Question

Suppose you were the Chief Financial Officer of WPCI Drugs and Products. By 2015, WPCI had become a major player in prescription drugs with sizable market share in quite a few of them, and several "blockbuster" drugs. WPCI also had numerous brand name home products such as Clean detergent and Chef Girlardee canned food.

The three pillars of WPCI's strategy were conservatism, marketing and cost control. WPCI consistently avoided much of the risk of product development and introduction in the volatile drug industry. Most of its new products were acquired or licensed after their development by other firms. Others were copies and clever extensions of products introduced by competitors. WPCI's success was built on its expertise in marketing, which eroded its competitors’ headstart, and on cost control, which ensured substantial margins. The results were impressive. Selected financial data for WPCI (in $ millions):

	2011	2012	2013	2014	2015
Sales	2,471.7	2,685.1	3,062.6	3,406.3	3,798.5
Net Income	277.9	306.2	348.4	396.0	445.9
Earnings Per Share	1.75	1.94	2.21	2.51	2.84
Dividend Per Share	1.00	1.15	1.33	1.50	1.70
Cash	357.8	322.9	436.6	493.8	593.3
Total Assets	1,510.9	1,611.3	1,862.2	2,090.7	2370.3
A/P and other noninterest-bearing liabilities	511.60	565.70	670.50	758.40	883.60
Long-term + Short-term debt	7.8	10.3	13.7	10.3	13.9
Net Worth	991.5	1,035.3	1,178.0	1,322.0	1,472.8

Balance Sheet 2015
Assets		Liabilities and Equity
Cash and Cash Equivalents	593.3	A/P and other non-interest bearing liabilities	883.6
Accounts receivable	517.3	Long-term + Short-term debt	13.9
Inventory	557.3	Total Liabilities	897.5
Plant, Property & Equip.	450.5
Others	251.9	Net Worth	1,472.8
Total Assets	2,370.3	Total Liabilities + Net Worth	2,370.3

1. Describe WPCI's capital structure for the period from 2011 to 2015. What are the likely factors leading to this capital structure? (Hint: Consider WPCI’s sustainable growth and its underlying components).

2. Based on the information given above, is this capital structure likely to be optimal? If yes, explain its merits relative to alternative capital structures. If not, discuss this capital structure’s main drawbacks, as well as the relative merits of the different possible paths to a more suitable capital structure.

Answer 1

1. Debt is pretty low and hence the net worth comprises of Equity to a major extent. This has also been increased due to retained earnings from sustained growth in profits over the years with a low dividend distribution history

2. Capital structure is adequate since the company operates in a volatile industry and refrains from launching new products. In case the strategy would have been aggressive in new lauches, the Company could rely on more debt and leverage its huge net worth and revenue generating capacity. Company should also focus on spending on R&D since it is sitting on a huge cash reserves