A. Operating profitability should be distinguished from return on common equity.

Apply the
financing leverage equation to highlight the difference. How much leverage does P&G carry? Is
the firm favourably leveraged?

Reformulated, equity statement, income statement and balance sheet for P&G.

Reformulated statement of common shareholders’ equity

Year ended June 30,2010
Balance, June 30,2009 63,382
Less preferred stock 1 (1,324)
Less noncontrolling interest (283)
Plus ESOP reserve 2 1340
Balance of common equity 63115
Transactions with common shareholders
Dividends (5,329)
Share Repurchase (6,004)
Share Issue 1,191
Share issues for preferred stock 351 (9,701)
Conversion 4
Additional P-I Capital charge (2)

Comprehensive income
Net income 12,736
Other comprehensive (4,464)
income
Preferred dividends (219)
ESOP Benefits 27
Loss on conversion (304) 7,776
preferred stock
Balance, June 30, 2008 61,888

Reformulated income statements

2010 2009 2008
Net sales 78,938 76,694 79,257
Cost of products sold 37,919 38,690 39,261
Gross margin 41,019 38,004 39,996
Advertising 8,567 7,519 8,520
Research and development 1,950 1,864 1,946
General and Administrative 14,481 13,247 13,551
Operating income from sales 16,021 15,374 15,979
before tax
Tax reported 4,101 3,733 3,594
Tax benefit of net interest 355 511 551
Tax on other OI (27) 4,429 (178) 4,066 (165) 3,980
OTHER OPERATING INCOME
(AFTER TAX)
OTHER OPERATING INCOME:
Gains on asset sales 70 469 434
Tax at 38% (27) 43 (178) 291 (165) 269
Other operating income after tax
Other comprehensive income (4,464) (7,104) 3,129
Loss on ESOP preferred stock (304) (257) (283)
conversion
Other 27 (84) (232)
Operating income 6,894 4,154 14,882
Net Financing expense
Interest expense 946 1,358 1,467
Interest income 12 14 17
Net interest expense 934 1,344 1,450
 Tax at 38% 355579 511883 551899
Preferred dividends 219 192 176
Net financial expense 798 1,025 1,075
Noncontrolling interest in earning (110) (86) (78)
Comprehensive income 5,986 3,043 13,729
Discontinued operations 1,790 2,756 784
Comprehensive income 7,776 5,799 14,513

Reformulated balance sheets

2010 2009 2008 2007

Operating assets
Operating cash 197 197 197 197
Accounts 5,335 5,836 6,761 6,629
receivable
Inventories 6,384 6,880 8,416 6,819
Deffered income 990 1,209 2,012 1,727
taxes
Prepaid expenses 3,194 3,199 3,875 3,300
and other
Property,plant and 37,012 36,561 38,086 34,721
equipment
Accumulated (17,768) (17,189) (17,446) (15,181)
depreciation
Goodwill 54,012 56,512 59,767 56,552
Other intangible 31,636 32,606 34,233 33,626
Other assets 4,498 4,348 4,837 4,265
125,490 130,249 140,648 132,65
Operating
liabilities
Accounts payable 7,251 5,980 6,775 5,710
Accrued liabilities 8,559 8,601 10,154 9,586
Taxes payable -- -- 945 3,382
Deffered taxes 10,902 10,752 11,805 12,015
Other liabilities 10,189 9,146 8,154 5,147
36,901 34,479 37,883 35,840
Net operating 88,589 95,770 102,815 96,815
assets (NOA)
Financial
obligations
Debt due in one 8,472 16,320 13,084 12,039
year
Long term debt 21,360 20,652 23,581 23,375
Less ESOP (1,350) (1,340) (1,325) (1,308)
reserve
Preferred stock 1,277 1,324 1,366 1,406
29,759 36,956 36,706 35,512
Financial assets
Cash equivalents 2,682 4,584 3,116 5,157
Investment -- -- 228 202
securities
2,682 4,584 3,344 5,359
Net financial 27,077 32,372 33,362 30,153
obligations
Total equity 61,512 63,398 69,453 66,662
Noncontrolling 324 283
interest
Common 61,188 63,115 69,453 66,662
shareholders
equity