American Home Product

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Corporate Finance-­‐ II -­‐ P r a t e e k T a y a l # 2 0 1 1 1 4 1 C o r p o r a t e F i n a n c e -­‐ I I P a g e | 1 C ase I: A merican Home Products Corporation Solutions to various questions are given below: A ns. 1: At Present, American Home Products Corp. seems to have no business risk but may face a certain risk in the long run. As per the ratios, it should not worry about business risk as: Working capital is very healthy ($1472.8 million). Cash excess ($233 million) The high Return on Assets (ROA), high profit margin, low current-to-asset ratio and 49.71 collection days show that AHP can generate cash…show more content…
However, this increases the risk of the firm, thereby reducing the value of the firm in comparison to an all debt capital structure. 100% Debt: This kind of capital structure is the most beneficial for the equity shareholders as their bottom line benefits the most and the highest earning per share is witnessed with this. However, this is also not suggested as this increases the risk of the firm as the debt obligation of the firm rises greatly. This might be a concern in times of turmoil. A ns. 2: 12 10 8 EPS 6 4 2 0 All Equity Equal All Debt 0 500 1000 1500 2000 EBIT 2500 3000 3500 4000 Prateek Tayal (2011141) Section C C o r p o r a t e F i n a n c e -­‐ I I P a g e | 4 A ns. 3: X = 2950.31 Here, X = = = = = = = Desired EBIT. Interest with capital structure 1. Tax Rate. Preference Dividend. Interest with capital structure 2. A ns. 4: This indifference point has major implications for capital structure decisions. At EBIT amounts in excess of the EBIT indifference level, the more heavily levered financing plan will generate a higher EPS. At EBIT amounts below the EBIT indifference level, the financing plan involving less leverage will generate a higher EPS. Therefore, it is of critical important for the financial manager to know
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