MGT201 - Financial Management Assignment No. 2 Solution Fall 2015 Due Date Feb 03, 2016
                              Assignment 2
                                            FALL SEMESTER 2015
                                  Financial Management (MGT201)
Due date: 3rd  February, 2016
Total marks: 10

 Assignment 2

FALL SEMESTER 2015

Financial Management (MGT201)

Due date: 3rd  February, 2016                                                                                                                        Total marks: 10

____________________________________________________________________________________________

Learning Objectives

?  To make students learn the application of capital structure theories

?  To make students develop skills to determine the optimal capital structure for firms under the

framework of capital structure theory

Learning outcomes

?  After doing this assignment, Students will be able learn the application of capital structure

theories on the financing decisions of firms.

INSTRUCTIONS

?  Use only given “solution format” to solve the question. Word file of “Solution format” is available

in “downloads” section of VULMS.

?  Assignment will be marked as ZERO if NOT followed the given format   .

Deadline

?  Make sure to upload the solution file before the due date on VULMS. 

?  Any submission made via email after the due date will not be accepted.

Formatting guidelines

?  Use the font style “Times New Roman” or “Arial” and font size “12”. 

?  It is advised to compose your document in MS-Word format. 

?  You may also compose your assignment in Open Office format.

?  Use black and blue font colors only. 

Referencing Guidelines

 

?  Use APA style for referencing and citation.  For guidance search “APA reference style” in Google and read

 

various websites containing information for better understanding or visit

 

http://linguistics.byu.edu/faculty/henrichsenl/apa/APA01.html               

Rules for Marking

 

Please note that your assignment will not be graded or graded as Zero (0), if:

?  It is submitted after the due date.

?  The file you uploaded does not open or is corrupt.

?  It is in any format other than MS-Word or Open Office; e.g. Excel, PowerPoint, PDF etc.

?  It is cheated or copied from other students, internet, books, journals etc.

 

 

Important

?  24 hours extra / grace period after the due date is usually available to overcome uploading difficulties. This

extra time should only be used to meet the emergencies and above mentioned due dates should always be treated as final to avoid any inconvenience.


 Note related to load shedding: Please be proactive

 

 

Dear students!

 

As you know that Pre Mid-Term semester activities have started and load shedding problem is also prevailing in our country. Keeping in view the fact, you all are advised to post your activities as early as possible without waiting for the due date. For your convenience; activity schedule has already been uploaded on VULMS for the current

 

semester, therefore no excuse will be entertained after due date of assignments, quizzes or GDBs.

 

 

 

 

QUESTION

The ABC Company, a 100% equity firm, has been manufacturing electrical home appliances for many years. They are planning to expand their production capacity to meet the increasing demand of home appliances. They require Rs. 5, 00,000 for the installation of new factory that expects to yield annual earnings before interest and tax (EBIT) of Rs. 100,000.  The company is having 10,000 outstanding shares. The current market value of share is Rs. 70. The company is planning to issue both equity and debt to finance this new factory. The funds can be raised through debt at following rates:


Amount of debt (D) Cost of debt (r

100000 3%

200000 4% 300000 4.5% 400000 5% 500000 6.7%


D)


 

 

The corporate tax rate is          30%.

Required 


Assuming cost of equity (r


  1. E.                    to be changing with the addition of debt (D) at following rates: 

Amount of debt (D) Cost of equity (r

0  10%

100000 11% 200000 11.5% 300000 12.7% 400000 17.5% 500000 24%


E)


 

 

  1.  Calculate the market value of equity       (E), total market value of the firm                                                 (V), market value

of shares and weighted average cost of capital (WACC


  1. L.                    of the firm. (1+1+1+1)
    1.  What is the effect of debt on market value of equity                                                                                        (E),         total market value of the firm


(V), market value of shares and weighted average cost of capital        (WACC

(1+1+1+1)


  1. L.                    of the firm?
    1.    What will be the optimal capital structure of the firm and why? (1+1)

 

SOLUTION FORMAT

Following format should be followed to answer the above questions:

(a) 

Fill those columns with available data in question and then calculate all the unknown variables in their respective column

Debt Cost of                Cost of         EBIT Net                 Market         Market      WACC MV of

 

debt (rD)

equity (rE)

income

(NI)

value of

equity (E)

value of

firm (V)

shares

                                                                                                     

 

 

 

(b)


Write the  Effect of debt on following variables:

Market value of equity (E)


Write the answer in the corresponding column of each heading


 

 

 

Total Market value of firm (V)  

 

 

 


Market value of shares

 

 

 

 

Weighted  average cost of capital (WACC)


 


 (c)

Determine the optimal capital structure for the firm? Optimal capital  structure:

(write the optimal amount of

debt and optimal financial

leverage (optimal debt ratio) in

corresponding column)

Why it is an optimal capital

structure for firm? (state the

reasons in corresponding

column) 

 

 

 

 

Working

Net income

 

 

 

 

Market value of equity

 

 

 

 

Total market value of firm

 

 

 

 

WACC

 

Tags: -, 03, 2, 2015, 2016, Assignment, Date, Due, Fall, Feb, More…Financial, MGT201, Management, No., Solution

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Replies to This Discussion

kisi ka bhi mgt201 nahi hey ???

all students read lecture number 34 and 35 .

Thanks!!!!!!!!

thanks 

34 mein tou kuch bhie nahin mila assignment related... :(

Jnab yeh assignment nahi ki kisi ne kia????

Please bta do ???. today is the last day for submission...

NO one has done i think :(

sis, I can you a format of APA  style writing as high lighted in instruction of assignment. 

"APA reference style"

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