With regards to the business risks related to American Home Products Corporation, they are quite low

due to the overall conservative nature of the business.

AHP’s cost base is low relative to the competition as it almost eliminates R&D costs. It does so by
capitalizing on innovators in the pharma market, acquiring or licensing successful products developed by
other firms in the market. This significantly reduces R&D costs and eliminates the risk of spending highly
on research for the development of new products. Thus, after the choice of a safe/successful product,
AHP focuses its on marketing and beating the competition.

Another factor that contributes to low business risk is the fact that the company is diversified. It has four
product lines divided between prescription drugs, over the counter drugs, food products and
housewares. It is worth noting that three of the above-mentioned product lines (prescription drugs, over
the counter drugs, and food products) are defensive. This minimizes AHP’s exposure to business cycles
and guarantees the firm a stable income stream.

Lastly, the company’s management style contributes to low business risk. Laporte’s management style,
despite being centralized, is that of a brilliant marketer and fiscally conscious spender, as per the HBS
case. This provides stability and peace of mind to investors, as the company’s future vision and strategy
is clear.

Moving on to financial risk, it is similarly low at AMH as the company has a track record of risk-aversion
and zero-debt policy. It has strong profitability, stable capital structure, consistent cash flows, and
financial flexibility.

In terms of profitability, the company displayed solid figures. Its net profits grew consistently on a yearly
basis, netting US$ 172 million in 1972 to reach of US$ 497.3 million in 1981. The company’s return on
equity is also encouraging, hitting 30.1% in 1981. The company’s profit margin was solid at US$ 12.0
million.

Moving on to capital structure, the company has practically no debt (US$ 13.9 million). It’s debt to
capital ratio is -9.0%, reflecting that the company’s operations are not supported by debt. In addition,
the company has low debt to equity and debt to asset ratios both at 0.005. The latter displays a healthy
capital structure, but it also says that the company is missing out on further growth opportunities by
taking on some debt.

AHM reflects cash flow protection via its stable cash flows supported by a low-cost base, diversified
revenue streams, and strong ability to service debt. The firm has an interest coverage ratio of 436.6,
which is extremely highly.

Last but not least, AHP’s financial risk is under control but it would be best for the company to increase
its leverage to a certain level to add more value to the stockholders. For instance, the could simply
utilizes its the excess cash flow of US$ 233 million to repurchase stocks, adding value to stockholders in
the short run.