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American Home Product case

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Title: American Home Product case
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Subject: Business
Date: December 14, 2002
Length: 4 / 1092
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In terms of financial risk, it would increase significantly as the risk of additional debt is shifted to our stockholders. The following points are worth considering to illuminate potential financial risk: • Examining Exhibit 3, we can see the extent to which debt financing increases risk...
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At 30% debt, the firm is now liable for an additional $362.2 million, $612.9 million at 50% debt, and $863.7 million at 70% debt. • Additional debt contributes to the uncertainty of profit before taxes and EPS. In fact, in Exhibit 3, we can see pro forma estimates of before-tax profits declining due to greater interest expense as the debt ratio increases...
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