Comments on Capital Structure Assignment: MBA 3S 2012

Ammad Ali and Muhammad Hassam

1. In the HUBC file, the beta of 0.75 was for the current capital structure but in the calculations you have assumed it for 0 leverage

2. The cost of debt was supposed to increase by 5 percentage point with each increase of 10% in weight of debt, in your calculations, you have reduced the cost of debt which has finally become negative which is counter intuitive.

3. The optimal capital structure is reached at a point where WACC is minimum, in your calculation you have have selected WACC of 0.1854 which is not minimum as shown by your WACC calculation table

4. Requirement No.10 in the assignment states that, “Find the average net income and assume that this net income will remain constant forever”. You have not done the above, instead used five years data individually, which is against the concept of constant growth.

5. You were supposed to 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) You have not provided any answer to the above questions


Tariq Khan and Muhammad Yunas

1.       In the OGDC file, while calculating ke, you have deducted Rf of .012 from Rm whereas Rf was 0.13

2.       While calculating kd, you were supposed to add .05 to cost of debt with every increase of 10% in weight of debt instead you have added .005

3.       In the WACC calculations, the column ‘assumed ke’ does not make sense, where you have multiplied 2 with kd. We have not studied any such thing in the class, nor were there any such instructions in the assignment

4.       Your suggestion for optimal capital structure seems to be wrong in the OGDC file, you have written that debt should be increased to 80%, whereas the calculations show that value of the firm and share price are maximum at 6.14% debt.

Hizbullah and Tahir Ali

1.  In the NCL file, the beta of .98 was for the current capital structure but in the calculations you have assumed it for 0 leverage

 2. Requirement No.10 in the assignment states that, “Find the average net income and assume that this net income will remain constant forever”. You have not done the above, instead used five years data individually, which is against the concept of constant growth.

3. You were supposed to (ii) Find the value of equity and debt at optimal (iii) should the company increase debt-level or reduce debt-level. You have not provided any answer to the above questions.

4. The share price should have come from your calculations; instead you have found it by dividing the existing balance sheet equity on number of shares and have ignored your own calculations.


Rukhshanda Naz

1.       Well done! There is one mistake, while calculating kd, you were supposed to add .05 to cost of debt with every increase of 10% in weight of debt instead you have added .005

Asad Iqbal

1.       You have average the monthly Rm but have not multiplied it with 12 to convert it to annual Rm

2.       In the PPL file, the beta of .86 was for the current capital structure but in the calculations you have assumed it for 0 leverage, i.e. you have considered it as unlevered beta

3.       while calculating kd, you were supposed to add .05 to cost of debt with every increase of 10% in weight of debt instead you have added .1

4.       To answer point 10, you have written that, “The current structure is a combination of 40% debt and 60% equity, Whereas to achieve optimal it should decrease the debt level to 20%, And the shares should be priced at Rs.214.56.” whereas the share price is maximum at 0 debt i.e. it is 240


Afzal and Furqan


1. Your calculation for the unlevered beta in LUCK sheet, first page, is incorrect, which is why your unlevered beta is higher than the levered beta!!!!

2.

Abeera and Ayesha

1. You were supposed to (ii) Find the value of equity and debt at optimal (iii) should the company increase debt-level or reduce debt-level. (iii) find price per share. You have not provided any answer to the above questions.

Monesa

1.      You have not shown calculations for the unlevered beta, and counter intuitively it is higher than the levered beta!!!!

2.      The risk free rate in your calculation has incorrectly been divided on 100 for the year 2009 and onward. It was already in decimal points, so you did not need to divided it further


Adnan Shah and Adeel Ahmad

1. The average cost of debt in the ATRL firm is 1.92, which means the firms pays 192% interest. Such a big figure is logically incorrect, and hence calls for additional checking of data. Generally, if your calculations return unreasonable values, then you should review your calculations or use some other method. Whatever model or method we use, they cannot defy logic.

2.       In the ATRL file, the beta of .35 was for the current capital structure but in the calculations you have assumed it for 0 leverage, i.e. you have considered it as unlevered beta which is incorrect.

2. The cost of debt was supposed to increase by 5 percentage point with each increase of 10% in weight of debt, in your calculations, you have added 10 percentage points instead.

3. You were supposed to 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) Finding the share price at this level. You have not provided any answer to the above questions


Zeenat Shah and Ziaul Islam

1.      You have deducted .02 from kd above the yellow line in NCL file, and added .05 to kd below the yellow line, I cannot see any reason for this inconsistency.

2.      You have used monthly data but have deducted the yearly Rf of .13 to find Ri-Rf or Rm-Rf. In your case, the Rf should have been adjusted as =0.13/12

3.      The yearly Rm was equal to =0.00385x12= 0.0462, but in the Ke calculation you have used the value of 0.00227 for Rm-Rf which is incorrect

4.      In finding the share price, you have divided value/shares. Whereas you need to deduct the value of debt from the total value of firm, then divided value of equity on shares.

Qazi Ammad and Ihsanullah

1. In the FEROZ file, beta of 0.26 was for the current capital structure but in the calculations you have assumed the beta of 0.1973 for current capital structure

2. The cost of debt was supposed to increase by 5 percentage point with each increase of 10% in weight of debt, in your calculations, you have added 10 percentage points instead.

3. You were supposed to 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) Finding the share price at this level.You have not provided any answer to the above questions

Aftab Ahmad and Ahmad Usman

1.      For finding cost of debt, you have divided interest on non-interest bearing liabilities. Instead, it should be calculated as =interest/ interest bearing liabilities.

2.      In the WACC calculation, you have shown kd to be negative in many cases. Such a figure is logically incorrect, and hence calls for additional checking of data. Generally, if your calculations return unreasonable values, then you should review your calculations or use some other method. Whatever model or method we use, they cannot defy logic.

Sarwat and Tania

1.       Requirement No.10 in the assignment states that, “Find the average net income and assume that this net income will remain constant forever”. You have not done the above, instead used five years data individually, which is against the concept of constant growth.

2.       You were supposed to 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.  You have not provided any answer to the above questions

3.       You have not identified at what point optimal capital structure is reached.







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