Date post: | 03-Jun-2018 |
Category: |
Documents |
Upload: | ravi-pratap-singh-tomar |
View: | 226 times |
Download: | 0 times |
of 14
8/12/2019 Assignment for FIN MKT_ Cost of Capital Submission
1/14
MBA (F&B) - BATCH VI
ASSIGNMENT FINANCIAL SYSTEM
Cost of Capital Calculation
SUBMITTED UNDER GUIDENCE OF
PROFF. SANKARSEN SARKAR
SUBMITTED BY
GROUP 6, SECTION 2
Team Members Enrollment Number
RAVI PRATAP SINGH TOMAR P301413CMG342
SAMEER GAIROLA P301413CMG353
SAUMYA KHARE P301413CMG358
SONAM SHARMA P301413CMG369
SONAM SHARMA P301413CMG370
8/12/2019 Assignment for FIN MKT_ Cost of Capital Submission
2/14
ContentsIntroduction .............................................................................................................................................. 4
Companies ................................................................................................................................................ 4
Estimation Methodology : ........................................................................................................................ 4
Cost of Debt ............................................................................................................................................. 4
Cost Of secured and unsecured Loans ...................................................................................................... 5
Cost Of Preference share .......................................................................................................................... 5
Cost of Equity ............................................................................................................................................ 6
Cost of Capital ........................................................................................................................................... 7
Cost of market returns from risk free market (Opportunity cost) .......................................................... 13
Limitations of Estimation methodologies ............................................................................................... 13
Conclusions : ........................................................................................................................................... 14
8/12/2019 Assignment for FIN MKT_ Cost of Capital Submission
3/14
8/12/2019 Assignment for FIN MKT_ Cost of Capital Submission
4/14
Introduction
Objective of analysis is to estimate cost of capital for companies doing business in power /
manufacturing industry and to establish a bench mark for investing and evaluating the cost structure for
mentioned companies with respect to market (BSE / NSE).
Companies1. OM Metal Infrastructure Ltd. (Listed in NSE and BSE , Taken NSE for calculations)
2. Epic Energy Ltd. (Listed in BSE)
3. Shilchar Technologies. (Listed in BSE)
4. RTS Power Ltd. (Listed in BSE)
5.Swelwct Power. (Listed in NSE and BSE , Taken NSE for calculations)
Estimation Methodology :
Construction of cost of capital is based on weighted average cost of capital basis , where proportion of
individual cost are divided from various sources e.g Debt , Loans Preferance shares and equity shares
raised in stock exchanges in BSE and / or NSE.
WACC is a composite figure reflecting cost of each component multiplied by the weight of each
component.
WACC = we x re + wp x rp + wd x rd
we = Proportions of equity re = Cost of equity
wp = Proportion of pref capital rp = Cost of preference capital
wd = Proportion of Debt rd = Cost of debt
The analysis has been conducted based on book values / face values of capital since fund raising
through loans are not at its market value but from book value.
Cost of Debt
Cost of debt is determined by equating the cash flows of the instrument to its market price. Cost of
perpetual debt, rdis Most debts are repayable in the specified time interval.
Post tax cost of debt = rd(1-T)
oP = Present Value Market Price.
tC = Cash Flow.
o
oP
P tdd
t Crr
C or
8/12/2019 Assignment for FIN MKT_ Cost of Capital Submission
5/14
dr = Cost Of Debt.
T = Tax Rate.
None of the selected companies have opted for fund raising from debt market. Hence cost component
from all this parameter is zero for all companies.
Cost Of secured and unsecured Loans
Cost of secured and unsecured loans is based on the data collected from 5 year balance sheets (For
Loan amount) and profit/loss accounts (For Interest Payment) of respective companies and thus,
average cost of loans was found.
___
_
LoansofValueBook
paidInterstLR
Post tax cost of Loans = rL(1-T)
Assumptions :
1.Entire loan amount would be repaid at end of the maturity period.
2. There is no difference among various sources of loans in terms of payment terms ,rate of interests
and maturity period.
Cost Of Preference share
Cost of preference capital, rpis determined by equating its cash flows to market price. No adjustment
for tax is required.
rp is the cost of preference shares. and Dt is preference dividend.
Assumption :-
That taxes are deducted at source itself. None of selected companies have opt for fund raising through
this channel.
