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A Report submitted towards the partial fulfilment of the requirements of two year full time in Master of Business Administration
UNDER GUIDANCE OF: Mr. N.C. JAIN (Asst. Vice President Finance)
Submitted By: SAGAR SHARMA MBA 3rd Sem.
Management and Commerce Institute of Global Synergy, Ajmer.
A large number of individual has contributed to this project. I am thankful to all of them for their help and encouragement. Like other reports, this report is also drawn from the work of large number of researchers and author in the field of finance. I would like to express my gratitude to Mr. N.C. Jain S.G.M. (finance) for giving me the opportunity and enough of support to undergo training in their organization, SHREE CEMENT LTD, BEAWER (RAJ) I shall like to thanks SHREE’S finance department for their able guidance, support, supervision and care during the whole training programme and to whom words can never express my feeling of gratitude and reverence. I would like to give my sincere thanks to officers, managers and employees of SHREE CEMENT LTD, BEAWER (RAJ) for providing valuable information, reports and data that were require for the study. The successful completion of my project has been carried out under the able guidance of Mr. N.C Jain S.G.M (finance). I take upon this opportunity to thank them for encouragement and guidance in completion of project. Their knowledge and expertise was of great help for the project study. Last but not least, I would like to express my deep sense of gratitude to my parents and friends for their unflinching moral support. Their towering presence instilled in me the carving to the work harder and completes this daunting task timely with a sufficient degree of in depth study. I have tried to give credit to all sources form where I have drawn material in this project still I fell obliged if they are brought to my notice.
About three decade ago, the scope of financial management was confined to the raising of funds, whenever needed and little significance used to be attached to financial decisionmaking and problem solving. As a consequence, the traditional finance texts were structured around this theme and contained description of the instruments and institutions of raising funds and of the major events, such as promotion, reorganization, Readjustment, merger, consolidation etc. When funds were raised. In the mid fifties, the emphasis shifted to the judicious utilization of funds. The modern thinking in financial management accords a far greater importance to management decision-making and policy. Today, financial management donot perform the passive role of scorekeepers of financial data and information, and arranging funds, whenever directed to do so. Rather, they occupy the key position in top management areas and play a dynamic role in solving complex management problems. They are now responsible for the fortune of the enterprises and are involved in the most vital management decision of allocation of capital. It is their duty to insure the funds are raised most economically and used in the most efficient and effective manner. Because of this change in emphasis, the descriptive treatment of the subject of financial management is being replaced by growing analytical content and sound theoretical underpinnings.
S.NO. 1. 2. 3. 4. 5 6. 7. 8. 9. 10. 11. 12. 13. 14. PARTICULARS Cement Industry Overview Introduction of Shree Cement The Cement Industry Structure Major Players of the Industry Policies SWOT Analysis Cement Manufacture Research Methodology Cost of Capital Cost of Debts Cost of Equity Weighted Average Cost of Capital Conclusion and Recommendation Bibliography PAGE NO. 5. 6. 12. 14. 16. 20. 25. 28. 30. 35. 37. 40. 49. 49.
