...American Home Products Corp. How much financial risk would American Home Products face at each of the proposed debt levels shown in case Exhibit 3? What debt rating would American Home received at each of the proposed debt levels? Comparison Table $ in million USD | American Home Products Corp. | Warner. Lambert Company | | Actual | Pro Forma 1981 for | Actual | | 1981 | 30% Debt to Total Capital | 50% Debt to Total Capital | 70% Debt to Total Capital | 1980 | Net Worth | $1,472.8 | $877.6 | $626.9 | $376.1 | $1,482.7 | Earnings per Share5-year CAGR | $3.1812.4% | $3.3312.4% | $3.4112.4% | $3.4912.4% | $2.413.0% | Return on Equity | 33.8% | 51.5% | 63.9% | 110.5% | 13.0% | Interest Coverage | 415.13 x | 17.5 x | 10.5 x | 7.5 x | 5.0 x | Debt to Total Capital | 0.9% | 30.0% | 50.0% | 70.0% | 32.4% | Bond Rating | AAA | | | | AAA/AA* | American Home Products Corp. (AHP) has 4 business lines i.e. xx, xx, xx, and xx. The foods and household products were the large market but potentially very competitive in price and can lead to low profit margin. On the other hand, the prescribed and packaged drugs were more protected and can contribute higher margin but they need high capital to invest in R&D or acquiring drug patents to stay competitive in the market as well as generating profitable business. In the past AHP has capital structure policy to utilize their self-generated capitals to run their business with little to none outside debt. With this policy...
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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...
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...Case: American Home Products 1) What are the problems confronting the company? As it has been mentioned in the case, American Home Products (AHP) is a successful and a highly expanding company that produces a host of products in four separate business lines: prescription drugs, packages drugs, food products, and housewares and household products. The success of the company is mainly due to its outstanding marketing department. In fact, instead of investing money in research and development in order to create new and innovative products, the company prefers to avoid taking risks and market products that are smart extensions of products already marketed by competitors. AHP is a very conservative and risk averse company, so the way it operates its business aligns well with the culture of the company. Another important thing is that for a long time, the company was under a tight financial control and a very conservative capital structure policy. In fact, it operates with an almost debt-free balance sheet in order to avoid any financial risk. As mentioned already, under the conservative capital structure policy, the company improved remarkably and both its sales and earnings grew impressively. However, this way of operating may trigger some problems on the long run. Since the company does not invest in research and development, it means that it faces a considerable problem which is the threat of substitutes. Moreover, it cannot expand into new markets and it relies heavily on its...
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...American Home Products Corporation INTRODUCTION The chief executive of American Home Products (AHP), William F. Laporte, is a man who is debt averse. Mr. Laporte is a man who does not like to spend money and his management style has produced outstanding financial success. However, Mr. Laporte will be retiring soon, which could mean AHP will have a new executive who may wish to change the capital structure by adding debt in order to increase shareholder wealth. At the time, AHP had practically no debt on its balance sheet; while the most comparable company, Warner-Lambert had a debt ratio of 32% and a bond rating between AAA and AA. PROBLEM STATEMENT The inevitable retirement of AHP’s chief executive has analysts wondering what, if any, change to AHP’s capital structure might look like. Furthermore, analysts are curious to know what the size of the payoff would be with such a policy change. ENVIRONMENTAL ANALYSIS There are both advantages and disadvantages to leverage in a capital structure. If AHP chose to use leverage in their capital structure the interest expense would be tax deductible and therefore lower the cost of the loan and their tax liability. Additionally, by incorporating debt into their capital structure AHP would only have to pay back the loan principal plus interest; whereas with equity, shareholders have direct claim on future profits, if any. Conversely, the larger debt-to-equity ratio, the more risky AHP would appear to investors due to the greater possibility...
