Table of Contents Introduction 3 Background 3 Culture of the Business 3 Stages of Development 3 Core problem 4 analysis and options 4 Risk analysis 5
First: The Business Risk 5
Second: The Financial Risk 6
Other kinds of risk: 7 Financial Analysis 7
The WAAC 7 Ratio Analysis 11 Recommendations: 12 References: 12
In 1981, AHP had reached sales of more than $4 billion by producing 1,500 marketed brands in 4 different kind of business; prescription drugs, packaged drugs, food products, and housewares and households products. Moreover, AHP is known to be the largest and profitable business in prescription of drugs; …show more content…
Hence, increasing debt will not form a big obstacle for the corporation. 4. Managerial Conservatism or Aggressiveness: previously, the company's the management style was very conservative and centralized. However, with the new change in the management we can expect that the management style will eventually change and a more aggressive approach will be adapted.
Any corporation faces a different number of risks during its operating life. However, in capital structural decisions two types of risks are usually the most important and focused on. These two types are: Business Risk and Financial Risk.
We will be analyzing these risks before and after the assumed change in capital structure in order to attain the optimal capital structure for American Home Products Corporation.
First: The Business Risk
As previously mentioned it is the risk that arises from the firm operation if it used no debt in its capital structure. Thus American Home Product Corporation now faces business risk only. In order to calculate business risk before and after the change in the Debt ratio we must determine the return on invested capital (ROIC). * Calculating Business Risk: 1. Before the Debt Ratio:
ROIC = ROE = 33.745% (see the Ratio Analysis). 2. After The Debt Ratio: The Debt Ratio | 30% Debt | 50% Debt | 70% Debt | Net Income | 452.1 | 433.9 | 415.6 | After Tax Interest PMT