Assignments: Strategic Financial Management

Marks = 5

Due on = January 22, 2014

Email: ims.assign@gmail.com

Note: Subject of email and file name should be in this format : Your_Name_Assignment_Name

Instructions

• 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