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Corporate Finance | 25765
Summer 2017/18
Case Study Guidelines
CASE STUDY: CAPITAL STRUCTURE ANALYSIS
You are employed in a corporate finance advisory firm that has been hired by the Board of
Directors of the company assigned to your group to perform analyses of the company’s
capital structure and to provide advice on whether the current capital structure is optimal.
Since your group will report directly to the Board of Directors, you can assume Financial
Management-level knowledge of finance. That is, you can assume that your readers would be
familiar with Modigliani and Miller (MM) theorem with corporate taxes. The report should
therefore cover material more advanced than MM with corporate taxes.
You should thoroughly read lectures 5, 6 and 7, the relevant textbook chapters, and pp. 1-34
of the survey, “The Theory and Practice of Capital Structure”, by Henri Servaes and Peter
Tufano (available on UTSOnline in the Course Documents/Case Study Documents folder)
to gain the background necessary to undertake the project.
Your group’s assigned task is to produce a report on the capital structure of the company
assigned to your group. In the report, you should analyse the capital structure of the assigned
company following the guidelines provided below, and determine whether the firm is under,
over or correctly leveraged.
A printed copy of the report is due at the beginning of class on 06/02/2018.
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GUIDELINES FOR THE REPORT
In your report, you must apply the theories and concepts discussed in class to the facts of
the firm assigned to your group.
The report should demonstrate your understanding of the theories and their practical
implications.
The report should be no longer than 12.5 pages, including the executive summary, tables
and graphs but excluding references and appendices. You can include one page of references
and up to two pages of appendices.
Please do not cite too many academic articles from the internet — this report is about
applying capital structure theories, as discussed in the lectures, the textbook and the
Servaes and Tufano paper, to a real company, and therefore there is no need for you to
do detailed review of academic literature in this report.
The report will be marked on both its content (discussions/analyses/arguments) and the
quality of the writing (organisation, clarity, conciseness, grammar and punctuation).
All graphs and tables included in the report must be produced by the group members.
You may not copy figures, graphs or tables from other sources such as company
annual reports or financial databases. You must discuss the relevance and the
significance of the information provided in tables and graphs included in the report.
You should not include redundant information in tables.
You may obtain raw financial data from financial databases and/or annual reports.
Most of the analyses should be based on at least 10 years of past data in order to
capture financing and leverage decisions of the firm over the business cycle.
In order to receive high marks on the report, the report must successfully apply
the theories and concepts discussed in class to the assigned company.
The report is be marked out of a total of 60.
A case study cover sheet is available on UTSOnline. The report should be submitted with a
completed and signed cover sheet attached.
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The following is a summary of the areas your group report must cover. Please note that it is
not comprehensive but it gives you a sense of what is expected in your submission.
1. EXECUTIVE SUMMARY and COMPANY AND INDUSTRY
OVERVIEW (8 marks)
1.1 EXECUTIVE SUMMARY (max ½ page)
Include a brief summary of the report highlighting its major conclusions and
recommendations and how you arrived at those conclusions and recommendations.
Half of the executive summary page should be left blank.
The executive summary must clearly state the optimal leverage or optimal leverage
range according to your analyses.
Clearly but briefly spell out the reasoning that led to this optimal leverage or optimal
leverage range
An executive summary must not be a list of the content of your report.
1.2 COMPANY AND INDUSTRY OVERVIEW (max. 2.5 pages)
Provide a summary of
the firm’s business activities
business segments: how large are each segment and what are the segments’ lines of
business
recent developments in the company: use financial statements, management
discussions in the company’s annual reports and news articles
recent developments in the industry: use news articles, industry reports and
management discussions in the company’s annual reports
This overview of up to 2 pages should also identify two comparable firms, which you
will use in your analyses in the next section (in the last point of section 2.1 only). You
should fully justify your choice of the comparable firms — compare the industry,
size, profitability and growth of comparable firms with firm you are analysing.
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2. CAPITAL STRUCTURE ANALYSIS (44 MARKS)
In this section you will analyse the company’s capital structure and leverage policy.