N
1tN
pt
p
to
)r(1
R
)r(1
DP
8/12/2019 Assignment for FIN MKT_ Cost of Capital Submission
6/14
Cost of Equity
Considering inconsistent dividend models and unstructured market growth offered by companies, we
have selected Capital asset pricing model for calculating cost of equity , however ,the primary
determinant of risk governs the cost of equity.
re= rf+ x (rmrf)
It relies on the market information and incorporates risk it need not know the dividend policy.
Calculations for Risk Free rate of returns : Chosen 8.8 as per 10 yr YOY basis from RBI.
8/12/2019 Assignment for FIN MKT_ Cost of Capital Submission
7/14
Risk premium Calculation
For calculation daily returns are calculated for period of 2008:09 to 2013:14 from respective NSE / BSE
for individual companies (for maximum available data from the date of listing)
Sensitivity (or Beta)calculation
It is important to note that for days when there was no trading for company shares data was omitted /
interloped with unitary method in order to obtain consistent regression function i.e sensitivity of data.
Assumptions
We attempted to use daily market closing price data from 2008:09 - 2013:14 for stocks listed in Bombay
Stock Exchange / National Stock Exchange and collected individual companies for the maximum tenure
with in scope of 2008:09 - 2013:14.
(1) The stocks selected should have been listed in Bombay Stock Exchange for the entire period 2008:09- 2013:14.
(2) There should be at least one trading in every month during the time period.
(3) The final 100 stocks were selected based on the number of trading days. Five value-weighted
portfolios were constructed by value ranking of the companies on the basis of market capitalization at
the end of every year and splitting these companies into value-ranked quintiles, and then forming five
portfolios based on value weights within a quintile.
Cost of Capital
Based on methodology, and data collected, cost of overall capital is framed and estimated for
companies on individual basis with respective NSE / BSE.
OM Metal Infrastructure:
Estimation of Current Cost of CapitalInputs Om Infrastructure
Equity
Number of Shares outstanding =
96,303,809.00
Face value per share =
1.00
Number of Warrants Outstanding
=
-
Current Market Price per
Warrant =
-
Current Beta =
8/12/2019 Assignment for FIN MKT_ Cost of Capital Submission
8/14
8/12/2019 Assignment for FIN MKT_ Cost of Capital Submission
9/14
Epic Energy
Inputs
Equity
Number of Shares outstanding = 67,100,000
Face Value per share = 10
Number of Warrants Outstanding = 0
Current Market Price per Warrant = 0
Current Beta = 0.39
Riskfree Rate = 8.86%
Equity Risk Premium = 0.08%
Debt
Book Value of Term Loan = 12,400,000
Interest Expense on Debt = 200,000
Average Maturity = 5
Pre-tax Cost of Debt = 2%
Tax Rate = 20%
Book Value of Convertible Debt = -
Interest Expense on Convertible = -
Maturity of Convertible Bond = 0
Market Value of Convertible = 0
Debt value of operating leases = 0
Preferred Stock
Number of Preferred Shares = 0
Current Market Price per Share= 0Annual Dividend per Share = 0
Output
Estimating Market Value of Straight
Debt = 12,400,000.00
Estimated Value of Straight Debt in Convertible = -
Value of Debt in Operating leases = -
8/12/2019 Assignment for FIN MKT_ Cost of Capital Submission
10/14
8/12/2019 Assignment for FIN MKT_ Cost of Capital Submission
11/14
Output
Estimating Market Value of Straight Debt =
189,400,000.00
Estimated Value of Straight Debt in Convertible =
-
Value of Debt in Operating leases
=
-
Estimated Value of Equity in Convertible =
-
Equity Debt
Preferred
Stock Capital
Market Value 101,058,400.00 189,400,000 - 290,458,400
Weight in Cost of Capital 0.15 0.27 - 0.42
Cost of Component 0.08 0.17 5.769%
RTS Power Corporation Limited :
Estimation of Current Cost of CapitalInputs
Equity
Number of Shares outstanding = 8,168,500
Face value per share = 10.00
Number of Warrants Outstanding =
Current Market Price per Warrant =
Current Beta = 0.39
Riskfree Rate = 8.86%
Equity Risk Premium = -8.68%
Loans
Book Value of Secured/Unsecured loan = 472,000,000
Interest Expense on Secured/Unsecured
loans 94,600,000
Average Maturity =
Pre-tax Cost of Debt = 20.04%
Tax Rate = 35%
Debentures
Book Value of Convertible Debt = Interest Expense on Convertible =
