Property, plant and equipment/assets
Long-term debt/assets
Firm A
Firm B
Firm C
27.9%
34.6%
62.5%
18.2%
3.7%
35.7%
Chapter 1
1.7
Effect of Industry Economics on Balance Sheets
Access the investor relations or corporate information section of the websites of
America (www.aa.com), Intel (www.intel.com), and Disney (http://disney.com). Study
the busines firm. Examine the financial ratios below and indicate which firm is likely to
be American A
Disney. Explain your reasoning.
Firm A
Firm B
Firm C
1.13
Exhibit 1.18 represents common-size income statements and balance sheets for seven
fir various stages in the value chain for the pharmaceutical industry. These common-
size sta amounts as a percentage of sales revenue. Exhibit 1.18 also shows the cash
flow from op expenditures ratios for each firm. A dash for a particular financial
statement item does no the amount is zero. It merely indicates that the amount is not
sufficiently large for the fir
of the seven companies and a brief description of their activities follow.
A.
Wyeth
Engages in the development, manufacture, and sale of ethical drugs (that is, drugs
requiri Wyeth's drugs represent primarily mixtures of chemical compounds. Ethical-drug
compan approval of new drugs from the U.S. Food and Drug Administration (FDA).
Patents protec competition until other drug companies develop more effective
substitutes or the patent
4
Choose 1 - 7 based on the common-size financial statement data in Exhibit 1.1
B.
Amgen
Engages in the development, manufacture, and sale of drugs based on biotechnology
res drugs must obtain approval from the FDA and enjoy patent protection similar to
that for drugs. The biotechnology segment is less mature than the ethical-drug
industry, with rela
having received FDA approval.
This firm is Walt Disney. Its revenues change with changes in economic
condit
to cyclical risk and, thereby, reducing their use of long-term debt. Besides
pro family entertainment, Disney operates theme parks, which the firm
does not i
This firm is Intel. Among the three firms, Intel faces the greatest risk of
techno
products. Although the manufacture of semiconductors is capital-intensive,
In financial risk to its already high business risk.
Thisb firmb isb Americanb Airlines.b Itsb revenuesb changeb withb changesb inb theb
econom
cyclicalb risk,b reducingb theb useb ofb long-termb debt.b Itb hasb operatedb atb ab netb lossb
fb hasb negativeb shareholders'b equity,b resultingb inb ab higherb ratiob ofb long-termb
debt
e
Wyeth- 4: This is the most mature company and they spend a larger amount on
research Their maturity allows for competitive competition and lower intangible assets.
Amgen- 3 higher research and development and intangible assets due to lack of
maturity and paten Laboratories- 1: This company has higher research and development
costs and the highes all seven companies. Johnson & Johnson- 7: One of the most
recognizable companies, th development costs and some intangible assets. Covance- 5:
This company does not have their property, plant, and equipment costs are above mostb
due to product development services for biotechnology and pharmaceutical drugs.
Cardinalb Health-b 2:b Thisb companyb d
3
Choose 1 - 7 based on the common-size financial statement data in Exhibit 1.1
C.
Mylan Laboratories
Engages in the development, manufacture, and sale of generic drugs. Generic drugs
have compositions as drugs that had previously benefited from patent protection but
for whic expired. Generic drug companies have benefited in recent years from the
patent expirati ethical drugs. However, the major ethical-drug companies have
increasingly offered gene
ethical drugs to compete against the generic-drug companies.
1
Choose 1 - 7 based on the common-size financial statement data in Exhibit 1.1
D.
Johnson & Johnson
Engages in the development, manufacture, and sale of over-the-counter healthcare prod
do not require a prescription and often benefit from brand recognition.
7
Choose 1 - 7 based on the common-size financial statement data in Exhibit 1.1
E.
Covance
Offers product development and laboratory testing services for biotechnology and pharm
also offers commercialization services and market access services. Cost of goods sold for
represents the salaries of personnel conducting the laboratory testing and drug approval
5
Choose 1 - 7 based on the common-size financial statement data in Exhibit 1.1
F.
Cardinal Health
Distributes drugs as a wholesaler to drugstores, hospitals, and mass merchandisers. Also
benefit management services in which it provides customized databases designed to help
more efficiently, contain costs, and monitor their purchases. Cost of goods sold for Cardin
the cost of drugs sold plus the salaries of personnel providing pharmaceutical benefits.
2
Choose 1 - 7 based on the common-size financial statement data in Exhibit 1.1
G.
Walgreens
Operates a chain of drugstores nationwide. The data in Exhibit 1.18 for Walgreens include
operating lease commitments for retail space.
6
Choose 1 - 7 based on the common-size financial statement data in Exhibit 1.1
and development costs, has higher goods sold, and cost of goods sold because they areb
a retailer. Walgreens- 6: This company is a chain drugstore that is required to pay anb
opera buildings. This company has the lowest intangible assets and one of the lowestb
net incom
ions, subjecting them
ducing movies and
nclude in property,
logical change for
its tel does not add
y, subjecting it to
or several years
and to assets.
n Airlines
s strategies of
each irlines, Intel,
and
ms that operate
at tements
express all erations
to capital
t necessarily mean
m to disclose it. A
list
ng a
prescription). ies
must obtain
t such drugs
from expires.
8.
earch. Biotechnology
chemical-based
tively few products
a
and development.
: This company
has t protection.
Mylan
t intangible assets
of y have research
and research costs
but
ndb laboratoryb
testingb oesb notb haveb
research
8.
the same chemical
h the patent has
on of several
major
ric versions of their
8.
ucts. Such products
8.
aceutical drugs. It
this company
services.
8.
offers pharmaceutical
customers order
al Health includes
8.
the recognition of
8.
distributor and not
a ting lease on all of
its es.
