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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
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