Cement Industry Overview
The Indian Cement industry dates back to 1914, with first unit was set-up at Porbandar with a capacity of 1000 tones. Currently The Indian cement industry with a total capacity of about 170 m tones (excluding mini plants) in FY07-08, has surpassed developed nations like USA and Japan and has emerged as the second largest market after China. Although consolidation has taken place in the Indian cement industry with the top five players controlling almost 50% of the capacity, the remaining 50% of the capacity remains pretty fragmented. Per capita consumption has increased from 28 kg in 1980-81 to 115 kg in 2005. In relative terms, India’s average consumption is still low and the process of catching up with international averages will drive future growth. Infrastructure spending (particularly on roads, ports and airports), a spurt in housing construction and expansion in corporate production facilities is likely to spur growth in this area. South-East Asia and the Middle East are potential export markets. Low cost technology and extensive restructuring have made some of the Indian cement companies the most efficient across global majors. Despite some consolidation, the industry remains
2008. INTRODUCTION ABOUT THE ORGANISATION Shree Cement Limited is a Beawar based company.” Commercial production commenced from 1st May1985 with a installed capacity of 6 lacs tones per annum in Beawar dist.6 6 .4 lacs tones per annum adjacent to its existing plant in order to take full advantage of its existing infrastructure and already developed captive mining lease enough to sustain a new cement plan. the industry.The Company undertook the implementation of new unit of 1. at Jaipur with a Vision: “ To register strong consumer surplus through a superior cement quality at affordable price. Investment norms including guidelines for foreign direct investment (FDI) are investor-friendly. In 1997 The Company commissioned its second cement plant . Now. The report reveals that this growth trend is being driven mainly by the expansion of existing plants and using more fly ash in the production of cement. Riding on increased activity in real estate. according to the annual report of the Department of Industrial Policy and Promotion (DIPP). the Indian cement industry is on a roll. The growth trend has been on for some time now. at 14 million tones as against 11. which is ranked second in the world in terms of production.6 lacs tones per annum during 1994-95 by a modernization and up gradation programme. The cumulative capacity was enhanced by de-bottlenecking and balancing equipment in December 2001 to 2.41 million tones in the corresponding period a year ago. The Company is a part of the Bangur Group and was incorporated on 25th October1979.somewhat fragmented and merger and acquisition possibilities are strong. Ajmer. located in Rajasthan. During the Tenth Plan.24 MT capacity per annum named "Raj Cement”. the capacity of this plant was upgraded to 7. is expected to grow at 10 per cent per annum adding a capacity of 40-52 million tones. If these trends are anything to go by. In 1995 .Raj Cement with a capacity of 12. it will not be long before the sector will match the demand supply gap. cement production has registered a growth of 9.28 per cent in April. All these factors present a strong case for investing in the Indian market.
Presently Shree Cement has 9.K. STRAND ROAD. BEAWAR. Ras in Pali District 3 MT and Khushkhera capacity is 3.1 MTPA capacity in three plants (Shree in Beawar 2.84 CRORES 10 Shree Cement Limited is one of the fastest growing Cement Companies in India. it is the largest single location cement producer in north India (sixth in country).G.84 CRORES 10 34. AJMER (RAJASTHAN) 21.6 MTPA.® 1979 BANGUR NAGAR.MTPA. BANGUR H. A product called “Tuff Cemento” has also launched by the company in April 2007.5 MTPA) The organization has performed 7 . COMPANY COMPANY INCORPORATION YEAR REGISTERED OFFICE CORPORATE OFFICE INDUSTRY CHAIRMAN MANAGING DIRECTOR EXECUTIVE DIRECTOR EQUITY CAPITAL FACE VALUE OF SHARE EQUITY CAPITAL FACE VALUE OF SHARE PROFILE SHREE CEMENT LTD. SINGHI 34.M. BANGUR M. At present company is producing over 100% capacity utilization. KOLKATA CEMENT MANUFACTURING B.
Punjab. The company has about 100 sales offices spread across the states of Rajasthan. Uttar Pradesh. Punjab and Jammu & Kashmir. Haryana. Uttaranchal. "Jung Rodhak Cement". Shree Cements is the largest cement producer in Rajasthan. The company has a total installed capacity of 6. Its cement is marketed under the brand name of “Shree Ultra Cement” with different grades like 33.825 million tonne (opc basis)The plants are strategically located in central Rajasthan. The Shree Mission – The company continues to be one of the most operationally efficient and energy conserving cements producers in the world. Bangur Cement and Tuff Cemento. The company retains its position as north India’s largest single-location manufacturer. 43 and 53 and sub-brand names like "red oxide cement". it has been consistently producing many notches above the nameplate capacity. Its mission statement is • • • • • • To harness sustainability through low-carbon philosophy To sustain its reputation as one of the most efficient manufacture globally. Haryana. Origin of the Company Promoted by the Bangur Group. Shree manufactures Ordinary Portland Cement (OPC) and Portland Pozzolana Cement (PPC). Shree Ultra Jung Rodhak Cement. Delhi. The Shree Vision – To be one of the India’s most respected enterprise through “best-in-class performance” and leading by “low carbon” philosophy making it a progressive organization that all stakeholders proud to deal with. Delhi. To continually add value to its products and operation meeting expectations of all its stakeholders.. To continually build and upgrade skills and competencies of its human resource for growth To be a responsible corporate citizen with total commitment to communities in which it operates and society at large. Uttar Pradesh and Uttranchal. etc. For the last 18 years. To continually have most engaged team. from where it can cater to the entire Rajasthan market as well as Delhi and Haryana. 8 .exceptionally well in the year 2007-08 increasing the PBT by 95% the reasons for this remarkable achievement and key strengths of the company are discussed in the report. Shree’s principal cement consuming markets comprise Rajasthan. It has three brands under its portfolio viz.
