FIN-516 – WEEK 2 – MINI – CASE ASSIGNMENT (This should be posted in Document Sharing) Select a major industrial or commercial company based in the United States, and listed on one of the major stock...

Introduction
The name of the company selected for analysis is “Johnson & Johnson” The Company belongs
to Drug Manufacturers – Major. The company was incorporated on November 10, 1887. The
company is a holding company and is involved in the research and development, production and
sale of a wide variety of products in the area of health care. The company ca
ies its operations
from more than 275 companies situated in 60 countries. The primary aim of the company is on
products relating to human health and wellbeing. It is categorized into three business segments
namely Consumer, Pharmaceutical and Medical Devices and Diagnostics. The company’s
subsidiaries function through 146 manufacturing facilities inhabiting approximately 21.6 million
square feet of floor space.
Operating Risks
Operating risks are general industry conditions and competition. There is also operating risks
from economic factors such as interest rate and fluctuations in cu
ency exchange rates,
technology advances, new products and patents. There is also risk from new products and patents
attained by competitors. There are some challenges inherent in new product development, which
includes obtaining regulatory approvals, challenges to patents, litigation or government action.
Financial Risks
The company has contingent liabilities. These are recorded when it is probable that a liability
will be incu
ed and the amount of the loss can be reasonably estimated. The company has
accrued for certain litigation matters. These are being continually monitored by each case and
adjust the accruals with new information.
Prefe
ed Stock
The company has prefe
ed stock – without par value. The company has 2,000,000 authorized
and unissued Preference Shares. This means that the company has not yet issued the shares, but
the company can issue the same in future if required.
Capital Structure
Source Amount
(in millions)
Short term portion of Long Term Debt $ 1,512.00
Long Term Debt $ 11,489.00
Prefe
ed Stock (authorized & unissued 2million shares) $ -
Market Value of Common Stock issued & outstanding $ 190,076.43
Total Capital $ 203,077.43
Market Value of Common Stock:
Shares issued 3119843000.00
Less: Treasury Shares 341354000.00
Net Shares Outstanding 2778489000.00
Market Value per share $ 68.41
Market Value of Common Stock (in millions) $ 190,076.43
The market value per share of $68.41 is taken from yahoo finance. This price is as on December
28, 2012 (near to balance sheet date of December 30, 2012).
(http:
in.finance.yahoo.com/q/hp?s=JNJ&a=11&b=2&c=2012&d=00&e=30&f=2013&g=d)
Actual Beta of Company
The actual beta of the company is 0.4 and it is taken from yahoo finance.
(http:
in.finance.yahoo.com/q?s=JNJ)
http:
in.finance.yahoo.com/q/hp?s=JNJ&a=11&b=2&c=2012&d=00&e=30&f=2013&g=d
http:
in.finance.yahoo.com/q?s=JNJ
Beta using Hamada Formula
Unlevered Beta = Levered Beta / (1 + (1 – Tax Rate) * (Debt / Equity))
Levered Beta = 0.4
Tax Rate = 35%
Total Liabilities (from balance sheet) = $56,521 millions
Total equity (from balance sheet) = $64,826 millions
Unlevered Beta = 0.4 / (1 + ((1 – 35%) * ($56,521 / $64,826)))
Unlevered Beta = 0.4 / (1 + 0.65 * 0.87)
Unlevered Beta = 0.4 / (1 + 0.57)
Unlevered Beta = 0.4 / 1.57
Unlevered Beta = 0.26
Cu
ent Marginal Tax Rate
The cu
ent marginal tax rate of the company is 35%.
Cost of Debt
Cost...