Download - American Home Products
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Capital Restructuring Analysis
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CEO Retirement Increase in Agency cost of new management
team Opinion of some analysts that AHP could
maximize their cash holdings through leverage
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No change to capital structure
Increase leverage to 30% debt ratio
Increase leverage to 50% debt ratio
Increase leverage to 70% debt ratio
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No change to debt ratio: Keep negative tax shield from taxable interest
(111.8M) 30% debt ratio:
Lose negative tax shield and gain 173.9M tax shield Net tax shield = 285.7M
50% debt ratio: Lose negative tax shield and gain 294.2M tax shield Net tax shield = 406.0M
70% debt ratio: Lose negative tax shield and gain 414.6M Net tax shield = 526.4M
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Increasing the debt ratio creates a tax shield, increasing the value of the firm the stock price
No change to debt ratio: $30/share
30% debt ratio: $31.80/share
50% debt ratio: $32.60/share
70% debt ratio: $33.40/share
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Increasing the debt ratio has potential to affect the bond rating based on the ratio of debt to market value and interest coverage
No change to debt ratio: 0.3%, 415.13, AAA
30% debt ratio: 7.1%, 17.5, AAA/AA
50% debt ratio: 11.0%, 10.5, AAA/AA
70% debt ratio: 14.5%, AA/A
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Leverage to 70% debt ratio
Maximizes shareholder value Mitigates risk of increase in Agency Cost Financial risk from increased interest expense offset
by AHP’s inherently risk-averse strategy Potential downgrading in bond rating to AA/A will
still lead to a healthy bond market