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...any debt, whereasfinancial risk requires that the firm’s common stockholders make a decision to finance it withdebt. a) American Home Products has been operating on four main lines of business that are lessuncertainty about product demand; for example, one of its business lines is food productsbecause whenever people buy foods. It means that AHP’s business risk is low. As mentionedabove, if a firm does its operation activities regularly without leverage, it means that its businessrisk is not significant high. Thus, ratio of cash to total assets is calculated by following: Figure 1 Proportion of cash and total assets, 1976-1981 ($ in millions) 1981 1980 1979 1978 1977 1976 Cash 729.1 593.3 493.8 436.6 322.9 358.8 Total 2,588.5 2,370.3 2,090.7 1,862.2 1,611.3 1,510.9 Assets Proportion 28.2% 25.0% 23.6% 23.4% 20.0% 23.7% Situational Analysis American Home Products Corporation is a company that has almost debt-free balance sheet and growing cash reserves. For 29 consecutive years through 1981, the firm has increased sales, earnings, and dividends ranging between 10% and 15% annually. In the 1960s, the firm’s return on equity increased from 25% to 30% in the 1980s. This was due to their unwillingness to spend any money. Also, this strategy led the company to be able to pay out almost 60% of its annual earnings as dividends. Due to AHP’s effective product marketing and their focus on selling, they are currently standing at a low financial risk. It is very unlikely for the company...
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...1. How much business risk does AHP face? Stable annual growth (10~15%) and profit margin (11~12%). Overall low-risk investments; ‘proven’ formulas instead of R&D. AAA Bond Rating. (EBIT 1981 / EBIT 1980) / % increase in sales. (954,8 / 857,5) / (4131,2 / 3798,5) = 1,02 2. How much financial risk would AHP face at each of the three proposed levels of debt shown in exhibit 3? DFL = % change EPS / % change EBIT = 1,12 / 1,11 = 1,009 Higher DFL means higher EPS variability 0% 1 30% 1,06 50% 1,1 70% 1,15 Debt to Capital = total debt / net worth Higher DtC ratio means higher risk 0% 0,009 30% 0,428 50% 0,99 70% 2,33 3. How much potential value, if any, can AHP create for its shareholders at each of the three proposed levels of debt? EPS goes up as % of debt goes up ($3.18 - $3.49) 0% $3.18 30% $3.33 50% $3.41 70% $3.49 Dividends rise 0% $1.90 30% $2.00 50% $2.04 70% $2.10 4. What capital structure would you recommend as appropriate for AHP? To determine the ‘debt capacity’ of a firm: EBIT/Interest Current: 954.8/2.3 = 415 Debt @ 30%: 922.2/52.7 = 17.5 • 5. 6. 7. 8. 9. 10. Debt @ 50%: 922.2/87.8 = 10.5 Debt @ 70%: 922.2/122.9 = 7.5 All are great, so need to look at more figures What are the advantages of leveraging AHP? Access to additional capital • Tax shield – debt is tax deductible • Increase in shareholder value • Increase in EPS • Increase in Dividends What are the disadvantages? a. Higher risk How would leverage up affect...
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...Justin Girouard Module 3 Assignment 2 Sn'o Risk Too Big Of A Risk Toro was a company that was built on residual lawn care products and in the past couple years prior to 1983, Toro had begun to emerge into the winter care products such as snow throwers. Loss of sales in the previous years led unhappy retailers with a lot of left over inventory that Toro bought back in attempt to keep them happy. This brought about the Sn'o Risk campaign. The SN'o Risk campaign was a huge success resulting in dramatic growth in sales and profit for Toro. American Home insurance company raised their interest rate in the Toro's snow thrower products was because they saw that the annual potential liabilities of the Toro's snow blower reached a potential $5,846,299 in 1982. This is a large liability for the company to take on for American Home and they realized the insurance policy they were providing was a necessity for Toro to have in order to keep this campaign successful. The $5,846,299 was 19.5% of the sales that year which exceeds the 10% discount rate Toro is accustomed to providing their customers and more importantly their shareholders. The Sn'o Risk promotional campaign was a great success due to the fact people were more interested in purchasing specifically the Toro product and the insurance company arranged themselves a contract readily accepting to meet the claims that were proposed in the campaign and in return the insurance company just take the 2.1% of the premium of...
