Marks = 10 Due on = November 15th 2012 Instructions- In a group of two students, 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: 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 |