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American Home Product

In: Business and Management

Submitted By seet
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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 quickly, so it can maintain current high 14.1% in 1978 to 8.8% in 1981 (Exhibit 1) shows that it faces future risk of losing market shares in all its business lines if it does not foresee competition and A ns. 2: High ROE (30.3). High quick ratio (42.68). Low debt-to-equity ratio (0.09). Low debt-to-asset ratio (0.01) Degree of Financial Leverage EBIT Interest Preferred stock dividend DFL 30% Debt 922.2 52.7 0.4 1.062 50% Debt 922.2 87.8 0.4 1.106 70% Debt 922.2 122.9 0.4 1.155 t has:

The above table shows that if AHP increases debt ratio, it will face a financial risk of increased debt-to-equity and debt-to-asset ratios resulting into solvency problems in long terms. AHP also face liquidity problems since the quick ratios decrease when the debt ratios increase. A ns. 3: The Company always focused on giving maximum return to its shareholders. At 70% debt, both the EPS and DPS are maximum as shown which implies possible increase in stock price which is beneficial to the shareholders due to their capital appreciation.

Prateek Tayal (2011141)

Section C

C o r p o r a t e…...

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