PLEASE FILL OUT THE GREEN PART OF THE EXCEL BELOW WHILE SHOWING FORMULAS AND ANSWER QUESTION 4 ABOVE. THANK YOU!

Formatting as Table Styles F30 fx \begin{tabular}{|c|c|c|c|c|c|c|c|c|c|c|c|} \hline & A & B & C & D & E & F & G & H & I & J & K \\ \hline 1 & Exhibit 1 Selected Fin & Pata for Ame & n Home Pr & cts Corpor & , 1972-19 & in millions & cept per sh & and ratio & & & \\ \hline \multicolumn{12}{|l|}{2} \\ \hline 3 & & \begin{tabular}{r} 1981 Pro- \\ Forma \end{tabular} & 1980 & 1979 & 1978 & 1977 & 1976 & 1975 & 1974 & 1973 & 1972 \\ \hline \multicolumn{12}{|l|}{4} \\ \hline 5 & 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 \\ \hline 6 & Net income & 497.3 & 445.9 & 396 & 348.4 & 306.2 & 277.9 & 250.7 & 255.6 & 199.2 & 172.7 \\ \hline 7 & Earnings per share & 3.18 & 2.84 & 2.51 & 2.21 & 1.94 & 1.75 & 1.58 & 1.42 & 1.25 & 1.08 \\ \hline 8 & Dividends per share & $1.90 & $1.70 & $1.50 & $1.325 & $1.15 & $1.00 & $0.90 & $0.777 & $0.625 & $0.59 \\ \hline \multicolumn{12}{|l|}{9} \\ \hline 10 & Cash & 729.1 & 593.3 & 493.8 & 436.6 & 322.9 & 358.8 & - & - & - & \\ \hline 11 & 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 \\ \hline 12 & Total debt & 16.6 & 13.9 & 10.3 & 13.7 & 10.3 & 7.8 & - & - & - & - \\ \hline 13 & Net worth & 1,654.5 & 1,472.8 & 1,322.0 & 1,178.0 & 1,035.3 & 991.5 & & - & & \\ \hline \multicolumn{12}{|l|}{14} \\ \hline 15 & Annual growth in sales & 8.8% & 11.7% & 11.1% & 14.1% & 8.6% & 9.4% & 10.2% & 14.8% & 12.4% & \\ \hline 16 & Annual growth in EPS & 12.0 & 13.1 & 13.6 & 13.9 & 10.9 & 10.8 & 11.3 & 13.6 & 15.7 & \\ \hline 17 & Dividend payout ratio & 59.7 & 60.0 & 59.8 & 60.0 & 59.3 & 57.1 & 57.0 & 54.7 & 50.0 & 54.6% \\ \hline 18 & After-tax profit margin & 12.0 & 11.7 & 11.6 & 11.4 & 11.4 & 11.2 & 11.1 & 11.0 & 11.2 & 10.9 \\ \hline 19 & Return on equity & 30.1% & 30.3% & 30.0% & 29.6% & 29.5% & 28.0% & 27.9% & 28.2% & 28.2% & 25.9% \\ \hline \end{tabular} Hint: ey example (part of it is provided in the AHP template under the Disney_Example tab)! ts; ruptcy Cost. Determining the Unlevered Firm Value, Vu, should be your first step in this solution!!! alue. For book value, you know book value of debt and equity from Exhibit 3 (Book Value of Equity in this case is called Net Worth in Exhibits 1-3). u are given the market value of equity (Agregate market value of common stock =$4,665 ) in Exhibit 3 . You can use the book value of debt as a proxy for uptcy Costs to help you find Vu. ill use excess cash to repurchase the shares. So, you will further reduce the Unlevered Firm Value by \$233. (using book values). Take the quiz to get the hint!!! c)/RD=DTC ;sociated with the interest on debt can be calculated using $13.9 in debt and the 48% tax rate (Exhibit 3). e given an example of how I determined a Credit Rating at 30% debt (using Book Value). At 30% or $376.1 mln debt your interest coverate is about 17.5 the rating is A and at 17.5 interested coverage the rating is AAA-AA. Using Warner-Lambet, we would say 30% debt and 17.5 times int. coverage is AAA d made my final decision to assign the lowest possible rating, A. of Default (P(Default)) using the table starting around row 50 Expected Bankruptcy Cost =P( Default )30% Firm Value. At this point, your best estmate of Firm Value =Vu+DTc. I picked 30% as my estimate of g from the overall average across industries from Korteweg (2010) from our class slides ch we estimated PPS: (1) at the announcement of debt issue/repurchase and (2) after the actual recapitalization. PPS adjusts at the ANNOUNCEMENT!!!! is for each level of debt) and \# of shares before buyback but at announcement as in (1). For the \# of shares, use 155.5 shares adjusted down by the shares 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. 