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With the retirement of AHP's CEO there is an opportunity to change the capital structure of the firm by adding some debt. The issue is should debt be added and, if so, how much debt should be added.
Member rating: No Rating | Words: | Submitted: Sun Nov 14 2004
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American Home Products (AHP) is a capital structure case. For the purpose of this analysis it is assumed that AHP currently has no debt. In other words it is an "unlevered" company. The focus of this case is that with the retirement of AHP's CEO there is an opportunity to change the capital structure of the firm by adding some debt. The issue is should debt be added and, if so, how much debt should be added. Four options will be analyzed: 0%, 30%, 50%, and 70%. Currently, due to the lack of debt, this firm only faces operating risk as opposed to financial risk. AHP has a solid five year compound annual growth rate in both earnings and dividends per share of 12.4% and 13.6% respectively. This compares favorably to a proxy company, Warner-Lambert, where the five year compound annual growth rate in both earnings and dividends per share was...
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