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

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

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

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

5. 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

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

7. 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

8. Performance
Performance between

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

10. 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

11. Things to consider Business Risk Financial Risk Financial Leverage
Bond Rating

12. Low Financial and Business Risk
Financial Risk

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

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

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

16. when the debt ration increases company pays less taxes.

18. INTEREST

19. 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

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

21. 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

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

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

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

25. Thank you for your attention!

26. Sources
Interest coverage ratio – expand!