4. A tax rate of 48% is used. 5. The common dividend payout ratio is 60%. 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 7.Currently, the Book Value of Equity is $1,472.8 (Exhibit 3) and Book Value of Deb is $13.9 (Exhibit 3) 16 17 18 19 20 21 22 23 8. Details of recapitalizations are (\$ millions): \begin{tabular}{|c|c|c|c|c|} \hline & & & Jebt Ratio & \\ \hline & & 30% & 50% & 70% \\ \hline Excess cash & & $233.0 & $233.0 & $233.0 \\ \hline Additional debt & & 362.21 & 612.95 & 863.69 \\ \hline Total repurchase & & $595.2 & $846.0 & $1,096.7 \\ \hline \begin{tabular}{l} Reduction in common shares \\ outstanding (millions of shares) \end{tabular} & & 19.8 & 28.2 & 36.6 \\ \hline Current Shares & 155.5 & 135.7 & 127.3 & 118.9 \\ \hline \end{tabular} assuming stock price $30 does not change. $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. 4. A tax rate of 48% is used. 5. The common dividend payout ratio is 60%. 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 7.Currently, the Book Value of Equity is $1,472.8 (Exhibit 3) and Book Value of Deb is $13.9 (Exhibit 3) 16 17 18 19 20 21 22 23 8. Details of recapitalizations are (\$ millions): \begin{tabular}{|c|c|c|c|c|} \hline & & & Jebt Ratio & \\ \hline & & 30% & 50% & 70% \\ \hline Excess cash & & $233.0 & $233.0 & $233.0 \\ \hline Additional debt & & 362.21 & 612.95 & 863.69 \\ \hline Total repurchase & & $595.2 & $846.0 & $1,096.7 \\ \hline \begin{tabular}{l} Reduction in common shares \\ outstanding (millions of shares) \end{tabular} & & 19.8 & 28.2 & 36.6 \\ \hline Current Shares & 155.5 & 135.7 & 127.3 & 118.9 \\ \hline \end{tabular} assuming stock price $30 does not change. D (optimal level of debt) using case provided Debt/Value \% (even though they are incorrect since they are based on book values not market values). Next, find D using market value based Debt/Value \% Exhibit 2 Comparison Data for American Home Products and Warner-Lambert, 1980 (\$ in Formatting as Table Styles F30 fx \begin{tabular}{|c|c|c|c|c|c|c|c|c|c|c|c|} \hline & A & B & C & D & E & F & G & H & I & J & K \\ \hline 1 & Exhibit 1 Selected Fin & Pata for Ame & n Home Pr & cts Corpor & , 1972-19 & in millions & cept per sh & and ratio & & & \\ \hline \multicolumn{12}{|l|}{2} \\ \hline 3 & & \begin{tabular}{r} 1981 Pro- \\ Forma \end{tabular} & 1980 & 1979 & 1978 & 1977 & 1976 & 1975 & 1974 & 1973 & 1972 \\ \hline \multicolumn{12}{|l|}{4} \\ \hline 5 & 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 \\ \hline 6 & Net income & 497.3 & 445.9 & 396 & 348.4 & 306.2 & 277.9 & 250.7 & 255.6 & 199.2 & 172.7 \\ \hline 7 & Earnings per share & 3.18 & 2.84 & 2.51 & 2.21 & 1.94 & 1.75 & 1.58 & 1.42 & 1.25 & 1.08 \\ \hline 8 & Dividends per share & $1.90 & $1.70 & $1.50 & $1.325 & $1.15 & $1.00 & $0.90 & $0.777 & $0.625 & $0.59 \\ \hline \multicolumn{12}{|l|}{9} \\ \hline 10 & Cash & 729.1 & 593.3 & 493.8 & 436.6 & 322.9 & 358.8 & - & - & - & \\ \hline 11 & 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 \\ \hline 12 & Total