Assignments: Strategic Financial management

Lectures: Strategic Financial Management
Assignments: Strategic Financial management

Assignment on Capital Structure and Firm Value

Marks = 5
Due on = January 22, 2014
Note: Subject of email and file name should be in this format : Your_Name_Assignment_Name


  • Collect 5 years data for the assigned companies.
  • Find the company's beta in the last 5 years on monthly share prices data
  • Find the annual market return for KSE 100, and average it
  • Deduct the yearly t-bills rate from the market return to find average market risk premium (i.e. Rm -Rf)
  • Find the cost of equity with CAPM equation [Beta calculations can be viewed in this VIDEO]
  • Find the company's financial expenses and divide it on the interest-paying liabilities 
  • (i.e. exclude accounts payable, wages payable etc). This will give you the cost of debt
  • find the tax rate (divide tax expense on net income before taxes)
  • Find the cost of debt after taxes (1-Tax)*cost of debt
  • assume that interest rates increase by 5% with every 10% increase in debt . 
  • Your starting point should be the cost of debt which you have calculated in step 6 above 
  • Find the average net income and assume that this net income will remain constant for ever.

  • Required: 
  • (i)Find the optimal capital structure where value of the firm is maximized. 
  • (ii) Find the value of debt at this level
  •  (iii) Should the company increase debt-level or reduce debt-level 
  • (iii) What will be the share price after your proposed capital structure