| American Home Products Corporation | Case Study | | Table of Contents Introduction 3 Background 3 Culture of the Business 3 Stages of Development 3 Core problem 4 analysis and options 4 Risk analysis 5 First: The Business Risk 5 Second: The Financial Risk 6 Other kinds of risk: 7 Financial Analysis 7 The WAAC 7 Ratio Analysis 11 Recommendations: 12 References: 12 Introduction Background In 1981‚ AHP had reached sales of more than $4 billion by producing
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Recommendation: Optimal Amount of Debt is 70% As Mr. Laporte approaches retirement‚ American Home Products (AHP) has an important decision to make with respect to adopting a more aggressive capital structure policy. Use of debt carries with it advantages and disadvantages. In accordance with value-based management‚ we recommend that AHP adopts a capital structure consisting of 70% debt. The following points justify such action: • The hallmark of value-based management is to choose strategies
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American Home Products Case Write-Up 1. A combination of business risk and financial risk shows the risk of an organization’s future return on equity. Business risk is related to make a firm’s operation without any debt whereas financial risk requires that the firm’s common stockholders make a decision to finance it with debt. Business risk can be evaluated volatility in earnings and profits (coefficient of variation of returns on assets and of operating profits). A measure of business risk
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American Home Product 1. How much business risk does American Home Product face? How much financial risk would American Home Product face at each of the proposed levels of debt shown in case Exhibit 3? (Hint: Calculate impact on net income of 10% reduction in EBIT). How much potential value‚ if any‚ can AHP create for its shareholders at each of the proposed levels of debt? 2. Construct a simple EBIT-EPS Analysis chart for AHP for each of the proposed levels of debt shown in case Exhibit 3. Give
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debt-free balance sheet and growing reserves. The exchange took place in 1968‚ 4 years after Mr. Laporte had taken over as chief executive of American Home Products (AHP). The subsequent American Home Product Corporation (AHP)‚ a highly growing American company‚ has four business lines: prescription drugs‚ packaged drugs‚ food products‚ housewares and household products. For a quite long time‚ AHP has applied a tight financial control and maintained an aggressive capital structure policy. Its mission is
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Case 1：American Home Products How much business risk does American Home Products face? How much financial risk would American Home Products face at each of the proposed levels of debt shown in case Exhibit 3? How much potential value‚ if any‚ can American Home Products create for its shareholders at each of the proposed levels of debt? American Home Products offers a variety of products spread over 4 product lines. This allows the company to attract many consumers and if one product
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Grant Nauta AHP Case Study Because American Home Products (AHP) currently operates with virtually no debt‚ their financial risk is very small. This shifts the burden heavily towards business risk. A porter’s five forces analysis is appropriate to determine the exact levels of business risk for American Home Products. First‚ the threat of substitutes is a risk that AHP cannot afford to ignore. Because they spend very little on Research and Development‚ and have to rely on their marketing to catch
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launch variously strategies‚ with wild coverage of products via extended channels in more regions/counties. • Because of debt free strategy‚ the company had limited investment in R&D. Even they can provide the “me to product” but the industry will change with more related regulation to be generated from government‚ that will require each pharmacy company spend longer time‚ more money to do the testing before launch to the market‚ “me to product” will slow down the process to catch the new market
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American Home Products (AHP) has established a strong track record of revenue growth and return on equity over the past decade‚ producing a host of products in four separate business lines: prescription drugs‚ packaged drugs‚ food products‚ and housewares/household products. AHP’s distinctive culture emphasizes conservatism‚ cost control and risk aversion. AHP’s corporate structure also concentrated most decision-making authority with the incumbent chief executive‚ William F. Laporte. This approach
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30 / 3.18 = 9.43 Stock Price : $ 30 30% Debt: x / 3.33 = 9.43 Stock Price : $31.4 50% Debt: x / 3.41 = 9.43 Stock Price : $32.2 70% Debt: x / 3.49 = 9.43 Stock Price : $32.9 Assumption : the P/E ratio remains constant for all the cases. The stock price‚ which represents the Value of the Firm‚ is the highest at $32.9 at the 70% debt ratio. This is in accordance with Figure 1‚ which shows that at lowest WACC (as calculated) the value of the firm will be maximum. These calculations
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