Based on the pro forma results for varying percentages of debt, as debt increases earnings per share and dividends per share also increase. When debt is issued, the money is used to repurchase stock at $30 per share with a price to earnings ratio of 9.43. With 30% debt, earnings per share increases from $3.18(no debt) to $3.33. The earnings per share multiplied by the P/E ratio values the stock at $31.40, which is about a 4.7% increase in the equity value. Dividends per share increases from $1.90(no debt) to $2.00 per share. A 30% increase in debt will not affect their AAA debt rating because their time interest earned number is 17.5, which is good as long as it does not go below 10. American Home Products will also have significant tax savings because interest on debt is tax deductible, which increases equity value. To get the

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Approximate Word count = 566
Approximate Pages = 2 (250 words per page double spaced)