the company has succeeded in substituting conventional coke with 100 per cent pet coke. It was incorporated in 1979. the Company has been awarded the prestigious 'National Energy Conservation Award" for the year 1997. SCL's capacity rose and touched 2 mtpa by 1997-98. as primary fuel resulting in lower inventory and input costs. Shree caters to cement demand arising in Rajasthan. testifies to the effectiveness of its multi brand marketing strategy. reducing its consumption per tonne of clinker. an international agency specializing in the rating of cement plants. These companies are Shree Digvijay Company Ltd. 9 .5 MW. Graphite India Ltd and Fort Gloster Industries Ltd.5 per unit (excluding interest and depreciation) as compared to over Rs 5 per unit from the grid. Delhi. Shree is rated best by Whitehopleman. The company also replaced indigenous refractory bricks with imported substitutes. the first manifestation of Shree’s strategic move from commodity to brand marketing. In appreciation of its achievements in Energy sector. the company's switch to pet coke could not have come at a better time. Shree Cement is the closest plant to Delhi and Haryana among all cement manufacturers in its state and proximity to these profitable cement markets renders the company an edge over other cement companies of the company in terms of lower freight costs. It is operating at over 100% capacity utilization.84 million tones of cement making it the largest single location cement producer in north India. Shree’s total captive power plant capacity today stands at 101.6 mtpa & in 2003-04 the company produced 2. Commercial production at its 0. In the past two years the price of coal has gone up. In 2000-01. Haryana. The company has one of the most energy efficient plants in the world. The steady growth in Shree’e volume especially year-on –year in the last two fiscals. The captive plant generates power at a cost of Rs 4. MULTIPLE COMPETITIVE BRANDS Incisive execution of Shree’s multiple competitive brand strategy has been delivering results along anticipated lines. Earlier dependent on good quality imported coal. Also. UP and Punjab. a waste from refineries.Shree Cement Ltd (SCL) is located at Beawer. SHREE ULTRA Launched in 2002. Shree Ultra was the company’s first brand. Over the years. Three companies of the Bangur group promoted SCL. India’s largest cement producing state. Its current cumulative installed capacity stands at 2. Rajasthan. Consistency in brand strategy is helping Shree to sustain its brands having lasting impression among its consumers. What is strategic for SCL is that it is located in central Rajasthan so it can cater to the entire Rajasthan market with the most economic logistics cost.6 million tones per annum (mtpa) cement plant in Rajasthan commenced in May 1985.
