Professional Documents
Culture Documents
Copyright © 2010 President and Fellows of Harvard College. No part of this product may be reproduced, stored in
transmitted in any form or by any means—electronic, mechanical, photocopying, recording or otherwise—without the
Business School.
uct may be reproduced, stored in a retrieval system or
ording or otherwise—without the permission of Harvard
Exhibit 1 Selected Financial Data for American Home Products Corporation, 1972–1981 ($ in millions except per share and ratio data)
1981 1980 1979 1978 1977 1976 1975 1974 1973 1972
Sales $4,131.2 $3,798.5 $3,406.3 $3,062.6 $2,685.1 $2,471.7 $2,258.6 $2,048.7 $1,784.4 $1,587.1
Cash 729.1 593.3 493.8 436.6 322.9 358.8 — — — —
Total debt 16.6 13.9 10.3 13.7 10.3 7.8 — — — —
Net worth 1,654.5 1,472.8 1,322.0 1,178.0 1,035.3 991.5 — — — —
Total assets 2,588.5 2,370.3 2,090.7 1,862.2 1,611.3 1,510.9 1,390.7 1,241.6 1,126.0 1,042.0
Net income 497.3 445.9 396 348.4 306.2 277.9 250.7 255.6 199.2 172.7
Earnings per share 3.18 2.84 2.51 2.21 1.94 1.75 1.58 1.42 1.25 1.08
Dividends per share $1.90 $1.70 $1.50 $1.325 $1.15 $1.00 $0.90 $0.777 $0.625 $0.59
Annual growth in sales 8.8% 11.7% 11.1% 14.1% 8.6% 9.4% 10.2% 14.8% 12.4% —
Annual growth in EPS 12.0 13.1 13.6 13.9 10.9 10.8 11.3 13.6 15.7 —
Dividend payout ratio 59.7 60.0 59.8 60.0 59.3 57.1 57.0 54.7 50.0 54.6%
After-tax profit margin 12.0 11.7 11.6 11.4 11.4 11.2 11.1 11.0 11.2 10.9
Return on equity 30.1% 30.3% 30.0% 29.6% 29.5% 28.0% 27.9% 28.2% 28.2% 25.9%
Exhibit 2 Comparison Data for American Home Products and Warner-Lambert,
1980 ($ in millions except per share and ratio data)
*Warner-Lambert’s debt was rated triple A but analysts felt the firm was close to being downgraded to double
A.
Exhibit 3 Pro Forma 1981 Results for Alternative Capital Structures ($ in millions except per share data)
a
EBIT is reduced in pro forma results due to the loss of interest income from the $233 million in excess cash used to
repurchase stock.
Exhibit 4 Detailed Assumptions for Pro Forma Recapitalizations Presented in Exhibit 3
1. Debt is assumed to be added to the capital structure by issuing debt and using the proceeds to
repurchase common stock. All purchases are assumed to be executed in January 1981.
2. Stock is assumed to be repurchased at a price of $30 per share, which was the prevailing stock
price in early January 1981.
3. The minimum cash balance is assumed to be $360.3 million (equal to Warner-Lambert’s 1980
cash balance); thus $233 million in excess cash is available for use in repurchasing stock.
6. Interest rate on all debt in all recapitalizations is assumed to be 14% before tax.
7. Interest forgone on excess cash is assumed to be at a rate of 14% before tax, so with
recapitalization EBIT falls by .14 times excess cash of $233 million, or $32.6 million. Thus, pro forma
EBIT is $922.2 million (actual EBIT of $954.8 million minus $32.6 million reduction in interest from
excess cash).
Current scenario 30% Debt Ratio 50% Debt Ratio 70% Debt Ratio
10.57%