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...Fortune 500 Companies Nose-Dive in the Chinese Market Candice Tabb International Business MGMT 338 5 December 2014 Duane A. Beaudoin Abstract Fortune 500 companies Home Depot, BestBuy, and Mantel have all failed in the Chinese market. External forces such as competitors and sociocultural effect the companies’ ability to overturn a profit resulting in a complete withdraw. The ideal profitability of China’s market has shown resistance to standardized companies. The unwillingness to adapt and conform to consumers and the lack of preparation on all three companies serves as a lessons learned and displays the true setback of standardizing a product vs. adapt or formulate a new. Fortune 500 Companies Nose-Dive in the Chinese Market China’s Foreign Direct Investment (FDI) and its economy have changed dramatically since the 1980’s. Revolution was widely due to the reform era lead by Deng Xiaoping. During the early 1980’s FDI was restricted to a small number of markets in certain regions. FDI policies evolved with time in the mid 1990’s and in the millennium, government policies relaxed and unified with domestic companies. Foreign companies are enticed into the Chinese market by its rising gross domestic product (GDP), favorable foreign exchange regulations, licensing requirements, tariffs, and taxes (Hale & Long, 2012, p. 2) Many U.S born businesses hop on the bandwagon in globalizing in economically stable countries. Hamlin & Li (2010) stated, “In 2010, China...
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...developing its market share to achieve this goal. . Thus, brand awareness gives IKEA a great power in the US market. However, IKEA’s motto is “low price with meaning”. “With meaning” for US market is different from the other markets. If IKEA cannot capture what US customers want, its offerings will become “low price and no meaning”. Introduction IKEA, the world’s largest furniture retailer was founded in 1943 by Kamprad. Its first showroom was opened in Almhult and for the first time the customers could see and touch their furnishings before ordering. By 2002, Ikea was the world’s most prominent furniture retailer. Though the company was privately held and did not release profit figures, its 2002 revenues approached $12 billion. IKEA’s product...
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...population in the United States are homeowners. However, while 71.8% of Whites are homeowners, only 47.3% of African Americans and 48.2% of Hispanics are homeowners. This large gap in homeownership rates can be contributed to discrimination by lenders and minorities’ misconceptions about the lending process. To overcome these issues, lenders need to eliminate discrimination and reach out to minorities. Ultimately, lenders who discriminate are going to hurt their own bottom lines since minorities represent a large market that has the high potential for growth. Introduction: Homeownership is the “American Dream” Housing has often been referred to as the #1 creator of wealth in the United States. It has been called, (1) the leading consumer product, (2) the leading consumer investment, and (3) a leading economic driver. Homeownership, in short, is the “American Dream.” It creates wealth. If you purchase a home today, with appreciation and through upkeep, it will be more valuable in the future. That appreciation provides homeowners with opportunities to create wealth. According to the Perlo (2003), in the latest Survey of Consumer Finances, published by the Federal Reserve Board, the median family that owned their home had a net worth of $171,700 in 2001 as compared to those without a home, whose net worth was only $4,800 in 2001. Homeownership also provides economic security and creates opportunities...
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... But quality is not compromised for the sake of cost. Swedenhas an international reputation for safety and quality you can rely on, and IKEA retailers take pride in offering the right quality in all situations”. The IKEA product range is wide in several ways; it comprises 9,500 products that are largely the same in all IKEA stores. First, it's wide in function: you'll find everything you need to furnish your home, from plants and living-room furnishings to toys and whole kitchens. Second it's wide in style. The romantic at heart will find just as much as the minimalist. And finally, by being coordinated, the range is wide in function and style at the same time, and at all times. IKEA offers not just furniture, but smaller fixtures for rooms as well, that can be bought at the same time as furniture. Customers can spend a lot of time in the stores, even if they don’t want to buy any furniture, they walk around the inside globally same formed IKEA, they get ideas how to furnish their house, and in the end they might have a plan to come back later or even buy something, probably just a candle or a vase. Many people associate Sweden with a fresh, healthy way of life. This Swedish lifestyle is reflected in the IKEA product range. IKEA works to ensure that products and materials...
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...HISTORY American Home Products Corporation was created in 1926 when a group of managers from Sterling Products and Household Products resolved on how to cheaply combine their resources in acquiring small companies as cheaply as possible. They successfully created products to have become household names such as Black Flag, Woolite, Chef Boyardee, Easy-Off, Anacin, Preparation H, Sani-Flush, Gulden’s Mustard and Ekco in the line of houseware. One the other hand, their largest and most profitable business included prescription drugs, antihypertensives, tranquilizers and oral contraceptives. The company was able to acquire Anacin, Bisodol Co. (Bisodol laxative), A.S. Boyle Co. (Old English floor wax), Kolynos Co., (Kolynos dentifrices), Wyeth Chemical Co. (Hills nose drops, Jads salts), Midway Chemical Co. (Aerowax), Preparation H hemorrhoid ointment, Three-in-1 Oil and Black Flag insecticide in the 1930s. Their marketing strategy started with a modest advertising budget in 1930 that eventually rose sharply in 1934 as it penetrated radio sponsorships with Blackett-Sample_Hummert. As 1936 entered, Advertising Age figures released that they were already ranking as number 8 advertiser in radio and they were able to maintain this for the rest of the decade. The company’s total spending in radio advertisements rose to more than 2.5 miliion in 1937 and remained as is until World War II. Come 1940s, Amercian Home Products Corporation additional products were included in their product line...
