Optimal Capital Structure and Initial Public Offerings of Teknoaids (pvt) limited company

Abstract

The purpose of this project is to find the optimal capital structure of Teknoaids (pvt) limited company and maximization of its value by adopting debt and equity financing. As the management of Teknoaids (pvt) limited has decided to go public by issuing initial public offerings, so for this the company has to first convert itself from private limited to public limiter by following the policies and guidelines of the governing body of the stock exchange of Pakistan i-e Security and the Exchange Commission of Pakistan (SECP). After getting public, the company has to meet the criteria of SECP to go public and the most basic requirement of SECP for the companies issuing IPO’s for the very first time is that the companies should have paid up capital of Rs 200 millions. In this project we have also discussed the significance of initial public offerings for the companies and benefits that the firm’s get after going public. As we have some limitations to find the cost of equity of the Teknoaids because it has not taken any leverage to support its business activities since its establishment, and data related to find the optimal capital structure is limited as it is supporting its operations by full equity. And we know that cost of equity is finding by capital asset pricing model (CAPM), but due to unavailability of data which might be helpful to find the cost of equity of the company by CAPM approach is not directly applied to find the optimum capital structure of Teknoaids (pvt) limited company. So to overcome this limitation, we have find the cost of equity of Teknoaids by company own yield plus judgmental approach as suggested in the book “financial management theory and practice” by EHRHARDT and BRIGHAM (Michael C. Ehrhardt, 2011). After finding cost of equity of the company we have calculated the cost of equity at different levels of debt i-e 15% of total assets of the company, 20%, 25% and 30%. Then calculate the value of equity, total value of the equity at each level of debt. As argued by Brigham and Gapenski in 1996, optimal capital structure maximizes the value of the firm and at optimal capital structure the weighted average cost of capital is also minimized, which helps in identifying the optimum capital structure of the company. After determining the capital structure of the Teknoaids (pvt) limited, we have further found the stock price of the shares of the company at different levels of debt and also found the number of shares to float in the market for trading at different level of debts. At the end, we have concluded that if teknoaids (pvt) limited take leverage of 20% of its total assets then the wacc at this level of debt is also minimum and the stock price of the company is at its maximum price as comparable at other three levels of debts.