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BUAD Bitter Pill F - BUAD 110 13 October 2007 Bitter Pill F...

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BUAD 110 13 October, 2007 Bitter Pill F It appears that Merck’s decision to recall Vioxx in September of 2004 caused a number of financial problems for the corporation, supporting Peter Lynch’s claims. Comparing the financial numbers for 2003 and 2005, there is evidence that suggests Merck’s financial performance, position, and cash flow have dropped as a result of the Vioxx recall. Beginning with Merck’s liquidity ratios, the numbers show that the current ratio remains below 2. This means that Merck might not be able to quickly turn assets into cash to pay short-term debts. The acid test ratio jumped from below 1 in 2003 to 1.5 in 2005, meaning that the company could have cash flow problems and may have to approach a high-cost lender for assistance to pay their short-term debts. Looking at Merck’s leverage in 2005 compared to 2003, debt to owner’s equity has increased about 13% from 61.4% to 74.2%. The balance sheets show that Merck still has more equity than debt; however, the company has taken on a lot more debt, which Merck could struggle to pay off in the short run because of its cash flow problems.
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