debt & 16.6 & 13.9 & 10.3 & 13.7 & 10.3 & 7.8 & - & - & - & - \\ \hline 13 & Net worth & 1,654.5 & 1,472.8 & 1,322.0 & 1,178.0 & 1,035.3 & 991.5 & & - & & \\ \hline \multicolumn{12}{|l|}{14} \\ \hline 15 & Annual growth in sales & 8.8% & 11.7% & 11.1% & 14.1% & 8.6% & 9.4% & 10.2% & 14.8% & 12.4% & \\ \hline 16 & Annual growth in EPS & 12.0 & 13.1 & 13.6 & 13.9 & 10.9 & 10.8 & 11.3 & 13.6 & 15.7 & \\ \hline 17 & Dividend payout ratio & 59.7 & 60.0 & 59.8 & 60.0 & 59.3 & 57.1 & 57.0 & 54.7 & 50.0 & 54.6% \\ \hline 18 & After-tax profit margin & 12.0 & 11.7 & 11.6 & 11.4 & 11.4 & 11.2 & 11.1 & 11.0 & 11.2 & 10.9 \\ \hline 19 & Return on equity & 30.1% & 30.3% & 30.0% & 29.6% & 29.5% & 28.0% & 27.9% & 28.2% & 28.2% & 25.9% \\ \hline \end{tabular} Exhibit 3 Pro Forma 1981 Results for Alternative Capital Structures (\$ in millions except per share data) \begin{tabular}{|c|c|c|c|c|} \hline & \multirow[b]{2}{*}{ Actual 1980} & \multicolumn{3}{|c|}{ Pro Forma 1981 for } \\ \hline & & \begin{tabular}{c} 30% Debt to Total \\ Capital \end{tabular} & \begin{tabular}{c} 50% Debt to Total \\ Capital \end{tabular} & \begin{tabular}{c} 70% Debt to Total \\ Capital \end{tabular} \\ \hline Sales & $4,131.2 & $4,131.2 & $4,131.2 & $4,131.2 \\ \hline Earnings before interest and taxes a & 954.8 & 922.2 & 922.2 & 922.2 \\ \hline Interest b & 2.3 & 52.7 & 87.8 & 122.9 \\ \hline Profit before taxes & 952.5 & 869.5 & 834.4 & 799.3 \\ \hline Taxes & 455.2 & 417.4 & 400.5 & 383.7 \\ \hline Profit after tax & 497.3 & 452.1 & 433.9 & 415.6 \\ \hline Dividends on preferred stock & 0.4 & 0.4 & 0.4 & 0.4 \\ \hline Earnings available to common shareholders & 496.9 & 451.7 & 433.5 & 415.2 \\ \hline Dividends on common stock c & $295.3 & $271.0 & $260.1 & $249.1 \\ \hline Average common shares outstanding (millions) & 155.5 & 135.7 & 127.3 & 118.9 \\ \hline Earnings per share & $3.18 & $3.33 & $3.41 & $3.49 \\ \hline Dividends per share & $1.90 & $2.00 & $2.04 & $2.10 \\ \hline Beginning of Year & & Beginning & of Year after Recap & italization \\ \hline Cash and equivalents & $593.3 & $360.3 & $360.3 & $360.3 \\ \hline Total debt & 13.9 & 376.1 & 626.8 & 877.6 \\ \hline Net worth & $1,472.8 & $877.6 & $626.9 & $376.1 \\ \hline Common stock price & $30 & - & - & - \\ \hline Aggregate market value of common stock & $4,665.0 & & - & \\ \hline & & & & \\ \hline & & & & \\ \hline \end{tabular} 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. b What is the implied interest rate on debt? (Hint: interest/debt, see below) \begin{tabular}{|c|c|c|} \hline 14% & 14% & 14% \\ \hline 60% & 60% & \\ \hline \end{tabular} Exhibit 2 Comparison Data for American Home Products and Warner-Lambert, 1980 (\$ in How do you determine Unlevered Firm Value? Check our class slides for the Disney example (part of it is provided in the AHP template under the Disney_Example tab)! Remember VL=Vu+PV Perpetual Tax Benefits of Debt - Expected Bankruptcy Costs; So, solving for Vu--> Vu=VLPV Perpetual Tax Benefits of Debt+Expected Bankruptcy Cost. Determining the Unlevered Firm Value, Vu, should be your first step in this solution!!! Firm of debt. Check hints below for the PV Perpetual Tax Benefits of Debt and Expected Bankruptcy Costs to help you find Vu. In the case we are told that AHP plans to reduce its Asset Base by $233mln as it will use excess cash to repurchase the shares. So, you