Dressen Case Study Essay

1)I believe ane major factor was how appealing Dressen had arrest during 1995, as strange to previous years. It appeargond that new worry had turned the fellowship around. Management stated Dressen was looking dependable for future day growth during the hold on of 1995. I think management felt it was the opportune time to administer. They cute to sell Dressen while they were making money and being successful, as opposed to hemorrhaging money from Westinghouse.Dressen was Westinghouses star performer in the Q3 of 1995. gross revenue change magnitude 10% over the year-prior quarter. EBIT reached 12% of gross gross revenue as well. Their growth outline as well as technology and work processes lead management to believe that there was even peachyer growth potential. Dressen was now headed in the right direction. Management was trying to strike while the iron was hot. other factor was the cash acquisition of CBS in August 1995 for $5.4 billion. The large buy hurt had str ained an already weakened balance sheet. on that point was likewise a $2 billion bridge loan that was due in February 1996.Businesses be meant to earn frugal earn and mitigate the cost associated with them. Without powerful and timely cost strategy, a business kindlenot climb the stairs of economic prosperity. Organizations have to be aw ar of how oft cost they are incur over a certain period of time, as most of the time, richly ope proportionalitynal costs can devastate the entire pecuniary body structure of an entity.Apart from the cost, it is also important for a party to be pursuant(predicate) in their wampum momentum because it is something that takeholders, as well as analysts, are looking for in a comp each. There are certain balances that can be taken into account to analyze why Westinghouse would want to sell Dressen. Mentioned below are some calculations that justify why Westinghouse was intending to sell Dressen at the end of the fiscal year 19951991199219 9319941995Net gross revenue671577508563621% Change-14.01-11.9610.8310.30 piggy Profit200151122153203Gross profit margin29.8126.1724.0227.1832.69Net Income-40-6029Net Profit Margin-7.87-10.664.67Dressen recorded a pull in profit of $29 in 1995, as compared to the boodle loss of $60 a year before, precisely the profit profit margin of the keep go with in 1995 was only 4.67%, which is still very low. The Gross Profit Margin in the same year was 10.30%, which shows that around 90% of the sales come chthonian the net Cost of Goods Sold. This is a very high take in that businesses cannot uphold for a long period of time. Total assets of Dressen also showed a net decrease from fiscal year 1994 to 1995Year19941995Assets $ in billion705657 proportion-6.809A decrease in the ope proportionalitynal assets would not be bankable for the caller-up as a whole. Therefore, Westinghouse was willing to sell Dressen because the lodge was not doing well in its jurisdiction.2)There are a numbe r of paygrade tools which could be used for the purpose of analyzing the effectiveness of a company as a whole. Warburg is considering paying $585 million for Dressen and we must analyze if this is a fair price for Warburg to pay. cost to bread is a symmetry that is usually applied by investors on the entire investment in order to anticipate the evaluate dividend.Specifically, it refers to the proportion evaluation of an entitys price of shares in relation to earnings for each share. bell to Earnings dimension is generally symbolized as an earning multiplier factor or investment multiplier. However, there are some prob capacity flaws in the P/E proportionality, but it is still the most widely recognized technique to bankers bill potential speculations. Market price to earnings is one of the most vital tools used to analyze the stance of investors while commit in the company. Five-year period abbreviation has been taken into conside dimensionn for Dressen Question-21991 1992199319941995Share Price Average3232151515Earnings Per Share00.00-0.87-1.310.60Market Value to Earnings00-17.175-11.4524.88The computation of Dressens Market Price to Earnings is demonstrate that thecompany did a good job in the fiscal year 1995, as its Price to Earning (P/E) or Market Value to Earning (MV/E) proportion had increased tremendously to a level of $24.88. The higher the P/E, then the higher the net worth of the company. Enterprise Value to Sales is a valuation system that is applied to assess the ratio of enterprise value to its market share price.The Enterprise Value to Price ratio allows investors to make a end on whether the market share of the company is expensive or cheap. The ratio has also considerable influence on the companys sales as it is utilized by many market analysts to avoid any manipulation over the turnover of an entity. The Enterprise Value to Sales analysis is mentioned below19941995Market hoodization $ in Million458481Total Debt in $ million 247176Total Worth in $ Million705657Less interchange in $ Million52Net Worth in $ Million700655Annual Sales in $ Million563621EV/Sales124.33105.48The Enterprise Value to Sales is high in both years 1994 and 1995. This shows me that the net worth of the company is high. EBIAT is a financial appraisal technique which is used to figure out the operating performance of a company. It refers to how much resources have been utilized to generate revenue indoors a presumption span of time. The financial evaluators are most likely to consider