American Home Products

Actual 1981 30% debt to total capital 50% debt to total capital 70% debt to total capital

Return on Equity 33.8% 51.5% 69.2% 110.5%

Time interest earned 415.13x 17.49x 10.5x 7.5x

Book value / share $9.5 $6.5 $4.9 $3.2

Earnings available to security holders $499.6 m $504.8 m $521.7 $538.5 m

Net profit margin 0.12 0.11 0.11 0.10

Price / earnings ratio 9.43x - - -

Stock price $30 $31.40 $32.16 $33

Taxes $455.2 m $417.4 m $400.5 m $383.7 m

Earnings / share $3.18 $3.33 $3.41 $3.49

Dividend / share $1.90 $2 $2.04 %2.101. Return on Equity (ROE):

As we noticed that the ROE increased in these different capital structures and reached the highest ratio in 70% debt (110.5%). As the debt ratio increase, the ROE increases which indicates how profitability the firm is utilizing shareholder’s funds.2. Time interest earned (TIE):

It indicates the ability of the firm to cover interest expenses. We noticed that this ratio has decrease to reach the lowest in 70% debt (7.5x). Although the interest coverage is lo in 70% debt, it is higher than the interest coverage of Warner Lambert Company. This shows that the interest coverage with 70% debt of AHP is high compared to the industry. This ratio is highly related to bond rating and market’s assessment of risk and to be graded AAA, AA this ratio have to be above 4. In case of AHP with 70% debt the coverage ratio is 7.5 so they will still have AAA bond rating.

3. Earnings available to security holders:

It is higher in 70% debt ($538.5m) than in 30%, 50%, that indicates that even though they have high debt, they have enough earnings to cover the debt and distribute dividends.

4. Price / earnings:

We have calculated this ratio to calculate the stock price. We noticed that the stock price was increasing in the 4 alternatives capital structure and reached the highest ($33) value in 70% debt although the book value was the lowest ($3.2) this means that the company, in this strategy, is maximizing the value of the stock.

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