Marriott Case Study

Background and Introduction

American Home Products Corporation (AHP) has been founded in 1860 at Philadelphia and is one of the largest pharmaceutical companies in the United State. At 1964, William F. Laporte took over as chief executive officer and his distinctive financial culture makes AHP become a company with tight financial control and almost zero debt financing.

Accompanied by its marketing expertise and conservatism business strategy, AHP has obtained a stable, consistent growth and profitable financial performance. Sales, earning and dividends of AHP have been increased consistently for 29 consecutive years. The outstanding management and performance also grant AHP a good reputation among institutional investors.

At 1981, William F. Laporte is getting close to his retirement and voices of changing AHP’s capital structure policy for bring greater value to shareholders have been raised by speculative analysts.

In this report, we will provide numerical analysis in how capital structure affects AHP’s financial performance, share price and company valuation. And provide a recommendation if AHP should accept recapitalization and the best capital reallocation, assuming stock repurchase by issuing debt and spending the cash reserved at $233 million.

Stock valuation

Is the stock price more or less “fair”?

By Gordon formula,

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In our calculation, the fair price of AHP should be around $29.55, while the market price is given at $30. The premium of the market price over the fair price may have some various reasons.

External Factors

Externally, the demand of the stock is slight higher than the supply. The investors are expecting the growth and strong future cash inflow of AHP. The shareholders may buy and hold the stocks for long-term investment.

Internal Factors

Internally, the brand name, stability and sophistical business network attract the investors and build up their loyalty. The high quality of management and professionals...