one on one interaction with opinion builders and influencers if high standing among the fraternity of respected construction space list. Shree Ultra volumes reflects its acceptance by professional influencers. Their support.P. Delhi. BANGUR CEMENT Bangur Cement was launched in 2006 as a premium brand. Together the two variance have made Shree Ultra the flagship brand of the company. The brand was launched with powerful media and promotional support. Launched in the first month of the year under review. Tuff Cemento was able to secure a network of the 1000 dynamic and resourceful dealers in a record time of about four months. with aggressive and establish competitors. and to enable Shree Cement to achieve the maximum possible combined market share in its market. the imaginative advertising and the momentum has clearly sustained it’s growth over time. and in the NCR. Shree Ultra Jung Rodhak. It has been position as rock strong. on the functional differentiator of rust prevention. competitive with best in the market designed to full fill user aspiration for high quality construction. Which in turn facilities acceptance by domestic consumers. able to withstand exceptionally harsh environmental conditions. Today it is present all of Shree Cement’s market territories. It has made selective penetration in both urban and rural markets. contributing half of the Shree’s total sales. Bangur Cement has achieved 95% of its total sales in the trade segment. Overall.on the promise of high performance. On a more exclusive level. as well as sustained local promotions. and the making further headway in Rajasthan. parts of south Punjab and Western U. Haryana. Tuff Cemento has an altogether more ambitious agenda: to be aggressively competitive and become a leading brand in the coming months. has helped to improve brand recall. Bangur cement maintained its zero outstandings status in this year as well. While its current status would otherwise be regarded as reasonable. the brand tagline reflects its promise of top-of-market value: “Sasta Nahi. TUFF CEMENTO This is the latest brand offering from Shree Cement. directed at a highly competitive niche market. Given the premium profile design for it the brand is supported by a matching network of business partners and business associates carefully selected for the track record in selling to high end market segment. Sabse Achcha”. At one level Shree’s field forts takes the trades in to the confident with transparent terms and tested and proven promotional offrings. and prepared the ground for fresh initiatives in the market place. The brand is consolidated its position in the market. the main focus of the construction boom in north India.Its generic OPC version has been joined by a variant. In 07-08 it chalked up its highest volumes in the home market of Rajasthan. Its early successes are founded on a two tier marketing and distribution programme. it deploys special teams of highly professional technical sales experts t conduct direct. 10 .
Grey cement is used only for construction purposes while white cement can be put to a variety of uses. White cement is more expensive because its production cost is more and excise duty on white cement is also higher. Shree cement does not manufacture white cement at present. 11 .CEMENT Cements are of two basic types. PPC is hydraulic cement. It is used for mosaic and terrazzo flooring and certain cements paints. CEMENT GREY Portland Pozzolona Cement (PPC) WHITE Ordinary Portland cement Pozzolona used in the manufacture of Portland cement is burnt clay of fly ash generated at thermal power plants. It is used as a primer for paints besides has a variety of architectural uses.gray cement and white cement. The cost of white cement is approximately three times that of gray cement. PPC differs from OPC on a number of counts.
Sri Lanka. The Cement Industry Structure Presently the total installed capacity of Indian Cement Industry is more than 175 mn tones per annum. tie-ups with customers. contractors Wide spread distribution network . Major Cement Plants: • • • • • • • • • • Plants : 140 Typical installed capacity Per plant : Above 1. UAE and Mauritius Strong marketing network. It also minimizes problem of leaching and efflorescence. with a production around 168 mn tones . Sales primarily through the dealer channel 12 . Reduced heat of hydration leads to lesser shrinkage cracks. The whole cement industry can be divided into Major cement plants and Mini cement plants. Nepal. An additional gel formation leads to lesser pores in concrete or mortar.Pozzolona during manufacturing consumes lot of hydration heat and forms ‘cementious gel’.5 mntpa Total installed capacity : 170 mntpa Production 07-08: 161 mntpa All India reach through multiple plants Export to Bangladesh.
Himachal Pradesh. Rajasthan. Assam.000 to 1. South (Tamil Nadu. Kerala. Pondicherry. Meghalaya. Karnataka. Haryana. Tones Production around : 6.400 Presence of these plants limited to the state Infrastructural facilities not the best Regional division The Indian cement industry has to be viewed in terms of five regions:• • • • • North (Punjab. 1.Mini Cement Plants: • • • • • • • • • Nearly 300 plants & Located in Gujarat. J&K and Uttranchal).2 mn tones Mini plants were meant to tap scattered limestone reserves. However most set up in AP Most use vertical kiln technology Production cost / tonne . Chandigarh. West (Maharashtra and Gujarat). Delhi.Rs. MP mainly Typical capacity < 200 tpd Installed capacity around 9 mn. 13 . Jharkhand and Chhattisgarh). and Central (Uttar Pradesh and Madhya Pradesh). Andhra Pradesh. Orissa. Andaman & Nicobar and Goa). East (Bihar. Rajasthan. West Bengal.
