American Home Products Case Study

9774 Words 40 Pages
Register to read the introduction… b. American Home Products—Because of patent protection, pharmaceutical companies tend to generate relatively high profit margins and significant cash flows from operations. Although the manufacturing process for pharmaceutical products is capital intensive, cash flow from operations is usually sufficient to fund capital expenditures. American Home Products used the excess cash flow to pay dividends and repurchase capital stock. The firm also borrowed short-term funds and invested the proceeds in the acquisition of another business. Borrowing short term to finance investments in long-term assets is usually undesirable because the firm must repay the debt before the long-term assets generate sufficient cash flow. Perhaps American Home Products needed to borrow short term to consummate the acquisition, with the expectation of refinancing the short-term debt with long-term borrowing soon after the acquisition. Alternatively, American Home Products might have anticipated a decline in long-term rates in the near future and borrowed short term until long-term rates actually declined. Interpublic Group—An advertising agency serves as a link between clients desiring advertising time and space and various media with advertising time and space to sell. Thus, the principal asset of an advertising agency is accounts receivable from clients, and the principal liability is accounts payable to various media. Interpublic Group reports an increase in accounts receivable of …show more content…
continued. operations of Texas Instruments grew significantly during the year. Cash flow from operations was sufficient to fund capital expenditures and increase the balance of cash on the balance sheet. Note that Texas Instruments issued capital stock during the year and repaid long-term debt. The amounts involved, however, are small. g. Limited Brands—Current assets and current liabilities dominate the balance sheets of retailers. Thus, working capital management is of particular importance. Limited Brands increased its current liabilities in line with increases in accounts receivable and inventories. Thus, cash flow from operations approximately equals net income plus depreciation. Limited Brands invested most of the cash flow from operations in additional property, plant, and equipment, the acquisition of other businesses, the repayment of short-term debt, and the payment of dividends. Upjohn—This problem includes Upjohn primarily to compare and contrast it with American Home Products, also a pharmaceutical company. Both companies generated sufficient cash flow from operations to fund capital expenditures and pay dividends. Upjohn sold a portion of its business during the year and invested the proceeds in marketable

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