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American Home Products

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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 it reduced the risk of the company when the company face the short term problem on ability to generate profit, they don’t need to be much of a concern on the interest payment coverage and the debt payment ability. However, this already generated less return on capital as well as has limit ability to grow as the company need to invest in new drug patents. Moreover, when the company keep a lot...

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