB$stin t0e debt ratio to increase in intervals of one (ercent an d $sin t0e ta3 rate from t0e firm
*ividend 'olicy Cas Return Ratio
/0e dividend (olicy of Procter & Gamble is strai0tfor2ard1 contin$o$sly ret$rn earnins to investors t0ro$0 dividends and stoc, re($rc0ases! /0e follo2in dividend (olicy analysis e3(lains t0e met0ods and com(arisons $sed to ded$ce t0e aforementioned 25
statement! An estimated free cas0 flo2 to e?$ity FCFE (rovides t0e dollar amo$nt t0at is available to be (aid to s0are0olders1 as dividends or stoc, re($rc0ases! /0e net cas0 flo2 to s0are0olders is t0e act$al dollar amo$nt t0at 2as (aid o$t to s0are0olders in dividends and stoc, re($rc0ases! Com(arin t0ese amo$nts (rovides a val$able financial ratio1 t0e cas0 ret$rned ratio1 20ic0 is t0e net cas0 flo2s to s0are0olders divided by t0e free cas0 flo2s to e?$ity! If t0e cas0 ret$rn ratio 2as e?$al to one t0is 2o$ld indicate t0at a firm is (ayin its s0are0olders t0e e3act amo$nt a mo$nt t0at is 0as available as free cas0 flo2s! im(ly1 t0is ratio indicates if a firm is (ayin o$t more or less t0an it can as dividends!
/0e free cas0 flo2 to e?$ity is estimated as t0e s$m of net income1 de(reciation de (reciation & amorti6ation1 c0anes in c$rrent asset & liability acco$nts1 ca(ital e3(endit$res1 (roceeds from asset sales1 ac?$isitions1 and c0anes in debt1 less any dividends (aid to (referred s0are0olders! /0e val$es $sed in t0e estimation of eac0 FCFE1 2it0 e3ce(tion of (referred dividends1 2ere ta,en from Procter & Gamble
Procter & Gambles cas0 ret$rned ratio1 in total1 decreases dec reases over t0e five years of st$dy! /0e cas0 ret$rned ratios reater t0an one1 '-%- to '-%'1 indicate t0at Procter & Gamble is (ayin o$t more to its investors in dividends and stoc, re($rc0ases t0an it 0ad available as free cas0 flo2s! /0e ratios less t0an one s0o2 t0at t0e firm is (ayin less to s0are0olders and retainin t0e free cas0 flo2s as cas0! Increasinly eac0 year t0e firm 0as (aid o$t more dividends to its s0are0olders1 a total increase on t0e statement of cas0 flo2s of '9!9': from '-%- to '-%4! Procter & Gambles net cas0 flo2s to s0are0olders 26
are not acc$rately re(resented by b y t0e increase in dividends (aid! /0is is t0e res$lt of t0e volatile c0anes in t0e total amo$nt of stoc, re($rc0ases eac0 year1 20ic0 is directly correlated to t0e fl$ct$atin c0anes in net n et income! E3aminin t0e statement of cas0 flo2s s0o2s t0at t0e firm retains more cas0 in years t0at net income decreases1 and red$ces t0e amo$nt of stoc, re($rc0ases re($rc0a ses t0at it ma,es! /0e cas0 ret$rn ratio ranes from -!)7 to %!'%-1 and 0as a median of %!-%- over t0e five years! /0is s$ests t0at Procter & Gamble is (ayin most of its available free cas0 c as0 flo2s bac, to its s0are0olders t0ro$0 dividends and stoc, re($rc0ases! /0e years '-%- t0ro$0 '-%' (rovide a cas0 ret$rn ratio reater t0an one1 meanin Procter & Gamble (aid o$t more dividends and stoc, re($rc0ases t0an t0e estimated available free cas0 flo2! /0e table belo2 ill$strates t0e cas0 ret$rn ratio and ret$rn ratios t0at 2ill be disc$ssed ne3 t!