will further reduce the Unlevered Firm Value by \$233. There is a BIG HINT in the Quiz on Capital Structure+AHP case regarding Vu (using book values). Take the quiz to get the hint!!! Remember, you are applying the perpetuity assumption/formula: PV=D(RD)(TC)/RD=DTC. When you are backing out Vu, the PV of the perpetual benefits from tax savings associated with the interest on debt can be calculated using $13.9 in debt and the 48% tax rate (Exhibit 3). AAA/AA with worse indicators). I decided to remain concervative and made my final decision to assign the lowest possible rating, A. Now, using the credit rating that you assigned, find the corresponding Probability of Default (P(Default)) using the table starting around row 50 direct+indirect costs of bankruptcy. You can use your own estimate. 30% is coming from the overall average across industries from Korteweg (2010) from our class slides Exhibit 3 Pro Forma 1981 Results for Alternative Capital Structures (\$ in millions except per share data) \begin{tabular}{|c|c|c|c|c|} \hline & \multirow[b]{2}{*}{ Actual 1980} & \multicolumn{3}{|c|}{ Pro Forma 1981 for } \\ \hline & & \begin{tabular}{c} 30% Debt to Total \\ Capital \end{tabular} & \begin{tabular}{c} 50% Debt to Total \\ Capital \end{tabular} & \begin{tabular}{c} 70% Debt to Total \\ Capital \end{tabular} \\ \hline Sales & $4,131.2 & $4,131.2 & $4,131.2 & $4,131.2 \\ \hline Earnings before interest and taxes a & 954.8 & 922.2 & 922.2 & 922.2 \\ \hline Interest b & 2.3 & 52.7 & 87.8 & 122.9 \\ \hline Profit before taxes & 952.5 & 869.5 & 834.4 & 799.3 \\ \hline Taxes & 455.2 & 417.4 & 400.5 & 383.7 \\ \hline Profit after tax & 497.3 & 452.1 & 433.9 & 415.6 \\ \hline Dividends on preferred stock & 0.4 & 0.4 & 0.4 & 0.4 \\ \hline Earnings available to common shareholders & 496.9 & 451.7 & 433.5 & 415.2 \\ \hline Dividends on common stock c & $295.3 & $271.0 & $260.1 & $249.1 \\ \hline Average common shares outstanding (millions) & 155.5 & 135.7 & 127.3 & 118.9 \\ \hline Earnings per share & $3.18 & $3.33 & $3.41 & $3.49 \\ \hline Dividends per share & $1.90 & $2.00 & $2.04 & $2.10 \\ \hline Beginning of Year & & Beginning & of Year after Recap & italization \\ \hline Cash and equivalents & $593.3 & $360.3 & $360.3 & $360.3 \\ \hline Total debt & 13.9 & 376.1 & 626.8 & 877.6 \\ \hline Net worth & $1,472.8 & $877.6 & $626.9 & $376.1 \\ \hline Common stock price & $30 & - & - & - \\ \hline Aggregate market value of common stock & $4,665.0 & & - & \\ \hline & & & & \\ \hline & & & & \\ \hline \end{tabular} 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. b What is the implied interest rate on debt? (Hint: interest/debt, see below) \begin{tabular}{|c|c|c|} \hline 14% & 14% & 14% \\ \hline 60% & 60% & \\ \hline \end{tabular} 4. What capital structure would you recommend as appropriate for AHP? How would the capital markets react to a decision by the company to increase the use of debt in its capital structure? Hint: use the provided AHP Excel template and follow suggestions on the 'Hints' tab as well as the Disney example of firm value at different levels of debt that was covered in class and is available in the AHP Excel template 'Disney Example' tab and in your class slides. First, find D (optimal level of debt) using case provided Debt/Value \% (even though they are incorrect since they are based on book values not market