Maturity of Convertible Bond =
Market Value of Convertible =
Debt value of operating leases =
Preferred Stock
8/12/2019 Assignment for FIN MKT_ Cost of Capital Submission
12/14
Number of Preferred Shares =
Current Market Price per Share=
Annual Dividend per Share =
Output
Estimating Market Value of Straight Debt
= 472,000,000
Estimated Value of Straight Debt in Convertible =
-
Value of Debt in Operating leases =
-
Estimated Value of Equity in Convertible
=
-
Equity Debt Preferred Stock Capital
Book Value 81,685,000.00 472,000,000.00 - 553,685,000
Weight in Cost of Capital 0.15 0.85 - 1.00
Cost of Component 0.06 0.13- 12%
Estimation of Current Cost of CapitalInputs Shilchar Technologies
Equity
Number of Shares outstanding =
3,813,400.00
Face value per share =
10.00
Number of Warrants
Outstanding =
-Current Market Price per
Warrant =
-
Current Beta =
0.04
Riskfree Rate = 8.86%
Equity Risk Premium = -8.68%
Loans
Book Value of
Secured/Unsecured loan =
189,400,000.00
Interest Expense onSecured/Unsecured loans
40,200,000.0
Average Maturity =
-
Pre-tax Cost of Debt = 21.22%
Tax Rate = 35%
Debentures
Book Value of Convertible Debt
8/12/2019 Assignment for FIN MKT_ Cost of Capital Submission
13/14
= -
Interest Expense on Convertible
=
-
Maturity of Convertible Bond =
-
Market Value of Convertible =
-
Debt value of operating leases =
Preferred Stock
Number of Preferred Shares =
-
Current Market Price per Share=
-
Annual Dividend per Share =
-
Output
Estimating Market Value of
Straight Debt =
189,400,000
Estimated Value of Straight Debt
in Convertible =
-
Value of Debt in Operating
leases =
-
Estimated Value of Equity in
Convertible =
-
Equity Debt
Preferred
Stock Capital
Book Value 38,134,000
89,400,000 - 227,534,000
Weight in Cost of Capital 0.17 0.83 - 1.00
Cost of Component 0.08 0.14 - 13%
Cost of market returns from risk free market (Opportunity cost)
As mentioned Risk free rate is 8.86 for ten year , Investor may find opportunities based on Internal rate
of return or based on NPV values in order to evaluate duration and percentage of investment in
portfolio.
Limitations of Estimation methodologiesIt is assumed that there is negligible floatation cost, since it is neglected in all companies hence it has
been considered as non differentiated costs, however this is not necessary.
Cost structure of loans are considered homogeneous in all terms and conditions , which need not to be
true in all cases.
8/12/2019 Assignment for FIN MKT_ Cost of Capital Submission
14/14
CAPM is worked out over Book value, since calculation is based on loan funds , however in presence of
debentures etc market value is considered to be a better measure in order to estimate Cost of capital. In
present case since loans does not have market value , hence mixture of book value and market value is
avoided. One must check for implications before relying only on book value at her / his own discretion.
Conclusions :Cost of capital for companies are as follows :-
Name Of Company Cost Of capital Cost Of Debt Cost Equity
Om metals Infrastructure 21% 24 % 2%
Epic Energy 5.4% 1.29% 5.47%
Shilchar Technologies 13% 14% 8%
RTS Power 12% 13% 6%
Swelect Energy Systems 10% 11% 8%
It shows that best choice may be to invest in Epic energy , considering the compensation over opportunity
costs in this sector and understanding the requirement of portfolio diversification choices.
From the point of view of management, out of the five selected companies , four of them have a cheaper
equity as compare to debt (in form of term loans) , so it is advisable to procure funds through equity while
operating in this industry.
Reference
1. http://www.nseindia.com/
2. www.bseindia.com
3. http://www.moneycontrol.com/
4. http://in.finance.yahoo.com/q/hp?s=EPIC.BO&a=02&b=2&c=2009&d=02&e=2&f=2014&g=d5. http://www.ommetals.com/
6. http://www.epicenergy.com.
7. http://www.swelectes.com/
8. http://www.rtspower.com/
9. http://www.tradingeconomics.com/india/gdp-growth-annual
10. Book : Financial Managment by Rajiv Shrivastava and Amit Mishra . Published By TMH Publication.
11. Conditional CAPM and Cross Sectional ReturnsA study of Indian Securities Market , study
conducted by Lakshmi Narasimhan S and H.K.Pradhan.