Assume you are American Home Products Treasurer where your assignment is to draft a well-written report to the CFO and Chairman convincing them to change the firms capital structure to that which you deem optimal. Your report should state your recommended capital structure and why? Consider in your persuasive argument managements long-term culture that has favored its ultra-conservative debt ratio and why that should be changed.

Your report should contain appendices that outline your analysis in how you arrived at the optimal capital structure and its impact on shareholder value and EPS. Make sure you include the following at a minimum:

List any and all assumptions and calculated inputs used in your analysis and, most importantly, the basis for such assumptions. You may also use a range for certain unknown variables where appropriate and consider sensitivity analysis.

Clearly show how you determined AHPs cost of equity capital using the two methods discussed in class.

Clearly show your methodology to determine AHPs optimal capital structure.

Include how you estimated cost of financial distress e.g. the probability of bankruptcy as a function of D/E; and the cost of bankruptcy should AHP need to file for bankruptcy protection