this ratio as an indicator of a companys performance within a defined accounting motorcycle. This will allow them to set a point of time within the operating cycle that they can focussing on.EV/EBIAT19941995Market Capitalization $ in Million458481Total Debt in $ million247176Total Worth in $ Million705657Less specie in $ Million52Net Worth in $ Million700655EBIAT in $ Million-2.510.4EV/EBIAT(28,000)6,298The company recorded a net loss in the year 1 994 of $-28,000, but it is a supreme figure of $6,298 in the year 1995.My calculation for the Dividend Discount Model is as follows P = Dividend / WACC gWACC = 12%G = Growth rate = 4%= 1.2 / 12 81.2/ 0.08P = $15The average Share Price in the year 1995 was also $15.Taking all of this analysis into consideration, I believe that $585 million is a fair price to pay for Dessen. The net worth of Dressen in terms of financial value and share valuation are strong. I believe that Warburg is underpaying for Dressen. I believe Warburg got Dressen for a good price. I feel that Warburg should have paid more than for Dressen, so with a purchase price of $585 million I believe Warburg 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 debt obligations to analyze the financial competitiveness of a company as a whole. Two diametric ratios could be used to analyze Dressens ability to generate comfortable cash flows to service its debt. The two ratios I used for Dressen are the money extend to Sales ratio and Debt to loveliness.The Cash Flow to Sales ratio is an important ratio which analyzes whatpercentage of the companys sales are on credit, and how much of the sales are on cash. The computed ratio for the attached fiver years is belowOperating Cash Flow to Sales19961997199819992000Forecasted Operational Cash Flow778399hundred and one95Forecasted Sales in Million $658698740784804Operating Cash Flow to Sales11.7011.8913.3812.8811.82Average12.33The forecasted figure of the cash flow to sales is exhibit that the company is not efficient in getting their cash rather 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 Dressens sales are oncredit, which is not a good sign from the viewpoint of the company. The risk in generating sufficient cas h flow will remain with the company for the succeeding(a) five years (1996-2000) as well, because the cash generating cycle of the company is too low and it has to be increased accordingly.The Debt to fairness ratio of Dressen for the next five years is below Debt to Equity19961997199819992000Total Debt in $ Million530501455409357Equity in $ Million178208247294345Debt to Equity2.982.411.841.391.03Average1.93The Debt to Equity ratio for Dressen (Forecasted) is showing that the levelof 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 pay its growth with debt. This can result in volatile earnings because of the supererogatory interest expense. Average Debt to Equity of the company is showing that the proportion of debt is close to 68%, while the proportion of equity is 32%.This is very cuddle to the restrictive covenants, in which debt should not be higher than 70%. There is a risk that this ratio will increase in the forthcoming 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 Rating19941995AverageSubordinate Debt in $ Million165Capital458481 dowery of Debt/Capital36.0334.3035.16Total Liabilities in $ Million247176Total Assets in $ Million705657Proportion35.0426.7930.91The Total Debt to Capital of Dressen 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 companys ability to sustain its financial obligations. The higher the coverage ratio, the better the ability of the company to take its obligations to its lenders. Analysts and investors perform coverage ratios to determine the change in a companys financial posit ion. The findings of the coverage ratio I performed on Dressen are below19941995EBIT-2.510.4Interest Expense31Coverage Ratio-0.8310.40This analysis shows that Dressen 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 Dressen.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 companys 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 Warburg because they need to make sure they can meet their short-term obligations subsequently the buyout.Current Assets in Million $183Current Liabilities in Million $95Current Ratio1.926Dressen has a cu rrent ratio of 1.926. The current ratio can give a sense of the efficiency of a companys operating cycle and its ability to turn its product into cash. This ratio shows that Dressen is doing a good job as far as concourse its short-term financial obligations and promises. The gearing ratio is a financial ratio that compares some form of owners equity to borrowed funds.It is a measure of financial leverage that demonstrates the degree to which a firms activities are funded by owners funds versus creditors 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. If a company has more equity, then there would be more of a cushion, which would show financial strength. Debt420Equity160Assets705EBIT10.4Interest1Debt to Equity2.625EBIT/Interest10.4Equity/Assets22.70From this analysis, it can be determined that the Debt to Equity of the company is still hig h at 2.62%. Total Equity to Assets is relatively small at only 22.70%. This shows that most of the assets in Dressen have been bought utilise debt. From this analysis, it is found that the company is not risky when it comes to short-term financial obligations, but it will be in a dangerous situation in the long-term.