American Home Products Case Essay

To evaluate the economics of increased leverage, determined two key numbers in the spirit of the Adjusted Present Value (APV) technique: the present value of the tax savings generated, and the cost of financial distress caused by the increased risk of default. We calculated the present value of the tax-shield is calculated using the formula: tax rate × BV of Debt, assuming that the discount rate and the debt’s interest rates are equal. For the risk

3. How much AHP implement a more aggressive capital structure policy? What are the alternative methods for leveraging up?

Based on the analysis above, we can got the more leveraged by debt the lower the amount of the tax income will be. $50 million loan will create $0.34 per share tax benefit. If the loan was $259 Million it will reach to $1.75 per share. On the other hand, the EPS will increase from 0.91 to 0.93. In the same industry, a higher EPS is a good signal for investors. What’s more, the ROE will increase from 11% to 18%. As for the static trade-off model

In business, in the word of investment can be defined as the outflow of money for the purchase of valuable item with an expectation of positive future return or the purchase of equipment or inventory by owner in order to improve future business. (Kahraman, 2011) Moreover, the part of decision-making acts a crucial role in business investment that depends upon the investor’s profit expectation, the availability to finance the investment and the potential cost of assets. (Virlics, 2013) However, risk and uncertainty are the basic terms to the decision-making framework. Risk can be defined as the probability of outcomes or loss that is caused by internal or external vulnerabilities where the probabilities of the possible negative occurrence

If HCA chooses to remain at the current debt ratio take on a lower rating, suspicion might arise among investors. In both cases opportunities exist as well as consequences. The advantages and disadvantages are outlined in Scenario 1 - 3.

Risk is defined as the probability that a company will become insolvent and will not be able to meet its obligations when they become due for payment. The profitability versus

Risk refers to a likelihood, probability, a chance that a loss may occur in a given organization. Most of the times, there is a high risk when there is vulnerability. In this case, vulnerability refers to a weakness that the organization has. Risk assessment refers to the process of identification of potential hazards and proper analysis of the expected losses if those hazards occur (Homeland Security, n.d.). Risk assessment as a way of profiling risk according to impact to the organization. Some organizations have business impact analysis exercises geared towards determination of potential hazards based risk assessment approaches. Organizations’ risk differ depending on the size and the type of business they are doing. The disparity in organizations’ risk call for different adaptation of risk assessment approaches. Even with the disparities of the businesses, proper risk management not only ranks the risks according to the seriousness but also identifies the best methods to control risks in an organization.

Home Depot was claimed to receive summary disposition by the plaintiff who is a former employee. According to what was written in the report, “The employee was terminated after he kissed a married employee he supervised while the two were not at the store.” The plaintiff, Chris Goodrich, did a lawsuit against a home improvement store. As stated in the report, the plaintiff was complaining that he was terminated in violation of the Whistleblower's Protection Act (WPA) and the § 8 of the Bullard-Plawecki employee right to know act which is “an act to permit employees to review personnel records; to provide criteria for the review; to prescribe the information which may be contained in personnel records; and to provide penalties.” There were two basic allegations that employer did that resulted in the lawsuit.

Introduces the concepts of finance. Reviews the basic tools and their use for making financial decisions. Explains how to measure and compare risks across investment opportunities. Analyzes how the firm chooses the set of securities it will issue to raise capital from investors as well as how the firm’s capital structure is formed. Examines how the choice of capital structure affects the value of the firm. Presents valuation and integrate risk, return and the firm’s choice of capital structure.

However, two known authors in this field of study believe that companies with low business risk obtains factors of production at a lower cost which may also pave to the ability of the firm to operate more efficiently (Amit & Wernerfet, 1990). Therefore, many stockholders faced a high of uncertainty; this is because some companies do not have the financial strengths to cover its debts that even may result to bankruptcy.

1) It is obvious that when take on more debt, the risk of ability to service the interest payment is increased. However, in case of AHP they still have a certain level to absorb more debt into their balance sheet. Even at 70% Debt to Total Capital ratio, their interest coverage still better their competitor.

5. What capital structure would you recommend as appropriate for AHP? Are there any other sources of value, (other than the tax benefits), to AHP’s shareholders from a leverage increase? What are the disadvantages of leveraging this company?

Business risk refers to the chance a business's cash flows are not enough to cover its operating expenses like cost of goods sold, rent and wages. Unlike financial risk, business risk is independent of the amount of debt a business owes (Guzman & Media, 2015). Financial risk refers to the chance a business's cash flows are not enough to pay creditors and fulfill other financial responsibilities (Guzman & Media, 2015). Financial risk is the additional business risk concentrated on common stockholders when financial leverage is used and depends on the amount of debt and preferred stock financing (Brigham & Ehrhardt, 2014).

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?

The use of debt is estimated to increase AHP’s stock price due primarily to increases in EPS. It would be foolhardy, however, to ignore the potential setbacks to the firm by taking on much greater levels of debt: