Gillette Inc. was faced with a significant corporate strategy decision early in 1994 on whether it..

Gillette Inc. was faced with a significant corporate strategy decision early in 1994 on whether it would continue its high-margin strategy or shift to a lower margin to increase sales revenues in the face of intense generic competition. The two strategies being considered are as follows: Status Quo High-Margin Strategy ¦ Maintain profit margins at 1993 levels from 1994 to 2003. (In 1993, net income was $575 million on revenues of $5,750 million.) ¦ The sales/book value ratio, which was 3 in 1993, can then be expected to decline to 2.5 between 1994 and 2003. Low-Margin Higher-Sales Strategy ¦

»Gillette Inc. was faced with a significant corporate strategy decision early in 1994 on whether it would continue its high-margin strategy or shift to a lower margin to increase sales revenues in the face of intense generic competition. The two strategies being considered are as follows: Status Quo High-Margin Strategy ¦ Maintain profit margins at 1993 levels from 1994 to 2003. (In 1993, net income was $575 million on revenues of $5,750 million.) ¦ The sales/book value ratio, which was 3 in 1993, can then be expected to decline to 2.5 between 1994 and 2003. Low-Margin Higher-Sales Strategy ¦ Reduce net profit margin to 8% from 1994 to 2003. ¦ The sales/book value ratio will then stay at 1993 levels from 1994 to 2003. The book value per share at the end of 1993 was $9.75. The dividend payout ratio, which was 33% in 1993, was expected to remain unchanged from 1994 to 2003 under either strategy, as is the beta, which was 1.30 in 1993. (The T-bond rate was 7%, and the risk premium was 5.5%.) After 2003, the earnings growth rate was expected to drop to 6%, and the dividend payout ratio was expected to be 60% under either strategy. The beta would decline to 1.0. a. Estimate the price-sales ratio under the status quo strategy. b. Estimate the price-sales ratio under the low-margin strategy. c. Which strategy would you recommend and why? d. How much would sales have to drop under the status quo strategy for the two strategies to be equivalent?

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