International Reporting Case

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International Reporting Case
Sepracor Inc.

2007 (,000)
Current liabilities $ 554,114
Convertible subordinated debt 648,020
Total liabilities 1,228,313
Stockholders' equity 176,413
Net income 58,333

(a) Compute the following ratios:

Return on Assets = Net Income / Total Assets
Total Assets = Total Liabilities + Stockholders’ Equity = 1,228,313 + 176,413 = 1,404,726
Return on Assets = 58,333 / 1,404,726
Return on Assets = 4.15%
Return on Stockholders’ Equity = Net Income / Stockholders’ Equity
Return on Stockholders’ Equity = 58,333 / 176,413
Return on Stockholders’ Equity = 33.07%
Debt to Assets Ratio = Total Debt / Total Assets
Debt to Assets Ratio = 1,228,313 / 1,404,726
Debt to Assets Ratio = 87.44%

(b) Discuss the performance and financial position of Sepracor. Industry averages: ROA 3.5%, ROE 16% DAR 75%
Sepracor appears to be a strong company from an investor’s perspective, with Return on Assets and Return on Stockholders’ Equity higher than the industry averages. However, the Debt to Assets Ratio is significantly higher compared to the industry. This is an indication that the investment is riskier.
A decision to invest in the convertible bonds must be made weighing the pros of converting the bonds into common stock with the possibility of a stock price increase, and the cons of a risky investment due to possibility of failure because of high debt levels.

(c) Compare Sepracor to an international company like Bayer. The fair value of the equity component of the convertible bonds is 150,000.
A significant difference between iGAAP and U.S. GAAP is the accounting for securities with characteristics of debt and…...

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