Dressen Case Study
I believe one major factor was how appealing Dressed had become during #1) 1995, as opposed to previous years. It appeared that new management had turned the company around. Management stated Dressed was looking good for future growth during the end of 1995. I think management felt it was the opportune time to sell. They wanted to sell Dressed while they were making money and being successful, as opposed to hemorrhaging money from Westinghouse.
Dressed was Westinghouse star performer in the SQ of 1995.
Sales increased 10% over the year- prior quarter. BIT reached 12% of sales as well. Their growth strategy as well as technology and work processes lead management to believe that there was even greater growth potential. Dressed was now headed In the right direction. Management was trying to strike while the iron was hot.
Another factor was the cash acquisition of CBS In August 1995 for $5. 4 billion. The large purchase price had strained an already weakened balance sheet. There was also a $2 billion bridge loan that was due in February 1996.
Businesses are meant to earn economic profit and mitigate the cost associated with them. Without effective and timely cost strategy, a business cannot climb the Atari of economic prosperity.
Organizations have to be aware of how much cost they are incurring over a certain period of time, as most of the time, high operational costs can devastate the entire financial structure of an entity. Apart from the cost, it is also important for a company to be consistent in their earnings momentum because it Is something that shareholders, as well as analysts, are looking for In a company.
I believe Warbler got Dressed for a good price. I feel that Warbler should have paid more for Dressed, so with a purchase price of $585 million I believe Warbler got a great value. #3) Financial Forecasting is an important metric to use because it can estimate the future financial outcomes of a company. Analysts have to forecast the cash flows and bet obligations to analyze the financial competitiveness of a company as a whole.
Two different ratios could be used to analyze Dresser’s ability to generate sufficient cash flows to service its debt.
The two ratios I used for Dressed are the Cash Flow to Sales Ratio and Debt to Equity. The Cash Flow to Sales ratio is an important ratio which analyzes what percentage of the company’s sales are on credit, and how much of the sales are on cash. The computed ratio for the next five years is below: operating case 1996 1997 1998 1999 2000 n low to sales Forecasted Operational Cash Flow 101 95 Forecasted Sales in Million $ 58 698 740 784 Operating Cash Flow to Sales 11. 70 11.
89 13. 38 12. 88 11. 82 Average 12. 3 The forecasted figure of the cash flow to sales is showing that the company is not efficient in getting their cash sooner as related to sales.
The amount of operating cash flow to sales ranges from 11 . 70% to 13. 38%, with an average of 12. 33%. This shows that over 80% of Dresser’s sales are on credit, which is not a good sign from the viewpoint of the company.
The risk in generating sufficient cash flow will remain with the company for the next five years (1996-2000) as well, because the cash enervating cycle of the company is too low and it has to be increased accordingly.
The Debt to Equity ratio of Dressed for the next five years is below: Debt to Equity Total Debt in $ Million 530 501 357 Equity in $ Million 178 208 294 345 Debt to Equity 2. 98 2. 41 1. 84 1. 39 1.
03 1. 93 The Debt to Equity ratio for Dressed (Forecasted) is showing that the level of debt is twice that of the equity. This is against the restrictive covenants. A high debt/ equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings because of the additional interest expense.
Average Debt to Equity of the company is showing that the proportion of debt is nearly 68%, while the proportion of equity is 32%. This is very near to the restrictive covenants, in which debt should not be higher than 70%. There is a risk that this ratio will increase in the upcoming years. #4) For the Debt Rating analysis I decided to examine the Debt to total Capital and the liabilities to total assets. I wanted to figure out these ratings for 1994 and 1995, before the buyout. Question-4 Debt Rating Subordinate Debt in $ Million 165 Capital Percentage of Debt/Capital 6.
03 34. 0 Total Liabilities in $ Million Total Assets in $ Million 35. 04 26. 79 30. 91 The Total Debt to Capital of Dressed on average is 35. 16%.
This would represent a rating category of “A. ” Along the same lines, liabilities to assets have a figure of 30. 91%. The bond rating in this particular scenario is also “A. ” The coverage ratio is a measure of a company’s ability to meet its financial obligations.
The higher the coverage ratio, the better the ability of the company to fulfill its obligations to its lenders. Analysts and investors perform coverage ratios to determine the change in a company’s financial position.
The findings of the coverage ratio I performed on Dressed are below: BIT Interest Expense 3 Coverage Ratio -0. 83 10. 40 This analysis shows that Dressed generates enough cash flow to pay its interest, specifically in the year 1995.
Taking all of this information into account, I would assign an “A” rating to Dressed. #5) In order to analyze the level of business risk for the buyout, I decided to use the current ratio and the gearing ratio. The current ratio is a liquidity ratio that measures a company’s ability to pay short-term obligations.
The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. This is an important ratio for Warbler because they need to make sure they can meet their short-term obligations after the buyout.
Current Assets In M 183 Current Liabilities in Million $ Current Ratio 1. 926 Dressed has a current ratio of 1. 926. The current ratio can give a sense of the efficiency of a company’s operating cycle and its ability to turn its product into cash.
This ratio shows that Dressed is doing a good Job as far as meeting its short-term financial obligations and promises. The gearing ratio is a financial ratio that compares some form of owner’s equity to borrowed funds.
It is a measure of financial leverage that demonstrates the degree to which a firm’s activities are funded by owner’s funds versus creditor’s funds. A company with high gearing (high leverage) is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are.