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FINM7402: Corporate Finance 2025

Case Study Assignment: Domino’s Pizza Enterprises (DMP)

In this assignment, you will analyze the corporate governance, cost of capital, capital structure
and dividend policy of Domino’s Pizza (ticker code: DMP), which is a company listed in the
Australian Securities Exchange (ASX).
The submission will comprise of two parts:
(a) Report (word/pdf): discussing corporate governance, cost of capital, optimal capital
structure and dividend policy (using the report template).

(b) Spreadsheet (excel): Showing all the calculations relating to cost of capital, capital
structure and dividend payout (using the spreadsheet template).

Requirements of the submission:

1. Corporate Governance (3/20):

(i) Monitoring: Discuss about the features of the board (refer to aspects that we
covered in the class: size, independence, classified) (1)

(ii) Incentives/Compensation: Discuss the compensation policies of the firm (1)

(iii) Your overall view of the firm’s corporate governance: Discuss how severe
the agency problem is in the firm and whether the board and compensation
policies are helping to mitigate the problem (1)

2. Cost of Capital (3/20)

(i) Estimate the firm’s cost of equity (estimating beta using the regression).
Comment on some of the practical issues when estimating cost of equity
using the CAPM approach (2)

(ii) Estimate the firm’s WACC (pre and post-tax) (1)

Note
• Treasury bill (TB) returns provided are monthly returns
• Since monthly data is provided for index and stock price, those returns
will also be calculated as monthly returns
• Annual values should be used to estimate the Cost of Equity as well as
the Overall Cost of Capital





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3. Capital Structure (10/20)

Use the following information for capital structure questions.

Domino’s current capital structure comprises of $1,178.50 million of long-term debt. It has
87.5 million shares outstanding with the current share price at $53.89 (31/12/2019). Its earnings
before interest and taxes (EBIT) is $203.66 million and the tax rate is 30%. There is a 45%
interest income deduction limit (based on EBIT). Its cost of debt (before tax) is 3.5%. Domino’s
as an unlevered firm is valued at $4,600 million.

(i) What is the firm’s optimal capital structure using the following approaches? (8)


a. Cost of capital approach. Assume that the cost of debt remains constant up to
50% debt to capital ratio. It then increases by 0.10% for every 10% increase in
debt to capital ratio above 50% (2)

b. Considering only the interest tax shield. Consider the interest income deduction
limit in your calculations (2)

c. Considering both interest tax shield and cost of financial distress. Consider the
interest income deduction limit and assume the following for distress cost in
your calculations (2)

Debt to Capital Ratio 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Probability of Financial Distress 0% 0% 0% 3% 7% 25% 28% 30% 32% 38%

The expected cost of financial distress is $450 million in the event of
distress. Use the cost of debt as the discount rate for financial distress
costs.

d. Relative (Regression) analysis (2)

Note:
• Always use equity market values in calculating the Debt to Capital ratios
• The discount rate for tax shield and financial distress costs is the cost of
debt


(ii) What is your recommendation for the company’s debt to capital ratio given
the different estimates of the optimal capital structure above? (2)

4. Dividend Policy (2/20)

(i) Discuss the firm’s current dividend policy. (0.5)

(ii) How is the firm’s dividend policy different from that of its peers or the
market? (0.5)

(iii) Would you suggest any changes to the firm’s current dividend policy?
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(1)
5. Presentation of the report (2/20)

a. Sequence/Structure (Is the writing a logical sequence of ideas, organised into
paragraphs that works to establish a clear line of argument for the reader?) (0.5)

b. Language/Mechanics/Professionalism (Has the vocabulary and expression
appropriate for formal academic writing within this discourse been used? Has
the work been edited for lapses in spelling, grammar, or sentence construction?
(0.5)

c. Referencing (Has broad research been conducted, in order to achieve
a synthesis of personal ideas and those of the extant literature? Have
the researched sources been referenced correctly, both within the
document, and in the Bibliography?) (1)


Submission Format and Guidelines
The report should be named in the following format StudentNO._Report_FINM7402'.
The excel workbook should be named as 'StudentNO._Calculation_FINM7402'.


Report format: The report should be in Calibri 12, and 1.5 spacing. Please try to keep your
report brief. Consider the following:

a. This assignment is not only about performing calculations. It is also about making
qualitative judgments and recommendations based on the results of your analysis.

b. You should also keep in mind that there is no single right or wrong answer. It all
depends on your views. All I am looking for are good arguments based on your views
and assumptions. If you make a decision without justification, I will mark it down
even if the decision appears to be valid. However, if you can clearly articulate why
you made a particular decision, even if I believe that is not correct, I will mark it
favorably.

c. So, clearly articulate your assumptions that you made to get to your conclusion.

d. Remember, do not show any calculation in the report (all calculations should be
shown in the spreadsheet). Only include summary tables and graphs in the report.

Excel workbook format: You will need to complete the Excel workbook which contains 7
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worksheets that are named respectively as ‘Beta Regression’, ‘Cost of Capital’, ‘Optimal
CS-COC’, Optimal CS-ITS’, Optimal CS-ITS &FD’, Optimal CS-Using Regression’, and
‘Dividend Policy’.
‘Beta Regression’ sheet: this includes the data you need to estimate stock beta. Here show
the regression plot and the estimated beta value from the regression.
‘Cost of Capital’ sheet: show computation of cost of debt, cost of equity, WACC and pre-tax
WACC here
‘Optimal CS-COC’ sheet: fill the given table to present the optimal capital structure using
WACC
‘Optimal CS-ITS’ sheet: fill the given table to present the optimal capital structure using
interest tax shield only
‘Optimal CS-ITS &FD’ sheet: fill the given table to present the optimal capital structure
using interest tax shield and financial distress costs
‘Optimal CS-Using Regression’ sheet: fill the given table to present the optimal capital
structure using the regression or relative approach
‘Dividend Policy’ sheet: show all data and calculations relating to dividend payouts and other
forms of payout to shareholders.
Time: Assume that we are at the beginning of 2020 (Using data available as of the end of
December 2019).
Submission: Both the files needs to be submitted through Turnitin – link will be provided
closer to the due date.


Data & References

1. Corporate Governance:
a. Data: Annual report 2019
b. References: Slides week 1 and chapter 29 of the Berk & DeMarzo textbook)

2. Cost of capital:
a. Data: Market Data available on Beta Regression Sheet
b. References: Slides week 2 and chapter 12 of the Berk & DeMarzo textbook
(Chapter 12 Appendix very useful)

3. Capital Structure
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a. Data: Case and Project Template
b. References: Slides week 4 & 5 and chapters 15 & 16 of the Berk & DeMarzo
textbook

4. Dividend Policy
a. Data: Project Template
b. References: Slides week 7 and chapter 17 of the Berk & DeMarzo textbook


Page limits: please adhere to the following page limits. I will not mark any content that goes
beyond the following page limits. Remember it is the quality not the quantity than counts.

• Corporate governance: 2 pages

• Cost of Capital: 1 page

• Capital Structure: 2 pages

• Dividend Policy: 1 page

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