The company retains its position as north India’s largest single-location manufacturer. Delhi.Regionwise Cement Production Centeal 16% South 33% Est 16% West 17% North 18% Major Players in Cement Industry Shree Shree Cements Ltd. 14 . located at Beawer. For the last 18 years. The company has installed capacity of 6. is a Rajasthan based company. Haryana. Shree manufactures Ordinary Portland Cement (OPC) and Portland Pozzolana Cement (PPC). Punjab. Uttar Pradesh and Uttranchal. it has been consistently producing many notches above the name plate capacity.825 mn tones per annum( opc basis )in Rajasthan. Its output is marketed under the Shree Ultra Ordinary Portland Cement’ and ‘Shree Ultra Red Oxide Jung Rodhak Cement’ brand names. Shree’s principal cement consuming markets comprise Rajasthan.
The Aditya Birla Group The Aditya Birla Group is the world’s eighth largest cement producer.96 million tones of Bargarh Cement ). In total.7 million tones. Grasim has a total capacity of 31 million tones and eyeing to increase it to 48 MT by FY 09. The company is India’s largest white cement producer with a capacity of 4 lakh tones. at Jawad in Madhya Pradesh went on Stream in 1985. Binani A fierce competitor with a 2. a village in Sirohi in the state of Rajasthan. The capacity has grown 25 times since then to 18.53 million tones of Damodar Cement and Slag and 0. Finally Grasim acquired controlling stake in Ultra Tech Cement Limited (Ultra Tech). which was acquired in 1998. Thirty five per cent of the company’s products transported are by sea which is the cheapest mode. GACL exports as much as 15 percent of its production.Ambuja GACL was set up in 1986 with 0. Birla White and Birla Ready mix and also regional brands like Vikram Cement and Rajshree Cement. a subsidiary of Grasim. This is aimed at increasing its presence in the eastern region. It’s a tough nut player which is outside CMA (Cement Manufacturer’s Association) and is prime reason for driving prices low in market.) Shree Digvijay Cement.5 million tones. Ambuja cement one of GACL’s well established brands. It is planning to expand the capacity of its wholly-owned subsidiary Damodar cement and Slag at Purulia in West Bengal. the flagship of the Aditya Birla Group. has its integrated grey cement plant at Sikka (Gujrat). As on FY’07. Grasim has five integrated grey cement plants and six ready-mix concrete plants. It has earned the reputation of being the lowest cost producer in the cement industry. The first cement plant of Grasim. ACC has a capacity of 22. Pindwara. the demerged cement business of L&T. Birla Plus. ACC Being formed in 1936. The company plans to increase capacity by 3-4 million tones in the near future. Offers a good quality product at 15 .2 MTPA plant is located at Binanigram. It has one of the world’s largest white cement plant at Kharia Khangar (Raj. Grasim has a portfolio of national brands which include Birla Supar. ACC Super is one of the company’s well established brands.40 million ( including 0. ACC was the largest player with a capacity of 22.525 mn tones per annum of its subsidiary Damodar Cement).4 million tones per annum (including 0.
