Fpl and American Home Products

In: Business and Management

Submitted By john89
Words 266
Pages 2
Questions for the HBS case on “American Home Products (AHP) Corporation”

1. How much business risk does AHP face? How much financial risk would AHP face at each of the proposed levels of debt shown in case Exhibit 3? How much potential value if any can AHP create for its shareholders at each of the proposed levels of debt?

2. What capital structure would you recommend as appropriate for AHP? What are the advantages of leveraging this company? the disadvantages? How would leveraging up affect the company's taxes? How would the capital markets react to a decision by the company to increase the use of debt in its capital structure?

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

4. In view of AHP's unique corporate culture, what arguments would you advance to persuade Mr. Laporte or his successor to adopt your recommendation?

Due date for Dividend Policy at FPL Case: 07/22/2013

Questions for the case “Dividend Policy at FPL Group, Inc.”

1. Why do firms pay dividend? What, in general, are the advantages and disadvantages of paying cash dividends?



2. What are the most important issues confronting the FPL Group in May 1994?

3. From FPL’s perspective, is the current pay out ratio appropriate? Would a higher pay out ratio be more appropriate? A lower pay out ratio?

4. From an investor perspective, is FPL’s pay out ratio appropriate?

5. As Kate Stark, what would you recommend regarding investment in FPL’s stock----buy, sell, or hold?…...

Similar Documents

Fpl and American Home Products

...Questions for the HBS case on “American Home Products (AHP) Corporation” 1. How much business risk does AHP face? How much financial risk would AHP face at each of the proposed levels of debt shown in case Exhibit 3? How much potential value if any can AHP create for its shareholders at each of the proposed levels of debt? 2. What capital structure would you recommend as appropriate for AHP? What are the advantages of leveraging this company? the disadvantages? How would leveraging up affect the company's taxes? How would the capital markets react to a decision by the company to increase the use of debt in its capital structure? 3. How might AHP implement a more aggressive capital structure policy? What are the alternative methods for leveraging up? 4. In view of AHP's unique corporate culture, what arguments would you advance to persuade Mr. Laporte or his successor to adopt your recommendation? Due date for Dividend Policy at FPL Case: 07/22/2013 Questions for the case “Dividend Policy at FPL Group, Inc.” 1. Why do firms pay dividend? What, in general, are the advantages and disadvantages of paying cash dividends? 2. What are the most important issues confronting the FPL Group in May 1994? 3. From FPL’s perspective, is the current pay out ratio appropriate? Would a higher pay out ratio be more appropriate? A lower pay out ratio? 4. From an investor perspective, is FPL’s pay out ratio appropriate? 5. As Kate Stark, what would you......

Words: 266 - Pages: 2

American Home Product

...        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...

Words: 1025 - Pages: 5

Dividend Policy at Fpl

...Nithin Geereddy 80842082 Corporate Finance Tuesday Section Dividend Policy at FPL Group, Inc Case Q1) Why do firms pay dividends? What, in general, are the advantages and disadvantages of paying cash dividends? Ans: The purpose of dividend payouts is to return wealth back to the company shareholders instead of using it for operations. Dividends provide investors with regular income from their investments and act as an incentive to continue or start investing in the company.  The company’s share price will drop in relation to the dividend payout, because a company’s value has not risen, they are just allocating money differently. All dividends must be declared by the board of directors and are taxable as income to the recipients. Taking into account the many theories of dividend policy including the Dividend Irrelevance, we can conclude that firms should pay out as dividends “any cash flow that is surplus after the firm has invested in all available positive net present value projects.” In some cases, this may be a way of signaling that the company is financially stable and capable of fulfilling dividend obligations. It may also be a way for companies to mitigate agency problems when they have excess cash. Advantages of paying cash dividends include: * A means of distributing excess cash and...

Words: 2141 - Pages: 9

Dividen Policy Fpl

...Group Assignment 4 Dividend Policy at FPL Group, Inc. 1. Why do firms pay dividend? What, in general, are the advantages and disadvantages of paying cash dividends? The sole purpose of dividends per se is to return wealth back to the shareholders of a company. Shareholders take risk and invest in company and the dividends are rewards for commitment, trust and risk-taking. Dividends transfer economic value from the company to the shareholders instead of the company using the money for operations. Often in case of more established and mature companies that are growing more slowly they are not “hungry” for cash and to reward the shareholders by sharing the wealth those companies pay dividends. Similarly paying dividends often is a sign of sound business model and stability of company at large. Both paying and not paying dividends and cash dividends have their own respective pros and cons as presented below: Advantages: 1. Dividends may appeal to investors who desire stable cash flow but do not want to incur the transaction costs from periodically selling shares of stock. 2. Behavioral finance argues that investors with limited self-control can meet current consumption needs with high dividend stocks while adhering to the policy of never dipping into principal. 3. Managers, acting on behalf of stockholders, can pay dividends in order to keep cash from bondholders. 4. The board of directors, acting on behalf of stockholders, can use dividends to reduce the cash...

