American Home Products Case Study

826 WordsApr 11, 20124 Pages
1) How much business risk does AHP face? How much financial risk would AHP face at each of proposed level of debt? a) General risks: • Strategic risk from internal management structure change, due to Laporte was approaching retirement that will cause another big waive of change for the whole senior management team as well as the company’s strategy. • Market risk. Pharmacy had not reached the heavy competition yet during early 1980s, AHP was still the early adopter in the industry, however, the nature of the market will change very quickly follow by the globalization and fast developing of medical technology, efficiency of information communication and financial industry. The competitor will able to launch variously strategies, with wild…show more content…
High tax High dividend payout ratio. 30%-70% debt of total capital • Could possibly downgrading the bond credit level from AAA to AA at beginning 2) Can AHP create value for its shareholders by changing the level of debt? What capital structure would you recommend as appropriate for AHP? What are the advantages and disadvantages of leveraging up this company? The simple answer is “Yes”. We propose the multiple steps to achieve better leverage. Targeting 30% debt in the first year, because our competitor uses that ratio too, that can be use as benchmark to convince shareholders. Second year we can go for 50% and 70% in the third year. Advantage: Case Study/American Home Products Corporation 2 • Use the excess cash to repurchase common stock will reduce common shares from 155.5(30% debt) m to 118.9m (70% debt), as the result that will increase the earning per share as well as the stock price. • Will increase the tax efficiency, the income tax can be reduced to 383.7m from 455.2 m. Even the debt interest rate is at 14%, but comparing with 48% tax rate that is very low. • Debt is a good tool to against inflation, as mentioned before, the average inflation rate from 1979-1981 was very high, borrowing money is good way to maintain the company’s assets to staying valuable. Disadvantage, • • • AHP might lose it AAA bond rate
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