Dressen Case Study Essay

1)I believe one major factor was how appealing Dressen had become during 1995, as opposed to previous years. It appe atomic number 18d that new management had turned the comp either around. Management stated Dressen was looking good for future growth during the end of 1995. I deem management felt it was the opportune time to sell. They wanted to sell Dressen magic spell they were making money and being successful, as opposed to hemorrhaging money from Westinghouse.Dressen was Westinghouses brain performer in the Q3 of 1995. Sales increased 10% everyplace the year-prior quarter. EBIT reached 12% of sales as well. Their growth strategy as well as engine room and work processes lead management to believe that there was even greater growth potential. Dressen was now headed in the right direction. Management was trying to strike while the iron was hot.Another factor was the capital acquisition of CBS in August 1995 for $5.4 billion. The large purchase price had strained an already w eakened balance sheet. in that respect was alike 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 strong and timely cost strategy, a business dischargenot climb the stairs of economic prosperity. Organizations have to be aware of how overmuch cost they are incurring over a certain period of time, as most of the time, high ope symmetrynal costs can devastate the entire pecuniary structure of an entity.Apart from the cost, it is as well as important for a ships company to be consistent in their earnings momentum because it is something that shareholders, as well as analysts, are looking for in a company. There are certain ratios that can be taken into account to give way why Westinghouse would want to sell Dressen. Mentioned below are some calculations that shrive why Westinghouse was intending to sell Dressen at the end of the fiscal year 199519911992199319941995Net Sales6 71577508563621% Change-14.01-11.9610.8310.30Gross Profit200151122153203Gross profit allowance29.8126.1724.0227.1832.69Net Income-40-6029Net Profit Margin-7.87-10.664.67Dressen recorded a clear up profit of $29 in 1995, as compared to the net loss of $60 a year before, but the net profit margin of the company 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 under the net Cost of Goods Sold. This is a very high figure that businesses cannot sustain for a long period of time. Total assets of Dressen also showed a net devolve from fiscal year 1994 to 1995Year19941995Assets $ in Million705657Proportion-6.809A decrease in the operational assets would not be acceptable for the company as a whole. Therefore, Westinghouse was willing to sell Dressen because the company was not doing well in its jurisdiction.2)There are a number of valuation likewisels which could be used for the purpose of analyzing the effectiveness of a company as a whole. Warburg is considering paying $585 one million million for Dressen and we must analyze if this is a fair price for Warburg to pay.Price to Earnings is a ratio that is usually applied by investors on the entire investment in hallow to anticipate the expected dividend.Specifically, it refers to the ratio evaluation of an entitys price of shares in relation to earnings for each share.Price to Earnings ratio is generally symbolized as an earning multiplier or investment multiplier. However, there are some probability flaws in the P/E ratio, but it is still the most widely accredited technique to measure potential speculations. Market price to earnings is one of the most vital tools used to analyze the stance of investors while investing in the company. Five-year period analysis has been taken into consideration for Dressen Question-219911992199319941995Share Price Average3232151515Earnings Per Share00.00-0.87-1.310.60Market Value t o Earnings00-17.175-11.4524.88The computation of Dressens Market Price to Earnings is showing that thecompany did a good reflect in the fiscal year 1995, as its Price to Earning (P/E) or Market Value to Earning (MV/E) ratio 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 method that is applied to assess the ratio of enterprise esteem to its market share price.The Enterprise Value to Price ratio allows investors to make a decision 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 crownworkization $ in Million458481Total Debt in $ million247176Total Worth in $ Million705657Less change in $ Million52Net Worth in $ Million700655 annual 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 direct performance of a company. It refers to how much resources have been utilized to generate revenue enhancement within a given span of time. The financial evaluators are most likely to consider this ratio as an indicator of a companys performance within a defined accounting cycle. This will allow them to set a point of time within the operating cycle that they can focus on.EV/EBIAT19941995Market Capitalization $ in Million458481Total Debt in $ million247176Total Worth in $ Million705657Less Cash in $ Million52Net Worth in $ Million700655EBIAT in $ Million-2.510.4EV/EBIAT(28,000)6,298The company recorded a net loss in the year 1994 of $-28,000, but it is a positive figure of $6,298 in the year 1995.My calculation for the Dividend Disc ount 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 idea 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 divergent ratios could be used to analyze Dressens ability to generate sufficient cash flows to service its debt. The two ratios I used for Dressen are the Cash commingle to Sales Ratio and Debt to truth.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 next five years is belowOperating Cash Flow to Sales19961997199819992000Forecasted Operational Cash Flow77839910195Forecasted Sales in Million $658698740784804Operating Cash Flow to Sales11.7011.8913.3812.8811.82Average12.33The 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 Dressens sales are oncredit, which is not a good sign from the viewpoint of the company. The fortune in generating sufficient cash flow will remain with the company for the next 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 fair play 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 style 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 turn up 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 $ Million165Capital458481Percentage 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 insurance coverage ratio is a measure of a companys 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 companys financial position. The findings of the coverage ratio I performed on Dressen are below19941995EBIT-2.510.4Interest spending31Coverage Ratio-0.8310.40Th is analysis shows that Dressen generates enough cash flow to pay its interest, specifically in the year 1995. Taking all of this nurture 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 accommodate 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 fit 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 after the buyout. certain Assets in Million $183Current Liabilities in Million $95Current Ratio1.926Dressen has a current 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 int o cash. This ratio shows that Dressen is doing a good job as far as meeting its short-term financial obligations and promises. The gear mechanism 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 high 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 using debt. From this analysis, it is pitch 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.