You are brought in by American Home Product's management to consult with them on whether or...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
You are brought in by American Home Product's management to consult with them on whether or not any of the debt recapitalization plans outlined in the case should be pursued. The four possibilities are (a) do nothing, (b) repurchase $595.2 million in stock, (c) repurchase $845.9 in stock, and (d) repurchase $1096.7 million in stock. Assume that for all of the repurchase plans the firm uses $233.0 million in cash that it currently holds and raises the additional funds needed from a debt issue. The data in exhibit 3 labeled actual 1981 data should be considered a forecast for 1981 assuming the company takes on no additional debt. You may need to make some additional assumptions in your analysis. Clearly explain what assumptions you are making and your justification for these assumptions. Finally, though the case mentions exhibit 4, it is in fact superfluous (and in some cases wrong). We will show why! 1. American Home Products would like to have an estimate of the change in their stock price if they announce they are adopting one of these recapitalization plans. Given the benefits of debt financing and distributing excess cash, what do you predict as the change in stock price for each of the recapitalization plans? 2. Do you see any non-tax costs or benefits associated with leveraging up the company under any of the proposed recapitalizations? Clearly explain your answer. 3. Recommend one of these plans to Mr. Laporte. Sell your call! You are brought in by American Home Product's management to consult with them on whether or not any of the debt recapitalization plans outlined in the case should be pursued. The four possibilities are (a) do nothing, (b) repurchase $595.2 million in stock, (c) repurchase $845.9 in stock, and (d) repurchase $1096.7 million in stock. Assume that for all of the repurchase plans the firm uses $233.0 million in cash that it currently holds and raises the additional funds needed from a debt issue. The data in exhibit 3 labeled actual 1981 data should be considered a forecast for 1981 assuming the company takes on no additional debt. You may need to make some additional assumptions in your analysis. Clearly explain what assumptions you are making and your justification for these assumptions. Finally, though the case mentions exhibit 4, it is in fact superfluous (and in some cases wrong). We will show why! 1. American Home Products would like to have an estimate of the change in their stock price if they announce they are adopting one of these recapitalization plans. Given the benefits of debt financing and distributing excess cash, what do you predict as the change in stock price for each of the recapitalization plans? 2. Do you see any non-tax costs or benefits associated with leveraging up the company under any of the proposed recapitalizations? Clearly explain your answer. 3. Recommend one of these plans to Mr. Laporte. Sell your call!
Expert Answer:
Answer rating: 100% (QA)
Estimate of the Change in Stock Price with Recapitalization Plans Debt recapitalization could potentially increase the stock price if the market perceives that the increased debt is being used efficie... View the full answer
Related Book For
Smith and Roberson Business Law
ISBN: 978-0538473637
15th Edition
Authors: Richard A. Mann, Barry S. Roberts
Posted Date:
Students also viewed these accounting questions
-
A selective college would like to have an entering class of 900 students. Because not all students who are offered admission accept, the college admits more than 900 students. Past experience shows...
-
You are brought in as: a) a corporate governance consultant or b) a business ethics consultant by HPs CEO. What recommendations would you give the new CEO, Meg Whitman? How would you go about...
-
If you are brought in as Sandras outside forensic accountant, what advice would you give her? Which employees could be stealing inventory? Describe one or two possible schemes applicable to this...
-
Staircase Equipment Company uses a job order cost system. The following data summarize the operations related to production for April 2014, the first month of operations: Materials purchased on...
-
The following situations are similar, but each represents a variation of a particular crime. Identify the crime and point out the differences in the variations. 1. Chen, posing fraudulently as...
-
Billy's Exterminators, Inc., has sales of $817,000, costs of $343,000, depreciation expense of $51,000, interest expense of $38,000, and a tax rate of 21 percent. What is the net income for this firm?
-
Suppose a trader buys a European Put on a share for \(\$ 4\). The stock price is \(\$ 53\) and the strike price is \(\$ 49\). (a) Under what circumstances will the trader make a profit? (b) Under...
-
The recent emphasis on capital maintenance concepts of income as seen in the FASBs support for comprehensive income implies that balance sheet measurement should determine measures of income. That...
-
Describe the key differences between accounting profit, cash flow, economic profit, free cash flow, operating cash flow, and net cash flow. Which one is most important to a firm and why?
-
Develop a worksheet simulation for the following problem. The management of Madeira Manufacturing Company is considering the introduction of a new product. The fixed cost to begin the production of...
-
Phenol (an organic compound containing only C, H and O) is used in the manufacture of resins and plastics. Combustion of 5.23 mg of phenol produces 14.67 mg CO, and 3.01 mg H,O. Determine the...
-
Discuss additional personal information that McZhao should gather from Cree in order to properly advise this new client. McZhao then focuses on Crees financial goals: Cree wants to fund university...
-
Determine, based on Beamons description of the Ogive Funds characteristics, his likely inclination to aggressively implement the funds strategy. Justify your response. Morris next meets Robin Barker,...
-
Which of SWMs trading policies identified by the client are consistent with good trade governance? A. Only Policy 1 B. Only Policy 2 C. Both Policy 1 and Policy 2 Michelle Wong is a portfolio manager...
-
Calculate the delay cost incurred in trading the LIM order. Bradley also sees that following a 10 a.m. Federal Reserve press conference, the market rose significantly throughout that day. He wants to...
-
Which of Braggs responses regarding effective performance attribution is correct? A. Only Response 1 B. Only Response 2 C. Both Response 1 and Response 2 Alexandra Jones, a senior adviser at...
-
You are the CFO at Arizona Screens Inc., whose capital structure is: 45% common stock, 35% bonds 20% preferred stock. The pre-tax cost of debt is 6.0%, the cost of preferred is 9.0%, and the cost of...
-
Archangel Corporation prepared the following variance report. Instructions Fill in the appropriate amounts or letters for the question marks in the report. ARCHANGEL CORPORATION Variance...
-
B. C. Ziegler and Company (Ziegler) was a securities company located in West Bend. It had established an internal procedure by which its customer lists were treated confidentially. This procedure...
-
Arthur Young & Co., a firm of certified public accountants, was the independent auditor for Amerada Hess Corporation. During its review of Ameradas financial statements as required by Federal...
-
Columbia University brought suit against Jacobsen on two notes signed by him and his parents. The notes represented the balance of tuition he owed the University. Jacobsen counterclaimed for money...
-
The assessment center approach to employee selection relies heavily on ____________ to evaluate a candidates job skills. (a) intelligence tests (b) simulations and experiential exercises (c) 360...
-
The selection technique known as ______________ asks a job candidate to actually perform on the job for a period of time while being observed by a recruiter. (a) mentoring (b) work sampling (c) job...
-
What is one of the reasons why employers are hiring more part-time or contingency workers? (a) Its hard to get people to work full-time anymore. (b) Part-timers are known to work much harder than...
Study smarter with the SolutionInn App