Words: 1039 - Pages: 5

Product Assessment of Home Phone Service

... Product Assessment of Home Phone Service LaShanta McDonald-Chambers MKT 100 February 10, 2013 Professor Agnieszka Sheriff Product Assessment Product marked for “obsolesces” in the U.S. that will be discussed in this case is Home Phone Service. For many years, this product has been used by various people in this country. However with the increase of the amount and quality of technological products, more sophisticated products serving similar purposes have entered the market, therefore, making the Home Phone Service obsolete. This means that the home phone service is no longer in demand (Federal Communications Commission, 2013). The use of this product significantly has dropped in the U.S. because many people currently use more efficient and portable communication products. In terms of its latest target market demographics using U.S. Census Data, home phone services are commonly used by housewives compared to other categories of people who prefer to use cell phones regardless of age and sex. Consider the table below. Table 1: Home Phone Users (Millions) Year | Jan 06 | Dec 06 | Jan 07 | Dec 07 | Jan 08 | Dec 08 | Jan 09 | Dec 09 | Jan 10 | Dec 10 | Jan 11 | Dec 11 | Users | 142.3 | 138.2 | 134.6 | 129.7 | 124.6 | 118.5 | 112.7 | 107.0 | 102.4 | 97.5 | 93.4 | 89.4 | Source: Federal Communications Commission. Local Telephone Competition: Status as of December 31, 2011. FCC Report. This report shows a decline in the use of home phones in the United...

Words: 1576 - Pages: 7

Fpl Case Study

...Executive Summary Statement of the Problem On May 5, 1994 Kate Stark an electric utility analyst at First Equity Security Corporation was faced with a decision involving Florida Power Light Company, (FP&L). FP&L is a strong utility company that has posted increased dividend returns over the last 47 years. The average return from 1984-1993 is $ 2.20. In the previous three weeks FP&L stock was issued a “hold” recommendation by Ms. Stark based on the assumption that its dividend payout would either increase, or remain at $ 2.48. Today however, Merrill Lynch downgraded FP&L stock based on management’s concern with excessive pricing of stock in an industry facing increasing risk. As a consequence the stock dropped by 6% and now Kate must decide to keep the original “hold” recommendation or to make a revision to “buy,” or “sell.” Discussion FPL is currently unprepared for the final stages of electric deregulation. A possible solution for FP&L to remain competitive is to grow out of its payout ratio by slowing the dividend growth rate to 1% starting in 1995. A 1% growth rate would lower FP&L’s payout ratio as long as the earnings increased faster than the shares. The current payout ratio for 1994 is approximately 107%. Industry average for 24 major companies is 80%. The 1% fixed rate would be beneficial to FP&L because by 1997 the ratio would be at 80% and at 79% by 1998. The net effect would mean more cash flow to handle its operating expenses and maturing debt. Conversely...

Words: 569 - Pages: 3

American Home

...EXECUTIVE SUMMARY COMPANY 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...

Words: 1736 - Pages: 7

American Home Products

...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...

Words: 651 - Pages: 3

American Home Products

...American Home Products Corporation 1. 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? A combination of business risk and financial risk shows the risk of an organization’s future return on equity. Business risk is related to make a firm’s operation without any debt, whereas financial risk requires that the firm’s common stockholders make a decision to finance it with debt. a) American Home Products has been operating on four main lines of business that are less uncertainty about product demand; for example, one of its business lines is food products because whenever people buy foods. It means that AHP’s business risk is low. As mentioned above, if a firm does its operation activities regularly without leverage, it means that its business risk 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 Assets | 2,588.5 | 2,370.3 | 2,090.7 | 1,862.2 | 1,611.3 | 1,510.9 | Proportion | 28.2% | 25.0% | 23.6% | 23.4% | 20.0...

Words: 1742 - Pages: 7

Fpl Case Study

...FPL Case Report FPL Group, Florida’s largest electric utility company, announced to cut its dividend for the first time in 47 years in 1994 has shocked the public. An analyst named Kate Stark was frustrating about whether she should revise her advice about her current “hold” recommendation on FPL’s stock. Another critical issue FPL facing is that whether or not to change its current pay out ratio based on the growing competitiveness in the utility industry. According to course notes and the textbook, dividends are a share of a company’s profits distributed to shareholders. Shareholders are the owners of the firm and dividends are their share of the firm’s profits. The advantage of paying dividends is that the dividend signals the firm’s financial stability. Paying dividends not only encourage current shareholders to retain their investment in the firm, but also increase the firm’s attractiveness to potential investor. The disadvantage of paying dividends is that the firm loss opportunities of further growing by having less liquid cash in hands. Paying a cash dividend may reflect the firm’s current success, but it weakens the firm’s ability to expand. The firm may decide to pay dividends later or reduce dividends amount to get the growth opportunity. Another disadvantage of paying cash dividends would be they are not tax deductible. There are two reasons for FPL’s dividends cut. First is because of the recent deregulation trend in the utility industry and second is the...

Words: 665 - Pages: 3

American Home Products Corporation

...1. A combination of business risk and financial risk shows the risk of an organization’s futurereturn on equity. Business risk is related to make a firm’s operation without 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...

