Capital Structure And Debt Analysis

Debt Ratios

Debt-to-book asset ratios

Using Avon's annual data we were able to calculate the Debt-to-book asset ratios for the past 5 years. The numbers in the chart below are given in 10s of thousands and give detail as the the capital structure of Avon. To see further calculations please refer to the attachment Debt to Assets.

Debt to Assets (Book) Ratio 2007 2008 2009 2010 2011
Long Term Debt 1168 1625 2482 2538 2459
Short Term Debt 930 1031 138 728 849
Total Assets 5716 6074 6833 7874 7735
Debt to Assess Ratio 0.367039888 0.437273625 0.383433338 0.41478283 0.427666451

Debt-to-market asset ratios

We calculated the Debt-to-market asset ratios for Avon because this gives individuals a more accurate picture to what the current capital structure of Avon is because the market rates are what Avon's is currently not what the book value states. To see further calculations please refer to the attachment Debt to Assets.

Debt to Assets (Market) Ratio 2007 2008 2009 2010 2011
Closing Price (12/31/XX) 39.53 24.03 31.5 29.06 17.47
Shares Outstanding (Mil) 433 426 427 429 430
Market Capitalization (12/31/XX) (Mil) 17,116 10,237 13,451 12,467 7,512
Market Value of Debt (Mil) 2098 2656 2620 3266 3308
Total Capitalization (Mil) 19,214 12,893 16,071 15,733 10,820
Debt to Assets Ratio 0.10918843 0.206006773 0.163031642 0.207592574 0.305727304

Industry

In the past 2 years Avon's Debt to Assets has been typically lower than the industry's average. Some companies have more and some have less showing that Avon does have an appropriate amount of debt not being incredibly risky and not not utilizing debt enough. In years 2007-2009 Avon's Debt to Assets were lower than industry's average. Since Avon fluctuates between higher and lower than the industry average it shows that they are utilizing debt to try and gain a financial competitive advantage over its competitors. Avon is issuing debt as it sees fit in order to gain the most benefit it can from its issuing. Debt can act as a tax shield to companies, making the income they have less and therefor pay less taxes. However, debt does have a price to it because as the amount of debt increases, it becomes more likely that the company will not be able to pay it all off so must pay its debt holders a larger interest rate. Avon's Debt to Book asset ratio is always larger than their debt to market ratio. To see further calculations please refer to the attachment Debt to Assets. This attachment gives specific calculations for all of the companies in the industry as well.

Industry Debt to Assets 2007 2008 2009 2010 2011
Elizabeth Arden 0.354273944 0.385665529 0.329774614 0.292397661 0.317713215
L'Oreal 0.149137931 0.208582529 0.13446677 0.066170354 0.04278055
Avon 0.367039888 0.437273625 0.383433338 0.41478283 0.427666451
Estee Lauder 0.238874476 0.274676454 0.230134933 0.194134523 0.195358714
Revlon 1.620922385 1.634686347 1.511335013 1.077276909 1.019014693
Ulta Salon 0.159914712 0.18629174 0 0 0
Industry Average 0.481693889 0.521196037 0.431524111 0.340793713 0.333755604

Yield to Maturity

The settlement date used to calculate the yield is 3 business days after the “Last Sale” date in the section listing the most recent trade information. This table was in part calculated using the yield function on excel for each individual bond listed. See attachment yield analysis for further details on calculations. The data used to calculate this table was found at from finra.org.