Financial Accountin) Ratios Re-orted in ,illionsB FCFE Net Cas0 Flo2s to 0are0olders Cas0 >et$rned >atio >et$rn *n Assets >et$rn *n Ca(ital >et$rn *n E?$ity Cost of E?$ity Cost of Ca(ital >et$rn (read >*C 8 Cost of Ca(ital E?$ity >et$rn (read >*E 8 Cost of
E?$ity
2014 %17+4 %'1)%9 -!)7 +!%7: +!+): %9!+4: 7!++: 9!4-: '!4):
201 %'19%4 %'1- -!))% +!%): +!-: %9!):
2012 %-1-9 %-1%9 %!-%+!': 7!94: %7!-:
2011 %-1+ %'1+-9 %!'%+!: )!'9: %7!:
2010 %%1-)9 %%149' %!- )!)4: )!4: '-!7:
%!9:
%!'4:
'!+9:
!%4:
+!)7:
+!7':
)!%:
)!47:
%'!+:
Financial Accountin) Returns
Acco$ntin ret$rns 2ere estimated for eac0 year $sin t0e firm
to '-%4 corres(ondin to t0e total decreases in net income and increases in total assets! /0e ret$rn on invested ca(ital ratio1 o(eratin o (eratin income net of ta3es over assets net of cas01 2as t0en com($ted! Cas0 is removed from assets to reflect only t0e invested ca(ital in order to be consistent 2it0 t0e n$merator1 o(eratin income! /0ese (ercentaes 2ere t0en com(ared to t0e cost of ca(ital1 (revio$sly estimated as t0e .ACC! .ACC! /0e difference bet2een t0e >*IC and t0e cost of ca(ital (rovides t0e ret$rn s(read!
Procter & Gamble
mar,et val$e of e?$ity is ina((ro(riate to $se for t0e ret$rn on invested ca(ital and ret$rn on e?$ity com($tations! He (rovides t2o rationales to s$((ort t0is1 com($tin acco$ntin ret$rns $sin t0e mar,et val$e of e?$ity 2o$ld create a do2n2ard do 2n2ard bias of t0e ret$rns beca$se mar,et val$es incl$de ro2t0 and a nd e3(ectations for t0e f$t$re! And1 t0e mar,et val$e mar,s $( t0e val$e v al$e of e3istin assets to reflect t0eir earnin (o2er1 20ere if t0ere 2ere no ro2t0 assets t0e mar,et val$e v al$e 2o$ld enerate a ret$rn on ca(ital e?$al to t0e cost of ca(ital! An ass$m(tion is made t0at com($tin t0e ret$rn on e?$ity $sin t0e boo, val$e of e?$ity is effective for com(arison to t0e cost of e?$ity! e?$ity! /0e (ositive ca(ital and e?$ity e3cess ret$rns for Procter & Gamble s0o2 t0at t0e firm is investin in (rofitable (roBects!
In Dr! Damodaran
& Gamble
a firm $ses cas0 to (ay dividends or b$y bac, stoc,1 it red$ces its boo, val$e of e?$ity by t0e amo$nt of t0e dividend or stoc, re($rc0ase! /0is co$ld decrease t0e firme$ters!com! /0e firm
Dr! Damodaran (rovides reasonin t0at can e3(lain Procter & Gamble
ret$rn on invested ca(ital and invested ca(ital! Procter & Gamble
29
Stoc" Returns
Acco$ntin ret$rns are $sef$l b$t can be inconsistent and $nreliable1 t0$s stoc, ret$rns for Procter & Gamble 2ere estimated to (rovide additional (ers(ective! /0e common stoc, ret$rn and dividend yield 2ere com($ted for t0e same time 0ori6on1 '-%- to '-%4 in order to maintain data consistency! /0e stoc, (rices1 $sed for t0is stoc, ret$rn calc$lation1 2ere ta,en from =orninstar on -K')K%9 and re(resent t0e fiscal year end closin (rices! /0e dividends (aid (er s0are 2ere ta,en from t0e firm
Common Stoc" Returns 'rice *ividend Return *iv3 ield *iv3 ield Corrected AnnualiDed Return Total return
2010 94! %!+-
2011 99!7% %!)7
2012 97!+) '!%4
201 +%!4% '!')