values). Next, find D using market value based Debt/Value \% Formatting as Table Styles F30 fx \begin{tabular}{|c|c|c|c|c|c|c|c|c|c|c|c|} \hline & A & B & C & D & E & F & G & H & I & J & K \\ \hline 1 & Exhibit 1 Selected Fin & Pata for Ame & n Home Pr & cts Corpor & , 1972-19 & in millions & cept per sh & and ratio & & & \\ \hline \multicolumn{12}{|l|}{2} \\ \hline 3 & & \begin{tabular}{r} 1981 Pro- \\ Forma \end{tabular} & 1980 & 1979 & 1978 & 1977 & 1976 & 1975 & 1974 & 1973 & 1972 \\ \hline \multicolumn{12}{|l|}{4} \\ \hline 5 & 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 \\ \hline 6 & Net income & 497.3 & 445.9 & 396 & 348.4 & 306.2 & 277.9 & 250.7 & 255.6 & 199.2 & 172.7 \\ \hline 7 & Earnings per share & 3.18 & 2.84 & 2.51 & 2.21 & 1.94 & 1.75 & 1.58 & 1.42 & 1.25 & 1.08 \\ \hline 8 & Dividends per share & $1.90 & $1.70 & $1.50 & $1.325 & $1.15 & $1.00 & $0.90 & $0.777 & $0.625 & $0.59 \\ \hline \multicolumn{12}{|l|}{9} \\ \hline 10 & Cash & 729.1 & 593.3 & 493.8 & 436.6 & 322.9 & 358.8 & - & - & - & \\ \hline 11 & 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 \\ \hline 12 & Total debt & 16.6 & 13.9 & 10.3 & 13.7 & 10.3 & 7.8 & - & - & - & - \\ \hline 13 & Net worth & 1,654.5 & 1,472.8 & 1,322.0 & 1,178.0 & 1,035.3 & 991.5 & & - & & \\ \hline \multicolumn{12}{|l|}{14} \\ \hline 15 & Annual growth in sales & 8.8% & 11.7% & 11.1% & 14.1% & 8.6% & 9.4% & 10.2% & 14.8% & 12.4% & \\ \hline 16 & Annual growth in EPS & 12.0 & 13.1 & 13.6 & 13.9 & 10.9 & 10.8 & 11.3 & 13.6 & 15.7 & \\ \hline 17 & Dividend payout ratio & 59.7 & 60.0 & 59.8 & 60.0 & 59.3 & 57.1 & 57.0 & 54.7 & 50.0 & 54.6% \\ \hline 18 & After-tax profit margin & 12.0 & 11.7 & 11.6 & 11.4 & 11.4 & 11.2 & 11.1 & 11.0 & 11.2 & 10.9 \\ \hline 19 & Return on equity & 30.1% & 30.3% & 30.0% & 29.6% & 29.5% & 28.0% & 27.9% & 28.2% & 28.2% & 25.9% \\ \hline \end{tabular} Hint: ey example (part of it is provided in the AHP template under the Disney_Example tab)! ts; ruptcy Cost. Determining the Unlevered Firm Value, Vu, should be your first step in this solution!!! alue. For book value, you know book value of debt and equity from Exhibit 3 (Book Value of Equity in this case is called Net Worth in Exhibits 1-3). u are given the market value of equity (Agregate market value of common stock =$4,665 ) in Exhibit 3 . You can use the book value of debt as a proxy for uptcy Costs to help you find Vu. ill use excess cash to repurchase the shares. So, you will further reduce the Unlevered Firm Value by \$233. (using book values). Take the quiz to get the hint!!! c)/RD=DTC ;sociated with the interest on debt can be calculated using $13.9 in debt and the 48% tax rate (Exhibit 3). e given an example of how I determined a Credit Rating at 30% debt (using Book Value). At 30% or $376.1 mln debt your interest coverate is about 17.5 the rating is A and at 17.5 interested coverage the rating is AAA-AA. Using Warner-Lambet, we would say 30% debt and 17.5 times int. coverage is AAA d made my final decision to assign the lowest possible rating, A. of Default (P(Default)) using the table starting around row 50 Expected Bankruptcy Cost =P( Default )30% Firm Value. At this point, your best estmate of Firm Value =Vu+DTc. I picked 30% as my estimate of g from the overall average across industries from Korteweg (2010) from our class slides ch we estimated PPS: (1) at the announcement of debt issue/repurchase and (2) after the actual recapitalization. PPS adjusts at the ANNOUNCEMENT!!!! is for each level of debt) and \# of shares before buyback but at announcement as in (1). For the \# of shares, use 155.5 shares adjusted down by the shares 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. 