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...BUS 525 ECONOMICS OF THE FIRM Date: 07,24,2013 Abstract Introduce and analysis the Maytag. Solve some problems also mention some theory. From this nine following part : Nature of Product/Service, Market trends, Production/ Supply Process & Costs, Structure of the industry/ Market, Government role, Business environment, Firm/industry location, Business & Pricing Strategies and Entrepreneurial ability of managers. Abstract………………………………………………………………………………2 Maytag background…………………………………………………………………4 Nature of Product/Service……………………………………………………………5 Market trends…………………………………………………………………………6 Production/ Supply Process & Costs…………………………………………………7 Structure of the industry/ Market,……………………………………………………9 Government role……………………………………………………………………...10 Business environment………………………………………………………………..11 Firm/industry location………………………………………………………………..14 Business & Pricing Strategies………………………………………………………..14 Entrepreneurial ability of managers………………………………………………….15 Reference……………………………………………………………………………………17 Maytag Background Maytag is a large company with a long history. The original business, formed in 1893, manufactured feeder attachments for threshing machines. In 1907, the company moved to Newton, Iowa, a small town 30 miles east of Des Moines, the capital. Manufacturing emphasis turned to home laundry equipment, and wringer-type washers. The history of Maytag Corp can be divided into four stages: 1. at the turn of the century, pioneering period, F.L Maytag founded the company...
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... Table of Contents Introduction Strategic Profile and Case Analysis Situational Analysis General Environment Analysis Industry Analysis Competitive Environment Analysis Internal Analysis Identification of Environmental Opportunities and Threats and Firm Strengths and Weaknesses (SWOT Analysis) Strategy Formulation Strategic Alternatives and Evaluation Alternative Choice Strategic Alternative Implementation Action Items Action Plans Epilogue Conclusion Works Cited Charts and Graphs Appliance Industry Market Share Whirlpool's Financial Analysis Business Unit Revenues and Operating Profit Global Home Appliance Industry: Saturation Level by Region Demand and Market Growth Introduction Whirlpool Corporation is a global leader in home appliances. Whirlpool began as a family company in Michigan making wringer washers. In the past fifty years, Whirlpool has expanded from a domestic company with operations in the United States to a global company with operations in Asia, Europe, Latin America and North America. Whirlpool's great success can largely be attributed to its strategic actions. These strategic actions are a result of Whirlpool's vision, value creating objectives, shared values, and worldwide excellence system. Whirlpool Corporation has gradually built itself up through international expansion to be the leading appliance manufacturer and marketer in the world. It has gone to great lengths to...
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... Table of Contents Introduction Strategic Profile and Case Analysis Situational Analysis General Environment Analysis Industry Analysis Competitive Environment Analysis Internal Analysis Identification of Environmental Opportunities and Threats and Firm Strengths and Weaknesses (SWOT Analysis) Strategy Formulation Strategic Alternatives and Evaluation Alternative Choice Strategic Alternative Implementation Action Items Action Plans Epilogue Conclusion Works Cited Charts and Graphs Appliance Industry Market Share Whirlpool's Financial Analysis Business Unit Revenues and Operating Profit Global Home Appliance Industry: Saturation Level by Region Demand and Market Growth Introduction Whirlpool Corporation is a global leader in home appliances. Whirlpool began as a family company in Michigan making wringer washers. In the past fifty years, Whirlpool has expanded from a domestic company with operations in the United States to a global company with operations in Asia, Europe, Latin America and North America. Whirlpool's great success can largely be attributed to its strategic actions. These strategic actions are a result of Whirlpool's vision, value creating objectives, shared values, and worldwide excellence system. Whirlpool Corporation has gradually built itself up through international expansion to be the leading appliance manufacturer and marketer in the world. It has gone to great lengths to...
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