American Home Products Corporation - Capital Structure Decisions

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Presentation transcript:

American Home Products Corporation - Capital Structure Decisions Ramazan Sahin, Monika Słowik 2017

Agenda Company introduction Company performance Analysis of the risks related to debt Change proposal Company’s later action

History Founded in 1926 from combined resources of Sterling Products and Household Products

Product lines Prescription Drugs Packaged Drugs Food Products Houseware and Household Items

Description of the company Successful company with an inefficient financial structure End of the 1980, almost no debt and cash balance equal to 40% its net worth

“I just don’t like to owe money” - William F. Laporte AHP Chief Executive

Corporate Culture Authority centralized on the chief executive Frugality and tight financial control Conservatism and risk aversion Ranked last among drug companies by the analysts

Performance Performance between 1972-81

Capital Structure(shortly) Total Liabilites X Long term debts…….A Capital Owner Equity Structure Common Stock……..B Retained Earning…….C

The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Companies that use more debt than equity to finance assets have a high leverage ratio and an aggressive capital structure

Things to consider Business Risk Financial Risk Financial Leverage Bond Rating

Low Financial and Business Risk Financial Risk

Low Financial and Business Risk Growth in Sales ROE ROA Profit Margin Debt Ratio Debt to Equity

Debt-Equity Ratio Debt Ratio Degree of Financial Leverage (DFL)

High Finacial Leverage Advantages of high financial leverage Lower tax expense Adds value to company (EPS, DPS) Disadvantages of high financial leverage Higher interest

when the debt ration increases company pays less taxes.

INTEREST

Bond Ratings Debt ratio Actual 1981(%0.9) 30% of debt 50% of debt Times interest earned ratio (EBIT/interest) 415.13 17.50 10.50 7.50 Rating based on Moody's interest coverage medians Aaa-Aa A Baa Rating based on S&P's interest coverage medians AAA AAA/AA AA/A Synthetic rating AA

Low Financial Levarage Disadvantages of Low Financial Leverage Missing forgoing opportunies for future growth Advantages of Low Financial Leverage Low Risk Low interterest expense

Conclusion Which proposal rate is best for company ? What are the advantages and disadvantages of this rate ? 30-50% would be the best + adv and dis

Which proposal is best for company ? 30% debt ratio could be an appropriate choice

What to do with the money? Repurchase stocks R&D Other

Company was renamed to Wyeth in 2002 It was purchased by Pfizer in 2009 Nowadays operates under Nestle

Thank you for your attention!

Sources https://www.moodys.com/sites/products/DefaultResearch/2005700000436062.pdf http://pages.stern.nyu.edu/~adamodar/New_Home_Page/valquestions/syntrating.htm#_ftn1 http://hbswk.hbs.edu/archive/4769.html Interest coverage ratio – expand!