4. A tax rate of 48% is used. 5. The common dividend payout ratio is 60%. 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 7.Currently, the Book Value of Equity is $1,472.8 (Exhibit 3) and Book Value of Deb is $13.9 (Exhibit 3) 16 17 18 19 20 21 22 23 8. Details of recapitalizations are (\$ millions): \begin{tabular}{|c|c|c|c|c|} \hline & & & Jebt Ratio & \\ \hline & & 30% & 50% & 70% \\ \hline Excess cash & & $233.0 & $233.0 & $233.0 \\ \hline Additional debt & & 362.21 & 612.95 & 863.69 \\ \hline Total repurchase & & $595.2 & $846.0 & $1,096.7 \\ \hline \begin{tabular}{l} Reduction in common shares \\ outstanding (millions of shares) \end{tabular} & & 19.8 & 28.2 & 36.6 \\ \hline Current Shares & 155.5 & 135.7 & 127.3 & 118.9 \\ \hline \end{tabular} assuming stock price $30 does not change. $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. 4. A tax rate of 48% is used. 5. The common dividend payout ratio is 60%. 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 7.Currently, the Book Value of Equity is $1,472.8 (Exhibit 3) and Book Value of Deb is $13.9 (Exhibit 3) 16 17 18 19 20 21 22 23 8. Details of recapitalizations are (\$ millions): \begin{tabular}{|c|c|c|c|c|} \hline & & & Jebt Ratio & \\ \hline & & 30% & 50% & 70% \\ \hline Excess cash & & $233.0 & $233.0 & $233.0 \\ \hline Additional debt & & 362.21 & 612.95 & 863.69 \\ \hline Total repurchase & & $595.2 & $846.0 & $1,096.7 \\ \hline \begin{tabular}{l} Reduction in common shares \\ outstanding (millions of shares) \end{tabular} & & 19.8 & 28.2 & 36.6 \\ \hline Current Shares & 155.5 & 135.7 & 127.3 & 118.9 \\ \hline \end{tabular} assuming stock price $30 does not change. D (optimal level of debt) using case provided Debt/Value \% (even though they are incorrect since they are based on book values not market values). Next, find D using market value based Debt/Value \% Exhibit 2 Comparison Data for American Home Products and Warner-Lambert, 1980 (\$ in Formatting as Table Styles F30 fx \begin{tabular}{|c|c|c|c|c|c|c|c|c|c|c|c|} \hline & A & B & C & D & E & F & G & H & I & J & K \\ \hline 1 & Exhibit 1 Selected Fin & Pata for Ame & n Home Pr & cts Corpor & , 1972-19 & in millions & cept per sh & and ratio & & & \\ \hline \multicolumn{12}{|l|}{2} \\ \hline 3 & & \begin{tabular}{r} 1981 Pro- \\ Forma \end{tabular} & 1980 & 1979 & 1978 & 1977 & 1976 & 1975 & 1974 & 1973 & 1972 \\ \hline \multicolumn{12}{|l|}{4} \\ \hline 5 & 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 \\ \hline 6 & Net income & 497.3 & 445.9 & 396 & 348.4 & 306.2 & 277.9 & 250.7 & 255.6 & 199.2 & 172.7 \\ \hline 7 & Earnings per share & 3.18 & 2.84 & 2.51 & 2.21 & 1.94 & 1.75 & 1.58 & 1.42 & 1.25 & 1.08 \\ \hline 8 & Dividends per share & $1.90 & $1.70 & $1.50 & $1.325 & $1.15 & $1.00 & $0.90 & $0.777 & $0.625 & $0.59 \\ \hline \multicolumn{12}{|l|}{9} \\ \hline 10 & Cash & 729.1 & 593.3 & 493.8 & 436.6 & 322.9 & 358.8 & - & - & - & \\ \hline 11 & 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 \\ \hline 12 & Total debt & 16.6 & 13.9 & 10.3 & 13.7 & 10.3 & 7.8 & - & - & - & - \\ \hline 13 & Net worth & 1,654.5 & 1,472.8 & 1,322.0 & 1,178.0 & 1,035.3 & 991.5 & & - & & \\ \hline \multicolumn{12}{|l|}{14} \\ \hline 15 & Annual growth in sales & 8.8% & 11.7% & 11.1% & 14.1% & 8.6% & 9.4% & 10.2% & 14.8% & 12.4% & \\ \hline 16 & Annual growth in EPS & 12.0 & 13.1 & 13.6 & 13.9 & 10.9 & 10.8 & 11.3 & 13.6 & 15.7 & \\ \hline 17 & Dividend payout ratio & 59.7 & 60.0 & 59.8 & 60.0 & 59.3 & 57.1 & 57.0 & 54.7 & 50.0 & 54.6% \\ \hline 18 & After-tax profit margin & 12.0 & 11.7 & 11.6 & 11.4 & 11.4 & 11.2 & 11.1 & 11.0 & 11.2 & 10.9 \\ \hline 19 & Return on equity & 30.1% & 30.3% & 30.0% & 29.6% & 29.5% & 28.0% & 27.9% & 28.2% & 28.2% & 25.9% \\ \hline \end{tabular} Exhibit 3 Pro Forma 1981 Results for Alternative Capital Structures (\$ in millions except per share data) \begin{tabular}{|c|c|c|c|c|} \hline & \multirow[b]{2}{*}{ Actual 1980} & \multicolumn{3}{|c|}{ Pro Forma 1981 for } \\ \hline & & \begin{tabular}{c} 30% Debt to Total \\ Capital \end{tabular} & \begin{tabular}{c} 50% Debt to Total \\ Capital \end{tabular} & \begin{tabular}{c} 70% Debt to Total \\ Capital \end{tabular} \\ \hline Sales & $4,131.2 & $4,131.2 & $4,131.2 & $4,131.2 \\ \hline Earnings before interest and taxes a & 954.8 & 922.2 & 922.2 & 922.2 \\ \hline Interest b & 2.3 & 52.7 & 87.8 & 122.9 \\ \hline Profit before taxes & 952.5 & 869.5 & 834.4 & 799.3 \\ \hline Taxes & 455.2 & 417.4 & 400.5 & 383.7 \\ \hline Profit after tax & 497.3 & 452.1 & 433.9 & 415.6 \\ \hline Dividends on preferred stock & 0.4 & 0.4 & 0.4 & 0.4 \\ \hline Earnings available to common shareholders & 496.9 & 451.7 & 433.5 & 415.2 \\ \hline Dividends on common stock c & $295.3 & $271.0 & $260.1 & $249.1 \\ \hline Average common shares outstanding (millions) & 155.5 & 135.7 & 127.3 & 118.9 \\ \hline Earnings per share & $3.18 & $3.33 & $3.41 & $3.49 \\ \hline Dividends per share & $1.90 & $2.00 & $2.04 & $2.10 \\ \hline Beginning of Year & & Beginning & of Year after Recap & italization \\ \hline Cash and equivalents & $593.3 & $360.3 & $360.3 & $360.3 \\ \hline Total debt & 13.9 & 376.1 & 626.8 & 877.6 \\ \hline Net worth & $1,472.8 & $877.6 & $626.9 & $376.1 \\ \hline Common stock price & $30 & - & - & - \\ \hline Aggregate market value of common stock & $4,665.0 & & - & \\ \hline & & & & \\ \hline & & & & \\ \hline \end{tabular} 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. b What is the implied interest rate on debt? (Hint: interest/debt, see below) \begin{tabular}{|c|c|c|} \hline 14% & 14% & 14% \\ \hline 60% & 60% & \\ \hline \end{tabular} Exhibit 2 Comparison Data for American Home Products and Warner-Lambert, 1980 (\$ in How do you determine Unlevered Firm Value? Check our class slides for the Disney example (part of it is provided in the AHP template under the Disney_Example tab)! Remember VL=Vu+PV Perpetual Tax Benefits of Debt - Expected Bankruptcy Costs; So, solving for Vu--> Vu=VLPV Perpetual Tax Benefits of Debt+Expected Bankruptcy Cost. Determining the Unlevered Firm Value, Vu, should be your first step in this solution!!! Firm of debt. Check hints below for the PV Perpetual Tax Benefits of Debt and Expected Bankruptcy Costs to help you find Vu. In the case we are told that AHP plans to reduce its Asset Base by $233mln as it will use excess cash to repurchase the shares. So, you will further reduce the Unlevered Firm Value by \$233. There