Assignment # 2

Firm Capital Structure (Optimal Capital Structure)

Q No. 1
Percent financed with debt
DEBT Cost of debts
0 0.1
0.1 0.1
0.2 0.105
0.3 0.11
0.4 0.12
0.5 0.14
0.6 0.16
Operating profit of firm is Rs. 80,000 and tax rate is 40%.
Risk free rate is 10%, market premium is 6% and unlevered beta is 1.
Required:
Calculate at what level of debt firm maximized value will.

Q No.2
ICI Company has unlevered beta of 1.2. Risk free rate in market is 11.5% and investor required 6% risk
premium to invest in market. Tax rate of company is 35%. Following is the schedule of borrowing rate
obtained from bank for different level of debt level in capital structure. Firm anticipating Rs. 120,000
operating profit (EBIT).
DEBT RATE
0  0.1
0.1 0.1
0.2 0.105
0.3 0.11
0.4 0.12
0.5 0.14
0.6 0.16

Calculate debt level in capital structure where firm obtained maximum value. Use Hamada equation and
show complete schedule to obtained firm value at different level of debt.
Q No.3
Lucky Cement Company has unlevered beta of 1. Risk free rate in market is 9% and investor required 5%
risk premium to invest in market. Tax rate of company is 35%. Following is the schedule of borrowing
rate obtained from bank for different level of debt level in capital structure. Firm anticipating Rs.
200,000 operating profit (EBIT).
DEBT RATE
0  0.1
0.1 0.1
0.2 0.105
0.3 0.11
0.35 0.12
0.45 0.14
0.55 0.16

Calculate debt level in capital structure where firm obtained maximum value. Use Hamada equation and
show complete schedule to obtained firm value at different level of debt.