Your discussion in this section should include, but not be restricted to, the following:
2.1 Historical Company Financing/Leverage Analysis and Peer Leverage Analysis (max.
4 pages, 20 marks)
You should document the financing and leverage history of the company and characterise the
company’s historical (and current) leverage policy using:
recent trends in the use of debt and equity
recent financing activities of the firm: debt and equity issues, placements and share
buybacks
o All the information (for at least the past ten years) mentioned above must be
presented in a table and then trends should be discussed. You should also use
graphs to facilitate your discussion as necessary
current and recent history of leverage and interest coverage ratios
o All the information (for at least the past ten years) mentioned above must be
presented in a table and then trends should be discussed. You should also use
graphs to facilitate your discussion as necessary
management discussions about the firm’s leverage policy (if available in the annual
reports).
Based on the above analyses, does the company have a target leverage ratio?
Does the past pattern of the company’s financing and leverage support:
the managerial inertia theory?
o The managerial inertia theory uses market leverage as the measure of leverage,
so you should use market leverage in this analysis.
the security mispricing theory?
o Think about what information you need to test the security mispricing theory.
Detail the company’s past capital expenditures, including mergers and their financing
all the information (for at least the past ten years) mentioned above must be presented
in a table and then trends should be discussed
is the financing behaviour of the company consistent with the pecking order theory?
You should document and discuss the firm’s leverage policy relative to the leverage policies
of comparable firms.
Comparable firms should only be used to compare leverage policies; all the other
analyses mentioned above should be done only on the firm your group has been
assigned.
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2.2 Optimal Leverage Analysis (max. 5.5 pages, 24 marks)
You should discuss the implications of the various capital structure theories for optimal
capital structure as they apply to your assigned company including:
Trade-off theory
o The trade-off between tax benefits of debt (including personal taxes and
dividend imputation credits (see Topic 7)) and the financial distress costs.
Keep the general discussion of the trade-off theory very short (not more than
half a page).
o Analysis of tax benefits should be detailed.
This analysis must consider Australia’s dividend imputation tax
system.
o The implications of the trade-off theory determinants (see Topic 5) of optimal
leverage for the optimal leverage of the firm.
The report should have separate sub-sections for each of the
following determinants: Profitability, Uncertainty of Operating
Income, Growth Opportunities and Types of Assets.
Analyses of the determinants should be both qualitative and
quantitative.
o You may incorporate stakeholder theory and agency theory (see Topic 6)
along with the trade-off theory determinants mentioned above in a broader
trade-off theory framework.
o The analyses of the trade-off theory determinants (including stakeholder
theory and agency theory, if you choose the broader framework) should
be detailed and should form the bulk of your analyses of optimal leverage.
Agency theory
Stakeholder theory
You should determine the optimal leverage or optimal leverage range of the firm and whether
the firm should increase, decrease or maintain its current leverage.
GRAMMAR, PUNCTUATION AND CLARITY (4 MARKS)
The report should be grammatically correct and properly punctuated.
The report should be clear, concise and to-the-point.
FORMAT AND PRESENTATION OF THE REPORT (4 MARKS)
The report should satisfy the basic formatting requirements suggested in the UTS Guide to
Writing Assignments: http://www.uts.edu.au/sites/default/files/business-writing-guide2014.pdf
References
The report should appropriately reference all sources used following the harvard-uts
referencing style: http://www.lib.uts.edu.au/help/referencing/harvard-uts-referencing-guide
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You should use the textbook, the lecture notes, company annual reports, industry reports and
news articles about the company and the industry as the primary references in writing the
report.
PLAGIARISM
Each member of the group must read the whole of the report before submission.
If there is evidence of plagiarism in any section of the report, then under UTS rule 16.2
your group may be subject to an allegation of student misconduct.
RESOURCES
Your group should acquire the financial and other information necessary to complete the case
study from databases available through the UTS Library (e.g., DatAnalysis Premium:
http://www.lib.uts.edu.au/databases/search_databases.py?search=datanalysis+premium
The UTS Library subscribes to many databases that provide information relevant for the case
study such as company financials, industry reports, newspapers and journal articles.
You can access these databases on and off campus via the UTS Library website:
http://www.lib.uts.edu.au/databases/search_databases.py?subcategory_id=324