is a BIG HINT in the Quiz on Capital Structure+AHP case regarding Vu (using book values). Take the quiz to get the hint!!! Remember, you are applying the perpetuity assumption/formula: PV=D(RD)(TC)/RD=DTC. When you are backing out Vu, the PV of the perpetual benefits from tax savings associated with the interest on debt can be calculated using $13.9 in debt and the 48% tax rate (Exhibit 3). AAA/AA with worse indicators). I decided to remain concervative and made my final decision to assign the lowest possible rating, A. Now, using the credit rating that you assigned, find the corresponding Probability of Default (P(Default)) using the table starting around row 50 direct+indirect costs of bankruptcy. You can use your own estimate. 30% is coming from the overall average across industries from Korteweg (2010) from our class slides Exhibit 3 Pro Forma 1981 Results for Alternative Capital Structures (\$ in millions except per share data) \begin{tabular}{|c|c|c|c|c|} \hline & \multirow[b]{2}{*}{ Actual 1980} & \multicolumn{3}{|c|}{ Pro Forma 1981 for } \\ \hline & & \begin{tabular}{c} 30% Debt to Total \\ Capital \end{tabular} & \begin{tabular}{c} 50% Debt to Total \\ Capital \end{tabular} & \begin{tabular}{c} 70% Debt to Total \\ Capital \end{tabular} \\ \hline Sales & $4,131.2 & $4,131.2 & $4,131.2 & $4,131.2 \\ \hline Earnings before interest and taxes a & 954.8 & 922.2 & 922.2 & 922.2 \\ \hline Interest b & 2.3 & 52.7 & 87.8 & 122.9 \\ \hline Profit before taxes & 952.5 & 869.5 & 834.4 & 799.3 \\ \hline Taxes & 455.2 & 417.4 & 400.5 & 383.7 \\ \hline Profit after tax & 497.3 & 452.1 & 433.9 & 415.6 \\ \hline Dividends on preferred stock & 0.4 & 0.4 & 0.4 & 0.4 \\ \hline Earnings available to common shareholders & 496.9 & 451.7 & 433.5 & 415.2 \\ \hline Dividends on common stock c & $295.3 & $271.0 & $260.1 & $249.1 \\ \hline Average common shares outstanding (millions) & 155.5 & 135.7 & 127.3 & 118.9 \\ \hline Earnings per share & $3.18 & $3.33 & $3.41 & $3.49 \\ \hline Dividends per share & $1.90 & $2.00 & $2.04 & $2.10 \\ \hline Beginning of Year & & Beginning & of Year after Recap & italization \\ \hline Cash and equivalents & $593.3 & $360.3 & $360.3 & $360.3 \\ \hline Total debt & 13.9 & 376.1 & 626.8 & 877.6 \\ \hline Net worth & $1,472.8 & $877.6 & $626.9 & $376.1 \\ \hline Common stock price & $30 & - & - & - \\ \hline Aggregate market value of common stock & $4,665.0 & & - & \\ \hline & & & & \\ \hline & & & & \\ \hline \end{tabular} 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. b What is the implied interest rate on debt? (Hint: interest/debt, see below) \begin{tabular}{|c|c|c|} \hline 14% & 14% & 14% \\ \hline 60% & 60% & \\ \hline \end{tabular} 4. What capital structure would you recommend as appropriate for AHP? How would the capital markets react to a decision by the company to increase the use of debt in its capital structure? Hint: use the provided AHP Excel template and follow suggestions on the 'Hints' tab as well as the Disney example of firm value at different levels of debt that was covered in class and is available in the AHP Excel template 'Disney Example' tab and in your class slides. First, find D (optimal level of debt) using case provided Debt/Value \% (even though they are incorrect since they are based on book values not market values). Next, find D using market value based Debt/Value \%