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.
This firm is American Airlines. Its revenues change with changes in the
econom
cyclicalc risk,c reducingc thec usec ofc long-termc debt.c Itc hasc operatedc atc ac netc lossc fc
hasc negativec shareholders'c equity,c resultingc inc ac higherc ratioc ofc long-termc 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 patenc
Laboratories- 1: This company has higher research and development costs and the highesc
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 most due to product development
services for biotechnology and pharmaceutical drugs. Cardinal Health- 2: This company 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 are ac
retailer. Walgreens- 6: This company is a chain drugstore that is required to pay an operac
buildings. This company has the lowest intangible assets and one of the lowest 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
nd laboratory testing
oes not have 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.
