American Home Products Corporation
American Home Products Corporation
Symbol : AHP
NYSE : AHP
Business Description :
American Home Products (AHP) is one of the largest pharmaceutical companies in the world, based in Madison, New Jersey, USA. American Home Products is a corporation involved in the production and marketing of over 1500 consumer goods allocated among four distinct business lines. AHP is a company with virtually no debt and an impressive amount of cash in its balance sheet. The company is characterized by its distinctive corporate culture that emanated from its chief executive William F. Laporte. During 17 years, Laporte maintained an extremely conservative capital structure. In 1981, while Laporte was approaching retirement, analysts speculated on the possibility of a more aggressive capital structure policy.
Business Risk faced by AHP in 1981:
In order to find the business risk faced by the company in 1981, we will run a regression using the company’s returns against the value-weighted returns including dividends from 1972 to 1981. (See Appendix 1) The slope of the regression line is the levered beta: βL = 0.7933. (See Appendix 2) We plug the levered beta into the equation below in order to find the unlevered beta:
βU = βL / [1+(D/E) (1-T)] βU = 0.7933 / [1+(13.9/1472.8)(1-0.48)] = 0.789
We use the unlevered beta in order to estimate the Business Risk faced by the company in 1981, since at this date, the company has almost no debt. Indeed, unlevering the beta removes any beneficial effects gained by adding debt to the firm’s capital structure. This measure shows the amount of systematic risk inherent in the firm’s equity compared with the overall market. In 1981, AHP faces low business risk of 0.789.
Financial Risk faced by AHP at different levels of Debt:
The levered beta includes both financial and business risk; therefore financial risk is the difference between the levered beta and the unlevered beta at each level of debt:
30% Debt Level: βL = βU
Symbol : AHP
NYSE : AHP
Business Description :
American Home Products (AHP) is one of the largest pharmaceutical companies in the world, based in Madison, New Jersey, USA. American Home Products is a corporation involved in the production and marketing of over 1500 consumer goods allocated among four distinct business lines. AHP is a company with virtually no debt and an impressive amount of cash in its balance sheet. The company is characterized by its distinctive corporate culture that emanated from its chief executive William F. Laporte. During 17 years, Laporte maintained an extremely conservative capital structure. In 1981, while Laporte was approaching retirement, analysts speculated on the possibility of a more aggressive capital structure policy.
Business Risk faced by AHP in 1981:
In order to find the business risk faced by the company in 1981, we will run a regression using the company’s returns against the value-weighted returns including dividends from 1972 to 1981. (See Appendix 1) The slope of the regression line is the levered beta: βL = 0.7933. (See Appendix 2) We plug the levered beta into the equation below in order to find the unlevered beta:
βU = βL / [1+(D/E) (1-T)] βU = 0.7933 / [1+(13.9/1472.8)(1-0.48)] = 0.789
We use the unlevered beta in order to estimate the Business Risk faced by the company in 1981, since at this date, the company has almost no debt. Indeed, unlevering the beta removes any beneficial effects gained by adding debt to the firm’s capital structure. This measure shows the amount of systematic risk inherent in the firm’s equity compared with the overall market. In 1981, AHP faces low business risk of 0.789.
Financial Risk faced by AHP at different levels of Debt:
The levered beta includes both financial and business risk; therefore financial risk is the difference between the levered beta and the unlevered beta at each level of debt:
30% Debt Level: βL = βU