Running head: GILLETTE CASE ANALYSIS
Gillette Case Analysis
Daniel J. Tirado
Professor Ed Scholl
March 5, 2015
The Gillette Company has been presented with a potential business opportunity to expand its offering with a new razor. Market research indicates that the new product will be well received and that it will obtain 10% market penetration. An initial pro forma modeled net cash flows of $22,710,427 over four years including an initial capital investment of $10,000,000. The firm has a strong financial position with an overall WACC of 9.50%.
Several potential options are examined including taking no action and approving the project under various financing structures. The option that maximizes shareholder value is approval of the project with100% of the financing to be provided via the issuance of new debt. This results in a NPV of $17,818,449 and WACC of 9.23%. Risks associated with the project are minimal and easily mitigated given the high profitability and the relatively low capital intensity of the project. The recommendation is to move forward with the project with debt financing. Introduction
This case investigates a potential business opportunity for the Gillette Company. Gillette provides many personal grooming products for men including deodorants, body washes, and shaving cream, but its core business remains in the sales of razors and associated shaving products (Gillette, 2015). In an effort to evaluate the possibility of creating a new razor to bring to market, Gillette performed a market research study at the cost of $1,500,000. This study found that the target market consisted of 30,000,000 American males, with 5% to 12% of them interested in purchasing the new razor. The study also proposes that Gillette could initially gain 10% market penetration and that it would experience cannibalization of 30% of its sales from other product lines. The research study concluded that from a market perspective, introducing a new razor might make business sense for the firm, but additional analysis on the financial impact of this project on the firm should be completed. This analysis must address the impact of the capital investment of this project on the firms weighted average cost of capital (WACC), the appropriate cash flows to attribute to the new product line, the net present value (NPV) of the associated cash flows, the internal rate of return (IRR) of the proposed capital investment, and any business or financial risks that the company might face by introducing the product. Finally, the financial analysis should result in a go/no-go decision for the expansion of Gillette’s product offering. Problem Definition
Because the purpose of a corporation is to build value for its shareholders, managers at Gillette must examine the impact that this project will have on its overall financial health and shareholder value. Thus, the problem for managers is to determine the viability of this potential business venture in the context of the company’s financial performance and market position. Secondarily, if the firm decides to move forward with the project, then it must also determine its financing structure while balancing that choice with the company’s WACC and the impact of adding financial leverage or signaling to shareholders.
Gillette has maintained a strong market position and the analysis performed in the market research study demonstrates that there is a significant opportunity for the company to expand its product line and grow revenue. Gillette is taxed at a rate of 35% and because it is a corporation, its shareholders also pay taxes on any dividend income or capital gains after the sale of stock. Historically, Gillette has maintained a capital structure of $60,000,000 in bonds at a coupon rate of 10% and $40,000,000 in equity at a cost of 14%. This results in a...
References: Ehrhardt, M., & Brigham, E. (2014). Corporate finance (5th ed.). Ohio: South-Western
Gillette. (2015).Retrieved March 5, 2015, from http://gillette.com/en-us
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