Solultion to Case Solultion-to-Case-Study-Cost-of-Capital-040513.pdfStudy Cost of Capital 040513
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Case Study - 1 You are valuing shares of unlisted Pharma Company. Calculate Cost of Capital from following data Risk Free Rate 8.00% Equity Risk Premium 9% Cost of Debt 12% Debt : Equity Ratio 1.20 Debt equity ratio of other companies Name of the Company Debt/equity ratio Beta as worked out Unlevered Beta Pfizer ‐ 0.44 0.44 Glaxo ‐ 0.27 0.27 Ranbaxy 0.50 0.71 0.53 DR Reddy 0.70 0.93 0.63 IPCA Lab 0.30 0.56 0.47 Average 0.47 Relevered Beta 0.85 Risk free rate 8.00% ERP 9% Beta 0.85 Cost of equity 15.63% 1 15.63% Cost of debt 8.11% 1.2 9.73% 2.2 25.36% WACC 11.53%
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Transcript of Solultion to Case Solultion-to-Case-Study-Cost-of-Capital-040513.pdfStudy Cost of Capital 040513
Case Study - 1
You are valuing shares of unlisted Pharma Company. Calculate Cost of Capital from following data
Risk Free Rate 8.00%Equity Risk Premium 9%
Cost of Debt 12%
Debt : Equity Ratio 1.20
Debt equity ratio of other companiesName of the Company Debt/equity
ratioBeta as worked
out Unlevered BetaPfizer ‐ 0.44 0.44 Glaxo ‐ 0.27 0.27 Ranbaxy 0.50 0.71 0.53 DR Reddy 0.70 0.93 0.63 IPCA Lab 0.30 0.56 0.47 Average 0.47 Relevered Beta 0.85
Risk free rate 8.00%ERP 9%Beta 0.85 Cost of equity 15.63% 1 15.63%
Cost of debt 8.11% 1.2 9.73%
2.2 25.36%
WACC 11.53%
Case Study - 2
You are valuing shares Tata Steel Limited. Calculate Cost of Equity using Gordon Dividend Model
Current Market Price 390.00 Expected Dividend 8.00 Expected Growth Rate of Dividend 15%
Dividend Yield 2.05%cost of equity 17.05%
Case Study - 3
You are valuing shares of Dabur India. Calculate WACC from following data
Risk Free Rate 8.00%Equity Risk Premium 9%
Beta 0.7
Cost of Debt 10%
Debt : Equity Ratio 0.50
Other InfoCompany has some of its manufacturing facilities in tax free zone. 30% of its profit for next 5 years is exempt from tax.
WACC for First 5 years
cost of equity 14.30% 1 14.30%
Cost of debt 7.73% 0.5 3.86%
1.5 18.16%
WACC 12.11%
WACC for subsequent Years
cost of equity 14.30% 1 14.30%
Cost of debt 6.76% 0.5 3.38%
1.5 17.68%
WACC 11.79%
Case Study - 4
You are valuing shares of XYZ Limited. Following is the data
Risk Free Rate 8.00%Equity Risk Premium 9%Beta 1.3Cost of Term Loan 12%Coupon on FCCB 2%
Additional info1) FCCB are convertible into equity shares at fixed conversion price of Rs.180 per share2) Premium payable to FCCB holders upon redemption after 5 years from date of issue will be such amount which gives them Yield to Maturity of 7.5%3) Business of the Company is financed as follows
Equity 40%Debt 40%FCCB 20%
Calculate cost of capital under following scenarios
a) current market price of the Company is Rs.105b) current market price of the Company is Rs.200c) current market price of the Company is Rs.280