Words: 853 - Pages: 4

Home

...Home    “When I think of home, I think of a place, where’s there’s love overflowing  I wish I was home, I wish I was back there, with the things I’ve been knowing” ­ Stephanie Mills,  “Home”    When I think of home, I have to think what is it actually? Is it my birthplace or where I spent most  of my upbringing? The small rural town, that seats in the southeastern part of North Carolina.  Elizabethtown, or better yet (E­town) to some but to me now it’s just a place I pass through  when time permits to pay my respects to those I knew; as well as lay flowers at my  grandmother’s gravesite.    Could home be the first place I moved to upon leaving the great state of North Carolina,  Tacoma Washington? Some could not get pass the grey skies, that continues to fill the  environment with drizzle so you require that cup of Seattle’s Best. I loved it there, and consider  it my 2nd home of choice.      Could home for me, be the Hampton Roads area of Virginia? Newport News to be exact, the  first place I was stationed after enlisting into the Army. Lovely area, the beaches was great in  the summer however the traffic on a peninsula was ugly year round. Not to mention the  hurricane season.    I can go on about the many places I’ve had to consider home, however I tend to feel like the  crab, Cancer (4th sign of the zodiac). What I mean is no matter, the area or new, unfamiliar  environment, I can always retreat to my shell, in which I carry. My home is not so much......

Words: 358 - Pages: 2

Dividen Policy at Fpl

...Dividend Policy at FPL 1. What are the major uses and sources of funds for FPL? • Major Uses – Operating expenses – Capital and nuclear fuel expenditures o In 1994, FPL budgeted $6.6 billion in expansion cap ex over the next five years in order to meet projected demand. Projects included building a new transmission line, refurbishing the oldest generating plant, improving operating efficiency at all plants, and buying a majority share in a coal burning plant owned by The Southern Company – Retirement of long-term debt and preferred stock – Dividends on Common Stock – Acquisitions o From 1985 to 1988, FPL attempted to diversify into higher growth businesses and made four major acquisitions (Colonial Penn Life Insurance, CBR Information Group and Turner Foods Corp) as well as established a real estate development subsidiary (Alandco) and an alternative energy development subsidiary (ESI Energy) • Major Sources – Operating revenues – Divestitures of non core operations o In 1991, FPL sold Colonial Penn o In addition, FPL was trying to sell Telesat Cablevision and Alandco – Issuance of FPL debt, common and preferred stock What is the industry structure and business risk? • Electric Utilities Industry Structure – Regulated industry historically dominated by monopolies and vertically integrated suppliers – Beginning in 1978, deregulation has been weakening the...

Words: 1038 - Pages: 5

Fpl Case

...Question 1 - Should Ms. Stark Revise her recommendation to her clients? Ms Stark currently has a HOLD recommendation on the FPL stock. Such a recommendation was developed on the analysis of the company’s fundamentals and on the forecasted future cash flows that the company will generate in the following years. As an equity research analyst, Ms Stark must have considered all the factors that can impact future cash flows and has provided a medium to long term price target and corresponding HOLD recommendation. Based on the financial data available in the exhibits, FPL is not facing any financial trouble, in fact, when looking at the financial projections for the next five years, it is clear that analysts expect an increase in revenues coupled with a reduction of capital expenditures which will lower the cash need for the following years. Accordingly, the change in the pay-out ratio is not a decision made to secure the financial survival of the company and therefore should not affect the enterprise and equity value. In fact, the financial projections already include the real factors that could affect future cash flows and equity value: (i) retail wheeling, (ii) litigations, or (iii) higher interest expenses which are relevant to the future and might negatively impact the company. In conclusion, Ms Stark should maintain the recommendation on HOLD, and base this decision on the fundamentals of the company rather than on the short term price movements due to rumors on...

Words: 979 - Pages: 4

Fpl Group

... of the stock. Another disadvantage is that by paying dividends to shareholders the company may have to issue more common stock if retained earnings or cash is low. In addition, cash dividends to shareholders are taxed as income for them so after the tax is taken out there may not be a capital gain. Also, instead of paying out cash dividends the company could be using the money to reinvest in the company, which would hopefully help the company and shareholders by increasing the stock price. 2. What are the most important issues confronting the FPL Group in May 1994? One of the most important issues confronting the FPL group in May 1994 was their decision regarding their dividend payout ratio. This is partially due to the deregulation of the utility industry, which could bring serious competition to the FLP group. Also, another important issue is the 22% decline in the S&P’s rating of the Electric Utility Index. In addition, from September 1993 to May 1994, FLP’s stock price fell by 19.6%. although the FPL group performed relatively well in 1993, there are still concerns regarding the company’s interest expense, which had a 140 basis point increase in the long term interest rates since September 1993. As there have been changes in the competitive market place, the FLP Group will have to address these issues in order to progress as a company. 3. From FPL’s perspective, is the current payout ratio appropriate? Would a higher payout ratio be more appropriate? A...

Words: 1232 - Pages: 5