Honeywell Case

1. What are the objectives of Honeywell’s new risk management program? How do they relate to the goal of “maximize shareholder value? The objectives of the new risk management program was to develop a multi-year insurance based strategy that covered all traditionally insured global risk in a single master insurance policy which would provide; * the same if not greater earnings protection * have lower total program costs * have the flexibility to incorporate additional risks if needed * and comply with all accounting standards. These objectives would help maximize shareholder values in two major ways, which should increase the value of the firm as shown in Exhibit 1. If the assumptions in the case are correct, it should reduce program costs by 15% - 20%. Second, if the program was successful in providing greater earnings protection – say for currency (2% negative impact on sales in 1996) or liability (Litton Systems patent infringement suite) this should further reduce costs. If we were to model 17% cost reduction and an improvement in earnings projections of 1% (essentially reducing currency risk by 1%), you can see that after tax profits and earnings per share would improve by 151%. The earnings improvement could have some follow on positive effects on debt as well. Today, they pay 11.0% interest on their debt. Improvements to their profits driven by the two elements mentioned above should help improve their interest coverage ratio which today stands at 11.8x EBITDA to 23.0 x EBITDA, as shown in Exhibit 2. This should in turn should help reduce the cost of financing in the future as well as improve access to capital as well. Based on the statements made in the Management Discussion and Analysis of Financial Condition, Honeywell is looking to grow. This would entail acquisitions as well as general investments due to the fact that their business is capital intensive. Financing this growth in the least costly