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
Premium Finance Stock
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
Premium Weighted average cost of capital Finance
American Home Products Corporation1. CASE SUMMARYAHP Chief Executive"I just don ’t like to owe money"‚ said William F. Laporte‚ AHP chief executive‚ when asked about his company ’s almost debt-free balance sheet and growing cash reserves. Mr. Laporte had taken over as chief executive of American Home Products in 1964. Throughout 17 subsequent years of his tenure Mr. Laporte has not changed his opinion of debt financing and AHP ’s abstinence from debt continued‚ while the growth in its cash balance
Premium Finance Management Corporate finance
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
Premium Finance Dividend yield Corporate finance
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
Premium Finance Debt Bond
Philip Taberer American Home Products Case 1. How much business risk does AHP face? How much financial risk would AHP face at each of the proposed levels of debt shown in case Exhibit 3? How much potential value if any can AHP create for its shareholders at each of the proposed levels of debt? AHP runs four lines of business that all have relatively low risk about future demands for their products. In other words people demand the sorts of products they sell. What separates their success compared
Premium Finance Stock Stock market
Introduction American Home Product (AHP) was founded in 1926 with the merging of several small home product companies. As the company expanded in the 1930’s‚ it acquired companies in different businesses. After World War II‚ the company had four lines of businesses: prescription drugs‚ packaged (over-the-counter) drugs‚ food products‚ and housewares and household products. Although the name “American Home Product” has never appeared on its products‚ the firm produces many well-known brands in the
Premium Financial ratio Finance Stock
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
Premium Stock Stock market Generally Accepted Accounting Principles
Marriott Corporation: Questions for HBS case “Marriott Corporation: The cost of capital” 1) Are the four components of Marriott’s financial strategy consistent with its growth objective? In my opinion‚ the four components of Marriott’s financial strategy are consistent with its growth objective. As we find in the case‚ the four components of Marriott’s financial strategy: Manage rather than own hotel assets‚ Invest in projects that increase shareholder value‚ Optimize the use of debt
Premium Marketing Hotel Hotels
American Home Products 1. 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? (See Exhibits 1 and 2 ) American Home Products currently has low business risk due to the conservative nature of their business. They piggyback on first movers
Premium United States International trade Culture