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    Anmols Assignment

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    tushar
    Reliance Industries' sources of long-term finance include equity share capital, secured and unsecured debentures, bonds, and term loans from banks and others. The weighted average cost of capital for Reliance in FY2018-19 was 8.764746%. Tata Power's sources include equity share capital, retained earnings, non-convertible debentures, and term loans. The cost of debt, equity and weighted average cost of capital was calculated. The weighted average cost of capital for Tata Power was 7.186%.

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    Anmols Assignment

    Uploaded by

    tushar
    51 views9 pages
    Reliance Industries' sources of long-term finance include equity share capital, secured and unsecured debentures, bonds, and term loans from banks and others. The weighted average cost of capital for Reliance in FY2018-19 was 8.764746%. Tata Power's sources include equity share capital, retained earnings, non-convertible debentures, and term loans. The cost of debt, equity and weighted average cost of capital was calculated. The weighted average cost of capital for Tata Power was 7.186%.

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    Reliance Industries' sources of long-term finance include equity share capital, secured and unsecured debentures, bonds, and term loans from banks and others. The weighted average cost of capital for Reliance in FY2018-19 was 8.764746%. Tata Power's sources include equity share capital, retained earnings, non-convertible debentures, and term loans. The cost of debt, equity and weighted average cost of capital was calculated. The weighted average cost of capital for Tata Power was 7.186%.

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    51 views9 pages

    Anmols Assignment

    Uploaded by

    tushar
    Reliance Industries' sources of long-term finance include equity share capital, secured and unsecured debentures, bonds, and term loans from banks and others. The weighted average cost of capital for Reliance in FY2018-19 was 8.764746%. Tata Power's sources include equity share capital, retained earnings, non-convertible debentures, and term loans. The cost of debt, equity and weighted average cost of capital was calculated. The weighted average cost of capital for Tata Power was 7.186%.

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    A.

    6
    Company 1- RELIANCE INDUSTRIES LTD.
    Following are the sources of long term finance for the company:

    SOURCES 2016-17 2017-18 2018-19

    Equity Share Capital 2,959 5,922 5,926

    Borrowings
    Secured:
    Non-Convertible Debentures 13,503 8,500 15,000
    Term Loans - from Banks 5,394 6,065 4,699
    Term Loans - from Others - - 383

    Unsecured:
    Non-Convertible Debentures 7,002 27,000 42,500
    Bonds 44,232 41,242 43,786
    Term Loans - from Banks 80,489 59,487 99,072
    Term Loans – from Others 1.528 1,881 2,066
    Total 1,52,148 1,44,175 2,07,506

    Company 2- TATA POWER


    Following are the sources of long term finance for the company:

    Capital Structure 2018-19


    Equity Share Capital
    Issued, subscribed and fully paid up capital 270.50
    Other Equity 3181.67
    Non-Current Borrowings
    Term loans 24303.76
    Non-convertible Debentures 9925.48

    A.7 RELIANCE INDUSTRIES LTD.


    Cost of Debentures after tax
    FY 2018-19

    Particulars Secured Unsecured


    Debenture Amount 15000 42500

    Tax Rate 30% 30%

    Interest rate (averaging highest 8.36% [(7.97+8.75)/2) 8.015%


    and lowest interest rates)

    Cost of Debentures [interest =8.36(1-0.3) =8.015(1-0.3)


    rate(1-tax rate)]
    =5.852% = 8.015%

    Cost of Equity Calculation using CAPM Model


     RF: (Calculated using 10-year Bond Yield Data)
    Year Rf

    2016-17 6.93%
     RM: 10.09%
    BETA 2017-18 6.965%

    2018-19 7.708%

    FY 2016-17 FY 2017-18 FY 2018-19

    0.73 1.17 1.51


    Return on Stock

    Ri = Rf + B (Rm – Rf)

    FY 2016-17 FY 2017-18 FY 2018-19

    Ri = 6.93 + 0.73 (10.09 – 6.93 ) Ri = 6.965 + 1.17 (10.09 – Ri = 7.708 + 1.51 (10.09 –
    6.965) 7.708 )

    Ri = 9.2368 Ri = 10.62125 Ri = 11.305

    Cost of preference shares

    The cost of preference shares is NIL as the company has never issued preference shares although the
    company is authorized to sell such shares.