 CUSIP Coupon (%) Maturity Call Price Ask Price Settlement Date Yield to Maturity Pre-Tax Cost of Debt
054303AT9 4.800% 3/1/2013 100.82 101.19 11/19/2012 0.604% 60.400%
054303AQ5 4.625% 5/15/2013 101.38 101.67 11/16/2012 1.251% 125.100%
054303AV4 5.625% 3/1/2014 104.44 104.45 11/21/1012 2.075% 207.500%
054303AU6 5.750% 3/1/2018 119.08 109.75 11/21/1012 3.698% 369.800%
054303AR3 4.200% 7/15/2018 112.95 102.50 11/21/1013 3.706% 370.600%
054303AW2 6.500% 3/1/2019 125.88 112.07 11/21/1014 4.285% 428.500%

Weighted Average Cost of Capital

Though the use of information found on Avon's most recent 10-Q ( http://quote.morningstar.com/stock-filing/Quarterly-Report/2012/9/30/t.aspx?t=XNYS:AVP&ft=10-Q&d=58b4053bfb48415dcaba591bc102a53f ) as well as with the current stock market capitalization the WACC was calculated. The WACC was calculated to be 5.28%. See attachment WACC for how this number was calculated.

Largest Priced Non-convertible Outstanding Debt Issue

Bond #054303AV4 is worth $500,000,000 and matures on 3/1/2014 with a coupon rate of 5.625%. The Notes will be redeemable, as a whole or in part, at our option, at any time or from time to time, by mailing notice to the registered address of each holder of Notes at least 30 days but not more than 60 days prior to the redemption. The redemption price will be equal to the greater of (1) 100% of the principal amount of the Notes to be redeemed or (2) the sum of the present values of the Remaining Scheduled Payments (as defined below) on those Notes discounted, on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months), at a rate equal to the sum of the applicable Treasury Rate (as defined below) plus basis points. In either case, accrued interest, if any, will be paid to the date of redemption.

Coupon Maturity Quote Date Settlement Date Benchmark Treasury Yield Call Yield Premium Call Price Yield Call Price
5.62500% 3/1 2/25 3/2 1.750% 0.50% 2.250% 85.47

Duration and Convexity

The following inputs were used to calculate Avon's duration for their largest issue callable bond. We are assuming the bond will not be called early.

Inputs
Coupon 5.62500%
Maturity 3/1
Ask price 104.89
Trade date 2/25/2009
Settlement date 3/2/2009
YTM 2.08%

Note: The information above was obtained as of 11/15/2012 but may have changed slightly since then to the ask price, settlement date, and yield.

Based on the information above, the Excel duration (using =DURATION) is 4.4753 and the modified duration (using =MDURATION) is 4.4294.

Input
YTM Increment 0.10%
V- 117.2875054
V+ 116.2529383
V0 104.89
Effective duration 4.931676293

The convexity of our bond came out to be 113263.6273.

Rate Change Impact Pricing Error
yield change 0.50%
acutal price change 9.32597119
forecasted price using duration -2.586417632 -11.91238882
Price change using convexity and duration 294.419129 285.0931578

The results show that estimating the price change using convexity and duration have very large errors when compared to the actual price change that results from the interest rate increase.

Bond’s credit rating?

Yielding 2.08% over an approximation of a 5 year period, we bench marked it to the 5 year treasury notes and bonds because it is the closest match to the maturity date of this particular security. The constant maturity for a 5 year T-note/bond is currently priced at 2.250% the credit spread and basis points came out to be 7.3.

Based on this credit spread we found that the rating for these bonds should be A. This means that they are fairly rated because they have a BBB rating.

Quarterly Report :10-Q

The entire 10-Q report can be found at http://quote.morningstar.com/stock-filing/Quarterly-Report/2012/9/30/t.aspx?t=XNYS:AVP&ft=10-Q&d=58b4053bfb48415dcaba591bc102a53f, but attached to this Wiki is a separate document ( outstanding debt) containing only the parts of the 10-Q that discuss the current outstanding debt of Avon.

Grades
1.5/2

"No evidence of any of the convexity questions answered, results on wiki are incorrect no spreadsheet to show how/why.
Part III corrections: No annualised values for means (arithmetic or geometric). Over and under performance is determined by the significance of alpha. Market risk premium should be a historic value (approx. 6%)
Check: Yearly AMRs still incorrect"

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