debt equity

American Home Products Corporation The CEO of American Home Products, William Laporte, has run the company with a capital structure that consists mainly of cash and virtually no debt. He has been very successful with this capital structure providing stable, consistent growth and profitability. The growth rate has been in the range of 10% to 15% and return on equity has been about 30%. These are pretty impressive numbers. Mr. Laporte?s motto was to increase shareholder value, …

…will accept taking on more debt as long as it increases shareholder value. The best way to convince him that debt is good is to show him pro forma results like the values given above. A 30% debt increase is a reasonable capital structure change that he will most likely accept, but a 50% debt increase would be too much at once. I believe initially it is best to start at 30% debt and gradually increase to 50% debt.