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I Want This Paper

In:

Submitted By lawrenceayoub
Words 377
Pages 2
. How much business risk does AHP face? Stable annual growth (10~15%) and profit margin (11~12%). Overall low-risk investments; ‘proven’ formulas instead of R&D. AAA Bond Rating. (EBIT 1981 / EBIT 1980) / % increase in sales. (954,8 / 857,5) / (4131,2 / 3798,5) = 1,02 2. How much financial risk would AHP face at each of the three proposed levels of debt shown in exhibit 3? DFL = % change EPS / % change EBIT = 1,12 / 1,11 = 1,009 Higher DFL means higher EPS variability 0% 1 30% 1,06 50% 1,1 70% 1,15

Debt to Capital = total debt / net worth Higher DtC ratio means higher risk

0% 0,009

30% 0,428

50% 0,99

70% 2,33

3. How much potential value, if any, can AHP create for its shareholders at each of the three proposed levels of debt? EPS goes up as % of debt goes up ($3.18 - $3.49) 0% $3.18 30% $3.33 50% $3.41 70% $3.49

Dividends rise

0% $1.90

30% $2.00

50% $2.04

70% $2.10

4. What capital structure would you recommend as appropriate for AHP? To determine the ‘debt capacity’ of a firm: EBIT/Interest Current: 954.8/2.3 = 415 Debt @ 30%: 922.2/52.7 = 17.5



5. 6. 7.

8.

9.

10.

Debt @ 50%: 922.2/87.8 = 10.5 Debt @ 70%: 922.2/122.9 = 7.5 All are great, so need to look at more figures What are the advantages of leveraging AHP? Access to additional capital • Tax shield – debt is tax deductible • Increase in shareholder value • Increase in EPS • Increase in Dividends What are the disadvantages? a. Higher risk How would leverage up affect the company’s taxes? a. As debt goes up, so do the tax shield benefits How would the capital markets react to a decision by the company to increase the use of debt in its capital structure? a. The market will expect higher return. How much might AHP implement a more aggressive capital structure policy? a. They are becoming more risky b. They are separating from the grip of the CEO (who will

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