    Term Loan after Tax

    FY 2018-19

    Particulars Secured Unsecured


    Term Loan Amount 5,082 1,01,138
    Tax Rate 30% 30%
    Interest Rate (Averaging 7.72% 8.39%
    the highest and the
    lowest rate)
    Cost of term loan =7.72(1-0.3) =8.39(1-0.3)
    [interest rate(1-tax rate)] =5.404% =5.873%

    Calculation of Weighted Average Cost of Capital

    FY 2018-19

    Security (Equity / Amount Weight Rate (Percentage) Return


    Debt) (Decimal) (Percentage)
    EQUITY 5,926 0.027765284 11.30482 0.313882

    DEBT 207,506 0.972234716 8.69220649 8.450865

    TOTAL 213,432 1 8.764746

     Cost of Bonds =
    Interest rate (1-Tax rate)
    Interest rate= (1.87+10.05)/2
    =6.185%
    Tax Rate= 30%
    Cost of bonds= 6.185 (1-0.3)
    =4.3295%

     Cost of Retained Earnings (Other Equity)


    Here cost of retain earnings is equal to cost of equity
    Sources Book Value Cost% Book
    Value*Cost%
    Equity 5926 11.305% 669.93
    Debentures
    -Secured 15000 5.852% 877.8
    -Unsecured 42500 5.6105% 2384.47
    Term Loan
    -Secured 5082 5.404% 274.63
    -Unsecured 1,01,138 5.873% 5939.83
    Bonds 43786 4.3295% 1895.71
    Total 2,25,132 13436.28

    Now using Weighted Average Cost of Capital


    = (13436.28/225132)*100
    =5.968%

    TATA POWER

    A. Cost of Debt

    i. Cost of Debentures
    As per the annual reports of the company the interest rates range between 8% to 10.75% pa.

    Hence, we take an average interest rate as (8+10.75)/2 = 9.375%

    Tax Rate is taken as 30%.

    Cost of debentures

    = [Interest Rate (1-Tax Rate) + {(Redemption Proceeds – Issue Proceeds)/No. of Years}] / [(Redemption
    Proceeds + Issue Proceeds)/2]
    = [9.375(1-0.3) + (100-100)] / [(100+100)/2]

    = 6.56%

    ii. Cost of Term Loan


    As per the annual reports of the company the interest rates range between 8.5% to 9.45% pa.

    Hence, we take an average interest rate as (8.5+9.45)/2 = 8.975%

    Tax Rate is taken as 30%.

    Cost of term loans = Interest Rate (1-Tax Rate)

    = 8.975*(1-0.3)

    = 6.28%

    I. Cost of Preference Shares


    The capital structure of the company does not contain preference shares.

    Hence, cost of preference shares is Nil.

    J. Cost of Equity
    Return on Market = 15.58%

    Risk Free Rate of Return = 7.708%

    Beta = 0.973

    Cost of Equity = Risk Free Rate of Return + Beta * (Return on Market – Risk Free Rate of Return)

    = 7.708 + 0.973 * (15.58-7.708)

    = 15.367%

    K. Cost of Retained Earnings (Other Equity)


    The cost of retained earnings is equal to the cost of equity i.e. 15.367%
    Weighted Average Cost of Capital

    Sources of Fund Book Value (Rs in Cost


    crores) (%)
    Equity Share Capital 270.50 15.367 (270.50*15.367%) =
    41.567
    Retained Earnings 3181.67 15.367 (3181.67*15.367%) =
    488.927
    Non-convertible 9925.48 6.56 (9925.48*6.56%) =
    debentures 651.111
    Term Loans 24303.76 6.28 (24303.76*6.28%) =
    1526.276
    37681.41 2707.881

    Weighted average cost of capital = (2707.881/37681.41) * 100

    = 7.186%

    A.8
    (a) Value of Debentures
    Tata Power

    Cost of Debenture (as per Q7) = 6.56%

    C = 9.375% x 9925.48 = 930.51 Crs. per year

    t = 60 years

    Present value of annual payments = 930.51/(1.0656)1 + 930.51/(1.0656)2 + 930.51/(1.0656)3 + …………


    930.51/(1.0656)60 = Crs.

    Present value of face value = 9925.48/(1.0656)10 = 219.33 Crs.

    Value of bond = Present Value of annual payments + Present value of face value.
    Value of Bond = 219.33 + = Crs.

    (b)Value of Stock

    Formula (Gordon Growth Model)

    P = D1/(Ke – g)

    Where,

    P = Value of the Stock

    D1 = Dividend of the current year

    Ke = Cost of Equity

    g = Growth rate of dividend.

    Tata Power

    D1 = 1.55 / share

    Ke = 16.84%

    g = 8.98% (CAGR)

    P = 1.55 / (0.1684 – 0.0898) = 19.72 Rs.

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