2014 )%!-) '!4
'!+-:
9!79: '!): !-9:
4!)+: !%: !'%:
'!'): '!+%: !7:
%4!)-: '!9): !-%:
Avera)e
Return
%'!4+: '!++: !%9: 7!'-: 1039%
30
/0e stoc, ret$rn of a firm is t0e (ercentae c0ane in stoc, (rice1 ( rice1 it 2as estimated above as t0e c$rrent stoc, (rice (l$s c$rrent dividend min$s t0e (revio$s year stoc, (rice divided by t0e (revio$s year stoc, (rice! /0e arit0metic averae 2as t0en fo$nd for t0e fo$r stoc, ret$rns t0at estimated to be %'!4+:! /0is averae stoc, ret$rn can be com(ared to t0e cost of e?$ity1 7!++:1 $sed (revio$sly in t0is section! /0e averae stoc, ret$rn re(resents t0e (ercentae ret$rn a s0are0older earned1 20ile t0e cost of e?$ity re(resents t0e ret$rn t0at a s0are0older demands from t0e firm! Com(arin t0e averae ret$rn and cost of e?$ity (rovides a s(read of 4!9-:! /0is (ercentae is t0e e3cess e 3cess ret$rn t0at a s0are0older received for investin in Procter & Gamble! /0e dividend yield 2as meas$red first as t0e c$rrent year dividend over t0e c$rrent year stoc, (rice! /0is met0od 2as not acc$rate for t0is analysis an adB$stment ad B$stment 2as made to correct t0e dividend yield t0at $sed t0e c$rrent (eriod dividend over t0e (revio$s (eriod stoc, (rice! An averae 2as t0en fo$nd for t0e fo$r estimated dividend yields1 it bein !%9:! Usin t0e time val$e of money e?$ation1 t0e ann$ali6ed rate of ret$rn 2as com($ted $sin t0e '-%- and '-%4 stoc, (rices! /0is ret$rn1 7!'-:1 (l$s t0e corrected c orrected averae dividend yield1 !%9:1 (rovided an estimated total ret$rn of %-!7:! /0e estimated total ret$rn1 %-!7:1 com(ared to t0e cost of e?$ity1 7!++:1 (rovided an e3cess ret$rn to Procter & Gamble s0are0olders of '!4):! #ot0 estimated stoc, ret$rns (rovided e3cess e3 cess ret$rns in contrast to t0e cost of e?$ity1 t0$s Procter & Gamble is creatin (rofitable ret$rns on t0e (roBects it invests in! Conclusion
Procter & Gamble
follo2in years to come t0e firm s0o$ld1 maintain its cas0 ret$rned ratio close to one by maintainin its dividend (ayo$t and adB$stin a dB$stin stoc, re($rc0ases in relation to earnins and available cas0! /0e firm s0o$ld also contin$e to invest its e3cess free cas0 flo2s in ac?$isitions or (roBects t0at ma3imi6e s0are0older 2ealt0!
