CASE STUDY ON AMERICAN HOME PRODUCTS CORPORATION

Submitted to the
Ramon V. Del Rosario College of Business
De La Salle University Manila

In Partial Fulfilment
Of the requirements in
FNC535M Financial Management

Submitted by:
Blasa, Angelique
Chan, Kristin Leslie
Cheng, Earl Ryan
Remulla, Maria Kristina
Submitted to:
Joyce Alimon
November 19, 2017

I.

INTRODUCTION

II.
III.
IV.
V.
VI.

STATEMENT OF THE PROBLEM

OBJECTIVES
SWOT ANALYSIS
FRAMEWORK
RECOMMENDATION

References
VII.
GUIDE QUESTIONS
a. How much business risk does American Home Products (AHP) face? How
much financial risk would AHP face at each of the proposed levels of debt
shown in case Exhibit 3? How much potential value, if any, can AHP create for
its shareholders at each of the proposed level of debts?
b. What capital structure would you recommend as appropriate for AHP? What
are the advantages of leveraging this company? The disadvantages? How
would leveraging up affect the companys taxes? How would the capital
markets react to a decision by the company to increase the use of debt in its
capital structure?
c. How might the AHP implement a more aggressive capital structure policy?
What are the alternative methods for leveraging up?
d. In view of AHPs unique corporate culture, what arguments would you
advance to persuade Mr. Laporte or his successor to adopt your
recommendation?

1. How would you characterize AHPs operating strategy?

a. What are the implications for AHPs basic business risk?
b. What are the implications for AHPs financial strategy?
2. What capital structure would you recommend for AHP? Why?
a. What is the effect of the repurchase? (Exhibit 3)
b. Why bother changing capital structure? (Exhibits TN-1 and TN-2)
3. What is the nature of the tax benefit?
a. What is its source?
b. What is its size?
c. How does the size of the tax benefit depend on the tax structure?
4. How would you convince AHP to changes its financial policies?
a. How would capital markets interpret a change?
b. Could AHP be forced to take on more debt?
c. How much debt is too much for AHP? (Exhibit TN-2)
d. What happened?