fnce203case4presentation-110316114306-phpapp01
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COMPANY CASE INTRO
A H P C A P I T A L S T R U C T U R E
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
AHPs Current Business,
Culture & GrowthOne of the most common business platitudes is that a corporations
primary mission is to make money for its stockholders ... At AmericanHome, these ideas are a dogmaticway of life.
4
LINES OF BUSINESS:RX DRUGS
OTC DRUGS
FOOD
HOUSEHOLD
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
AHPs Current Business,
Culture & GrowthOne of the most common business platitudes is that a corporations
primary mission is to make money for its stockholders ... At AmericanHome, these ideas are a dogmaticway of life.
4
LINES OF BUSINESS:RX DRUGS
OTC DRUGS
FOOD
HOUSEHOLD5
$ HUNDRED:MINIMUM EXPENDITURE
WHERE CEO APPROVALREQUIRED
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
AHPs Current Business,
Culture & GrowthOne of the most common business platitudes is that a corporations
primary mission is to make money for its stockholders ... At AmericanHome, these ideas are a dogmaticway of life.
4
LINES OF BUSINESS:RX DRUGS
OTC DRUGS
FOOD
HOUSEHOLD5
$ HUNDRED:MINIMUM EXPENDITURE
WHERE CEO APPROVALREQUIRED
11 2
% AVG GROWTHRATE FROM 1973-1981
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
AHPs Current Conservative
Capital Structure1 9 8 0 B A L A N C E S H E E T
TOTAL DEBT
$13.9 MM
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
AHPs Current Conservative
Capital Structure1 9 8 0 B A L A N C E S H E E T
TOTAL DEBT
$13.9 MM
TOTAL DEBT/TOTAL CAPITAL .9%
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
AHPs Current Conservative
Capital Structure1 9 8 0 B A L A N C E S H E E T
TOTAL DEBT
$13.9 MM
TOTAL DEBT/TOTAL CAPITAL .9%
INTEREST COVERAGE RATIO 436.6x
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
AHPs Current Conservative
Capital Structure1 9 8 0 B A L A N C E S H E E T
TOTAL DEBT
$13.9 MM
TOTAL DEBT/TOTAL CAPITAL .9%
INTEREST COVERAGE RATIO 436.6x
* W A R N E R - L A M B E RT S I N T E R E S T C O V E R AT E
R AT I O I S 5 . 0 x , W I T H B O N D S R A T E D A A A / A A .
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
AHPs Current Conservative
Capital Structure1 9 8 0 B A L A N C E S H E E T
TOTAL DEBT
$13.9 MM
TOTAL DEBT/TOTAL CAPITAL .9%
INTEREST COVERAGE RATIO 436.6x
EVALUATE IMPACT OF 30% , 50% , AND70% DEBT OF TOTAL CAPI TAL
* W A R N E R - L A M B E RT S I N T E R E S T C O V E R AT E
R AT I O I S 5 . 0 x , W I T H B O N D S R AT E D A A A / A A .
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
APV Calculations Given
Different Capital Structures
BASE CASE NPV {found FCF through growing perpetuityRaderived from unlevering Re
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
APV Calculations Given
Different Capital Structures
BASE CASE NPV
+ INTEREST TAX SHIELD
{found FCF through growing perpetuityRaderived from unlevering Re
{
foundimplied tax rate2 different assumptions of debt
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
APV Calculations Given
Different Capital Structures
BASE CASE NPV
+ INTEREST TAX SHIELD
+ COSTS OF FNCL DISTRESS
{found FCF through growing perpetuityRaderived from unlevering Re
{
foundimplied tax rate2 different assumptions of debt
{estimated to be ~ 20%of firm value
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
APV Calculations Given
Different Capital Structures
BASE CASE NPV
+ INTEREST TAX SHIELD
+ COSTS OF FNCL DISTRESS
{found FCF through growing perpetuityRaderived from unlevering Re
{
foundimplied tax rate2 different assumptions of debt
{estimated to be ~ 20%of firm value
A D J U S T E D P R E S E N T VA L U E
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
APV Calculations Given
Different Capital Structures
BASE CASE NPV
+ INTEREST TAX SHIELD
+ COSTS OF FNCL DISTRESS
{found FCF through growing perpetuityRaderived from unlevering Re
{
foundimplied tax rate2 different assumptions of debt
{estimated to be ~ 20%of firm value
A D J U S T E D P R E S E N T VA L U E
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ASSUMPTIONS MADE
A H P C A P I T A L S T R U C T U R E
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
We assumed the sales growthrate, and thus the FCF firm
growth rate would be consistentfrom the previous 9-year period.
_ From these assumptions, wedeveloped various Ra.
_ From a normal distrib, the P
(FCF
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
Assumption 1:
High Growth Rates ~ 8.8%-11.2%We assumed the sales growthrate, and thus the FCF firm
growth rate would be consistentfrom the previous 9-year period.