Holds around 14% of Rajasthan market. Others Other players like Shriram have insignificant share and are highly localized. It has a footprint but not a foothold in Rajasthan market POLICIES Quality Policy: • • • • ‘To provide products conforming to national standards and meeting customers requirements to their total satisfaction. To continually improve performance and effectiveness of quality management system by setting and reviewing quality objectives for: Customer Satisfaction Cost EffectivenessSs 16 . L&T is a strong player nationally and regarded as quality product. Also operates in the white cement market with Birla as its only competitor. Quite often they are supplied in other established brand’s cement bags. Shriram has a small presence and that too largely in southern Rajasthan. Gujarat and Rajasthan markets. Sales are focused in the North India. JK An entrenched competitor that has brands across the price spectrum with JK Nembahera leading the pack. There are various mini plants operating too which supply cheap cement which has no ISI certification and does not confirm BIS standards.cheap rates and has very good brand image. It lost significant market when Ambuja came to Rajasthan.
waste and greenhouse gases Continual improvement in environment management Compliance of relevant environmental legislation Water Policy: • • • • • To provide sufficient and safe water to people & plant as well as to conserve water. It is the responsibility of all of us to utilize energy effectively and efficiently’ Environment Policy: ‘To ensure : • • • • • Clean. energy. Develop means & methods for water harvesting Treatment of waste discharge water for reuse Educate people for effective utilization and conservation of water Water audit & regular monitoring of water consumption Health & Safety Policy: • • • • • ‘To ensure good health and safe environment for all concerned by: Promoting awareness on sound health and safe working practices Continually improving health and safety performance by regularly setting and reviewing objectives & Targets Identifying and minimizing injury and health hazards by effective risk control measures Complying with all applicable legislations and regulations’ Human Resource Policy: 17 . green and healthy environment Efficient use of natural resources. noise. we are committed to efficient water management practices viz.Energy Policy: • • • • ‘To reduce to the maximum extent possible the consumption of energy without imparting productivity which should help in: Increase in the profitability of the company Conservation of Energy Reduction in Environmental pollution at energy producing areas Since Energy is Blood of Industry. plant and equipment Reduction in emissions.
Energy Policy’ IT Policy: ‘To provide a robust IT platform suitable to the business processes and integrated management practices of the company. Every employee shall be accountable to the law of the land & is expected to follow the same without any deviation • • Management will appreciate observance of Business ethics & professional code of conduct To follow safety & Health. Quality.• • • • • • • • • ‘We at Shree Cement are committed to Empower People Honour individuality Non discrimination in recruitment process Develop Competency Employees shall be given enough opportunity for betterment None of the person below the age of 18 years shall be engaged to work Incidence of Sexual Harassment shall be viewed seriously Statute enacted shall be honoured in letter & spirit & standard Labour Practices shall be followed. transparency. Environment. efficiency. internal controls and profitability of business’ Trade and Non-Trade Networks There are two types of Networks: Trade and Non-trade a) Non-trade Network Non-trade Network: 18 . resulting into better speed.
Due to competitive pricing within the industry. there was not much differentiation among the various brands on offer. b) Trade Network Company Handling Agent Stockiest Retailers Consumers Advertising Need for Advertising Cement has evolved into a highly commoditized product category.Dams . 19 . Any industrial projects taken up by the private sector like bridges. People too did not pay much attention to this product unless there was a need.Govt.Govt.Canals These are all bulk requirements - Private Non-trade for Group housing / retail housing contractor’s projects on behalf of govt.Airports . Non-trade for govt infrastructure building . Hence people who were currently making their houses or were soon to embark on such a project became the target market.Cement Roads . Housing Projects .Bridges .Railways . roads etc.
there was a need for differentiation for which there was made some changes in the form of the product . But still the presence of the company has not been so intense as other brands have like Ambuja and Grasim etc. Because of the product being commoditized . SWOT Analysis for Shree Cements Strengths Focused strategy Lowest cost producer of cement in north India A secure source of raw materials High penetration in Govt. projects 20 . Shree Cement ltd. was not advertising its products past few years but looking at the competitive market and opportunities ahead it introduced a new ad campaign which was targeted to differentiate its product from other cement brands. It introduced an ad campaign showing the anti rusting capability of the Red Oxide Cement of the company.
