Strategy Paper - Case Study Example

Kelly Services Inc. The objective of this paper is to determine the optimum capital structure if Kelly Service Inc. were to source for additional amount of dollars. Myers (1977) argued that, “The optimum level of debt, if a company were to take on additional amounts would be the point at which additional dollars of debt were outweighed by the cost of bankruptcy.” Optimal capital structure is the mix of securities that minimizes WACC and maximizes stock price. As leverage increases, a company’s, ROE increases.

Steps involvedFirstly, we determine the WACC, which is the expected rate used for paying financing activities of Kelly Service Inc. =[(D/V) x Rd x (1-Taxc)] + [(E/V) x Re] Secondly, we determine the stock price of Kelly Service Inc. We first determine the beta of Kelly, when it is unlevered and when it is levered.Beta (levered) = Beta (unlevered) [1+ (1-Tax Rate) (Debt/Equity)]We then determined the RRR of Kelly Service Inc. using the CAPM model. RRR= Rf – (Rf –R)Beta using the calculated betas above and the most current Rf from the 3 year Treasury bond of Dec.

1985 of 8.4%. Using the RRR we then finally determine the price of the stock at different levels of debt and also the risk premiums with Po-$25.Lastly, we determine the value of the firm =Value (unlevered) + PV (Tc x Debt) (Tax Shields) or Value of Equity + Value of Debt. Using the determined stock prices above, based on different percentages of risk premiums and debt, we calculate the value of the firm.Works Cited Myers, Stewart C. "Determinants of corporate borrowing." Journal of financial economics 5.2 (1977): 147-175.