Ahp Case Study
Philip Taberer American Home Products Case
1. How much business risk does AHP face? How much financial risk would AHP face at each of the proposed levels of debt shown in case Exhibit 3? How much potential value if any can AHP create for its shareholders at each of the proposed levels of debt?
AHP runs four lines of business that all have relatively low risk about future demands for their products. In other words people demand the sorts of products they sell. What separates their success compared to other companies is their marketing excellence. AHP also run their business with low leverage, which adds value to overall low business risk. Risk aversion in general was stated as a central goal of AHP. The highlight how most of the co’s new products were acquired or licensed after their development by other firms or they were copies of new products introduced by competitors. This meant they avoided risky gambles on new products and used its market prowess to promote acquired products. They took advantage of their marketing clout to erode competitors.
The ratio of cash/total assets was around 23% in 1976 and rose to 28% in 1981 (according to figure 1), which meant that the firm had enough cash to finance operation costs.
Return on assets for AHP was also at a stable rate around 20% in 1981, which indicates its ability to cover operational costs by generating income. Another sign of low business risk.
b) Exhibit 3 illustrates how an increase in debt ratio for AHP is directly related to an increase in financial risk.
At actual levels in 1981 ROE= 33.8%; ROIC =33.4%
At 30% debt ROE= 51.5%; ROIC =38.3%
At 50% debt ROE = 69.2%; ROIC = 38.3%
At 70% debt ROE= 110.5%; ROIC= 38.3%
Exhibit 4 shows that AHP used 233 million $ of excess cash to repurchase stock on each proposed debt level and the remaining amount would be financed by debt. Therefore outstanding shares would decrease by 19.8
1. How much business risk does AHP face? How much financial risk would AHP face at each of the proposed levels of debt shown in case Exhibit 3? How much potential value if any can AHP create for its shareholders at each of the proposed levels of debt?
AHP runs four lines of business that all have relatively low risk about future demands for their products. In other words people demand the sorts of products they sell. What separates their success compared to other companies is their marketing excellence. AHP also run their business with low leverage, which adds value to overall low business risk. Risk aversion in general was stated as a central goal of AHP. The highlight how most of the co’s new products were acquired or licensed after their development by other firms or they were copies of new products introduced by competitors. This meant they avoided risky gambles on new products and used its market prowess to promote acquired products. They took advantage of their marketing clout to erode competitors.
The ratio of cash/total assets was around 23% in 1976 and rose to 28% in 1981 (according to figure 1), which meant that the firm had enough cash to finance operation costs.
Return on assets for AHP was also at a stable rate around 20% in 1981, which indicates its ability to cover operational costs by generating income. Another sign of low business risk.
b) Exhibit 3 illustrates how an increase in debt ratio for AHP is directly related to an increase in financial risk.
At actual levels in 1981 ROE= 33.8%; ROIC =33.4%
At 30% debt ROE= 51.5%; ROIC =38.3%
At 50% debt ROE = 69.2%; ROIC = 38.3%
At 70% debt ROE= 110.5%; ROIC= 38.3%
Exhibit 4 shows that AHP used 233 million $ of excess cash to repurchase stock on each proposed debt level and the remaining amount would be financed by debt. Therefore outstanding shares would decrease by 19.8