- From these assumptions, wedeveloped various Ra.
- From a normal distrib, the P
(FCF
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
Assumption 2:
2 Interpretations of Debt
1
D E B T S TAY S C O N S TA N T given amount of debt stays stable throughoutthe years as 30-70% of BV81leverage:
interest tax shield = D x T*
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
Assumption 2:
2 Interpretations of Debt
1
D E B T S TAY S C O N S TA N T given amount of debt stays stable throughoutthe years as 30-70% of BV81leverage:
interest tax shield = D x T*
2
TA R G E T L E V E R A G E R AT I O calculated debt to market value ratio in 1981 &maintained this target leverage ratio:
interest tax shield = using waccme
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
2
TA R G E T L E V E R A G E R AT I O calculated debt to market value ratio in 1981 &maintained this target leverage ratio:
interest tax shield = using waccme
Assumption 2:2 Interpretations of Debt
1
D E B T S TAY S C O N S TA N T given amount of debt stays stable throughoutthe years as 30-70% of BV81leverage:
interest tax shield = D x T*
DEBT CONSTANT
CAPITAL STRUCTURE
Growth Rate
376.1 626.8 877.6
5%
96 161 225
7%
96 161 225
9%
96 161 225
11%
96 161 225
13%
96 161 225
15%
96 161 225
17%
96 161 225
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
1
D E B T S TAY S C O N S TA N T given amount of debt stays stable throughoutthe years as 30-70% of BV81leverage:
interest tax shield = D x T*
Assumption 2:2 Interpretations of Debt
DEBT CONSTANT
CAPITAL STRUCTURE
Growth Rate
376.1 626.8 877.6
5%
208.70 359.59 521.12
7%
216.90 373.96 542.32
9%
225.27 388.64 564.02
11%
233.81 403.66 586.22
13%
242.53 418.99 608.92
15%
251.43 434.65 632.14
17%
260.51 450.64 655.86
2
TA R G E T L E V E R A G E R AT I O calculated debt to market value ratio in 1981 &maintained this target leverage ratio:
interest tax shield = using waccme
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
Assumption 3:Minimal Impact of Other Effects
AGENCY
CONFL ICTS
risk-shifting = 0stable cash flows, shareholders dont choose riskierNPV projects{
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
Assumption 3:Minimal Impact of Other Effects
AGENCY
CONFL ICTS
risk-shifting = 0stable cash flows, shareholders dont choose riskierNPV projects
manager risk aversion = 0corporate culture already risk-averse butcompany still posts strong returns{
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
Assumption 3:Minimal Impact of Other Effects
AGENCY
CONFL ICTS
risk-shifting = 0stable cash flows, shareholders dont choose riskierNPV projects
manager risk aversion = 0corporate culture already risk-averse butcompany still posts strong returns
FCF problems = 0/+managerial philosophy of frugality and tightfinancial control
{
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
Assumption 3:Minimal Impact of Other Effects
AGENCY
CONFL ICTS
risk-shifting = 0stable cash flows, shareholders dont choose riskierNPV projects
manager risk aversion = 0corporate culture already risk-averse butcompany still posts strong returns
FCF problems = 0/+managerial philosophy of frugality and tightfinancial control
ASYMMETRIC
INFO
shift from Pecking Order = 0/+use debt to buy back equity, which can signal thatmanagers believe firm is undervalued
{
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FINAL RECOMMENDATIONS
A H P C A P I T A L S T R U C T U R E
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
Recommendation for AHPsCapital Structure
A M E R I C A N H O M E P RO D U C T S
C A N I N C R E A S E I T S
S H A R E H O L D E R S R E T U R N S
B Y TA K I N G O N M O R E D E B T,
E V E N U P TO 7 0 % B O O K
VA L U E L E V E R A G E .
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
Select Financial Data AfterCapital Structure Shift
FIRM VALUE
$4447 MM
LEVERAGE
STOCK PRICE
CURRENT
FIRM VALUE
$5597 MM
LEVERAGE
STOCK PRICE
RECOMMENDED
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
Select Financial Data AfterCapital Structure Shift
FIRM VALUE
$4447 MM
LEVERAGE $13.9 MM
STOCK PRICE
CURRENT
FIRM VALUE
$5597 MM
LEVERAGE ~15% market
value
STOCK PRICE
RECOMMENDED
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[INTRODUCTION] [ASSUMPTIONS] [RECOMMENDATIONS]
Select Financial Data AfterCapital Structure Shift
FIRM VALUE
$4447 MM
LEVERAGE $13.9 MM
STOCK PRICE
$30/share
CURRENT
FIRM VALUE
$5597 MM
LEVERAGE ~15% market
value
STOCK PRICE
$39.70/share
RECOMMENDED
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QUESTIONS?
T H A N K Y O U !
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