American Home Products Case

2284 Words10 Pages
| 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

In 1981, AHP had reached sales of more than $4 billion by producing 1,500 marketed brands in 4 different kind of business; prescription drugs, packaged drugs, food products, and housewares and households products. Moreover, AHP is known to be the largest and profitable business in prescription of drugs;
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2. The capital structure must change. 3. The optimal capital structure that will balance between risk and return in order to maximizes the firm's stock price.
Moreover, it's shown that the previous capital structure was working however, these assumptions neglected 3 facts: the first is the added cost that can be reduced using more Debt. And the second is the opportunity costs and the risks faced by keeping excess cash. And last the opportunities missed by the lack of using the debt (area for expansion).
There are four main factors that influence the capital structure decisions; we will be analyzing these factors in order to reach the best conclusion. 1. Business Risk: that is the risk that arises from the firm operation if it used no debt in its capital structure. Thus, the firm know is facing business risk only without financial risk because it is under 0% debt ratio. We will be Calculating Business Risk in the risk analysis part in the coming sections. 2. The Firm's Tax Position: given that the tax position is high (48%) the firm can benefit from the interest tax deductible advantages specifically lowering the effective cost of debt and the cost of capital. 3. Financial Flexibility: this factor is basically about the ability to raise capital under difficult conditions. It mainly depends on how strong are the balance sheets and financial statements. American Home Products Corporation has strong

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