American Home Product

1. (1) How much business risk does American Home Products face?

與同性質產業相比，AHP公司所面臨的business risk相對較低，因為(嚴格的財務控制為公司節省許多不必要的固定成本

(AHP公司模仿競爭對手的產品並以更優越的方法行銷產品

( AHP公司避免大量的R&D支出與新產品介紹

(產品多樣化經營

(2) How much financial risk would American Home Products face at each of the proposed levels of debt shown in case Exhibit 3?

Financial risk ＝ Business risk × D/E ratio

| |Current |30% Debt |50% Debt |70% Debt |

|Debt Level($) |13.9 |376.1 |626.8 |877.6 |

|Equity |1472.8 |877.6 |626.9 |376.1 |

|D/E |0.0094 |0.4286 |0.9998 |2.3334 |

| |Financial Risk |

|30% Debt |約 Business risk的一半 |

|50% Debt |等於 Business risk |

|70% Debt |約 Business risk的2.3倍 |

(3) How much potential value, if any, can American Home Products create for its shareholders at each of the proposed levels of debt?

Current Aggregate market value of common stock＝$4,665

| |Value |

|30% Debt |4665.0＋((376.1－13.9)×0.48)＝$4838.9 |

|50% Debt |4838.9＋((626.8－376.1)×0.48)＝$4959.2 |

|70% Debt |4959.2＋((877.6－626.8)×0.48)＝$5079.6 |

2. (1) What capital structure would you recommend as appropriate for American Home Products?

建議使用30%debt level的資本結構，因為此資本結構既能增加價值亦將公司節省、保守的文化納入考量，而且也與競爭公司(Warner-Lambert)的負債比率更相符。

(2) What are the advantages of leveraging this company? the disadvantages?...