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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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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Stock Price The stock price for each debt ratio alternative can be calculated by: P/E Ratio = Stock Price EPS No Debt: 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
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1. How much business risk does AHP face? How much financial risk would the company face at each of the proposed levels of debt shown in Exhibit 3? Financial risk is a function of the company’s business risk multiplied by the debt/equity (D/E) ratio. Thus the higher the D/E ratio‚ the greater the leverage and financial risk. The following table provides the D/E ratios at each proposed level‚ which indicate the factor of increased financial risk. Current structure: no financial risk
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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
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American Home Products (AHP) opera en la actualidad‚ prácticamente sin deuda‚ su riesgo financiero es muy pequeño. Esto desplaza la carga pesadamente hacia el riesgo empresarial. Un portero de cinco fuerzas de análisis es preciso determinar los niveles exactos de riesgo del negocio de American Home Products. En primer lugar‚ la amenaza de sustitutos es el riesgo de que AHP no puede permitirse el lujo de ignorar. Debido a que gastan muy poco en investigación y desarrollo‚ y tienen que depender de
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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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UNIVERSIDAD DE CHILE FACULTAD DE CIENCIAS FORESTALES ESCUELA DE CIENCIAS FORESTALES DEPARTAMENTO DE MANEJO DE RECURSOS NATURALES Calculo del Coeficiente Beta para la Empresa S.A.C.I. FALABELLA Finanzas Patricio Bustos Arteaga. Camilo Hernández Peralta. Sebastián Lillo Aliste. Profesor: Cristóbal Videla H. Santiago‚ Chile 2008 1. Cálculo del Coeficiente Beta para la Empresa S.A.C.I. FALABELLA. Mucha gente familiarizada con las transacciones bursátiles utilizan una forma de análisis
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| 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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Investment and Capital Structure Case 5 American Home Products Corporation Assess American Home Products ’ (AHP) business risk. THE BUSINESS RISK OF A COMPANY INCLUDES ΒR WHICH IS RELATED TO ITS REVENUE AND OPERATING LEVERAGE WHICH ARISES FROM FIXED COSTS OF PRODUCTION. IN GENERAL‚ THE PHARMACEUTICAL INDUSTRY HAS A VERY HIGH BUSINESS RISK DUE TO HIGH RISKS AND COSTS THAT ARE ASSOCIATED WITH THE RESEARCH AND DEVELOPMENT OF NEW PRODUCTS. AMERICAN HOME PRODUCTS HAS A LOW BUSINESS RISK IN COMPARISON
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