/an"ru-tcy Analysis /0e Altman 68score model is a statistical analysis model t0at in cor(orate finance can be $sed to estimate t0e financial 0ealt0 of a firm! /0e form$la to estimate t0e L8score is similar to a 2ei0ted averae form$la it $ses five variables v ariables eac0 2it0 a $ni?$e coefficient! /0e follo2in five ratios are t0e variables1 2it0 corres(ondin coefficients1 $sed in t0e 68score model5 net 2or,in ca(ital over total assets 2it0 coefficient %!'1 retained earnins over total assets 2it0 coefficient %!41 earnins before interest and ta3es over total assets 2it0 coefficient !1 mar,et val$e of e?$ity over boo, val$e of total liabilities 2it0 coefficient -!91 and sales over total assets 2it0 coefficient co efficient %! Information $sed for t0is estimation of t0e L8score 2as do2nloaded from =erent *nline! /0e E#I/ and sales 2ere ta,en from Procter & Gambles '-%4 income statement! /0e retained earnins1 total liabilities1 total assets1 c$rrent assets1 and c$rrent liabilities 2ere ta,en from Procter & Gambles '-%4 balance s0eet! /0e mar,et val$e of e?$ity1 (revio$sly estimated in t0is analysis1 is t0e (rod$ct of t0e (rice (er s0are of common stoc, and total n$mber of s0ares o$tstandin! /0e L8score is t0e s$m of t0e (rod$cts of eac0 variable and its coefficient! /0e estimated L8score is inter(reted $sin t0ree interval ranes5 less t0an %!+%1 reater t0an %!+% and less t0an '!971 and reater t0an '!97! It can be (redicted t0at a firm 2it0 a L8score t0at is less t0an %!+% 2ill s$ffer from ban,r$(tcy 2it0in one year! An An estimated L8score bet2een %!+% and '!97 indicates a firm t0at is $nder financial distress and t0e (ossibility t0at ban,r$(tcy co$ld o cc$r 2it0in t0e ne3t year! A L8score t0at e3ceeds '!97 '! 97 indicates a firm t0at is not $nder financial distress! /0e estimated L8score for Procter & Gamble1 !4%1 t0is indicates t0at t0e firm is not financially distressed! /0eoretically1 t0e 0i0er t0e estimated L8score1 t0e less a firm is at ris, of ban,r$(tcy! /0e estimated L8score for Procter & Gamble is abo$t '+: 0i0er t0an t0e financial distress t0res0old and abo$t +): 0i0er t0an t0e ban,r$(tcy t0res0old1 32
indicatin it is very financial stable and 0as lo2 ris, of ban,r$(tcy in t0e near f$t$re! /0e biest im(act on Procter & Gambles L8score is t0e fo$rt0 variable1 t0e mar,et val$e of e?$ity over total liabilities! Procter & Gambles ca(ital str$ct$re1 s(ecifically its estimated $se of almost 79: e?$ity1 s$((orts it from bein less e3(osed to ban,r$(tcy ris,!
Cor-orate +overnance Introduction
Cor(orate overnance can be described as t0e $mbrella of standards1 controls1 and (rocesses of a firm t0at allo2 its o(eration! o(eration! /0e board of directors of a firm consists of t0e sta,e0olders t0at create controls1 and monitor t0e manaers! /0e str$ct$re of t0e board of directors and t0eir control over t0e manaers (rescribes t0e strent0 of cor(orate overnance t0at a firm 0as! /o determine t0e strent0 of cor(orate overnance of Procter & Gamble five criteria 2ere created! /0e criteria incl$de t0e firm
Procter & Gamble
committees and a lead inde(endent inde(enden t director is (resent! /0e str$ct$re and 0ierarc0y of Procter & Gamble
>e$lations on cor(orate overnance 2ere created 2it0 t0e arbanes8*3ley Act1 one t0at re?$ires a board of director
>eferrin to Procter & Gamble
Inc!1 =ar, Pinc$s1 0as t0e (o2er of 7- votes (er one s0are of common stoc,1 20ic0 s$bstantially 2ea,ens its overnance!
A firm
Cor(orate overnance can be described as t0e control t0at a firm
Conclusion 35
Procter & Gamble is t0e larest com(any in its ind$stry and (rovides co$ntless (rod$cts across t0e 2orld! /0is analysis anal ysis 0as covered Procter & Gambleesearc0in t0e firm
=or"s Cited5 36
0tt(5KK'472allst!comKinvestinK'-%'K-9K-4Kcom(anies820ere8s0are0olders80ave8no8 (o2er8at8allK 0tt(5KK(aes!stern!ny$!ed$KOadamodarK Damodaran1 As2at0 '-%48%-8%9! A((lied Cor(orate Finance1 4t0 Edition Pae ''+! .iley! indle Edition!
37