This because there are limits to the volume that a distribution and retail network could handle. Largest single plant capacity in India Shree power plant . They realized that a single brand has limited potential for faster increase in market share in these markets. green color was preferred the most Poor advertising and brand promotion Opportunities Real estate boom will lead to increased demand International expansion Demand from Pakistan side Reduction in customs duties Government’s thrust on infrastructure and tax incentives on housing loans Threats Increased competition from domestic as well as international players Rising input (oil) prices Sales highly dependent on monsoons Growth of counterfeits Creating Multiple Brands to Increase Market Share Company wanted to increase it’s share in the more remunerative markets. Rajasthan and Haryana are the markets where Shree have high realisation. which is producing electricity enough for Ras plant Weaknesses Less dealer incentives as compared to its competitors Color of the cement has not been perceived greatly. Thus there was a requirement for increasing distribution 21 .
17% 23.98% 7. In Haryana it rose by almost 50 percent.36% 2. Each of these brands has been built on a unique product promise. they studied the brand strategy of a fast moving Consumer Goods Company. To alleviate this.36% 19. Encouraged by the success of having two brands.77% 16.91% 17. another set of storage and distribution logistics like godowns and offices.60% 7.94% 7.67% 5.network in these markets. Yet. All bands were competing with each other. market share in Rajasthan almost doubled in just one year. Shree Cement chose to go ahead and launched Bangur Cement in 2006. thus all such costs were doubling. The marketing teams. Each brand had a unique products differentiation property. distribution network and penetration. Today Shree have three brands in the same market: Shree Ultra.29% 4. The result.86% 10.32% 3.P. distribution channel and logistics were all different for each brand. They found the same model could be applied in cement business as well. An altogether new marketing team.13% Achievements by maintaining three brands • • Higher Dealer Density Higher market share 22 . They realized that they can also achieve their objective by introducing another brand in the market.97% 8. The new brand would have its own marketing strategy.96% 2008-09 22. It required deployment of almost twice the quantum of resources to sustain two brands in the markets. as demonstrated below: Market share in different states STATE RAJASTHAN HARYANA DELHI PUNJAB U. additional advertising cost. Bangur Cement and Tuff Cemento. As a result of multiple brand strategy Company’s market shares have shown appreciable growth.32% 2007-08 20.03% 17. With three brands we have further consolidated our position in the market. we decided to launch a third brand-Tuff Cemento. UTTARANCHAL Efforts made to maintain three brands • • • • Independent marketing team Separate distribution and retail network Separate storage and logistics supports Higher advertisement cost 2006-07 11.15% 17. This company had multiple brands for soaps.
• • Better Realisation Lower logistics cost Risin 30 25 20 15 10 SUCCESS DRIVERS AT SHREE PEOPLE AS PROGRESS DRIVERS Shree believes that what is present in the minds of people is more valuable than the assets on the shop floor. All the company’s initiatives are directed to leverage the value of this growing asset. 5 0 Rajasthan Delhi 23 Market Share 2005-06 .
pet coke. The company has existing power plant capacity of 42 MW. ALTERNATE FUEL IN PET COKE The Company’s captive power plant as well as cement plants runs on alternate fuel. which would supply power to its new cement units. Until recently. LEADERS AT EVERY LEVEL Shree believes in creating leaders -not just at the organizational apex but at every level. The company is installing additional power plant of 18 MW capacity. SHAREHOLDER VALUE Shree is focused on the enhancement of value through a number of strategic and business initiatives that generate larger and a better quality of earnings. thus ensuring selfsufficiency. i.e.. it was obtaining pet coke domestically from Reliance Industries 24 . LOWEST COST OF PRODUCTION Its cost of production is around Rs. CULTURE OF INNOVATION Shree believes that what is good can be made better -across the organization.860 per ton. making it the lowest cost cement producer in India. COMMUNITY AND ENVIRONMENT Shree’s community concern extends from direct assistance to safe and dependable operations for its members and the environment.TEAMWORK Shree leverages effective team working to generate a sustainable improvement. ENERGY EFFICIENT PRODUCER Shree Cement is one of the most power efficient units in the country with a power consumption of 75 units per ton. The Company sources 100% of power requirement from its captive power plants. CUSTOMER FOCUS Shree is committed to deliver a superior quality of cement at attractively affordable prices. resulting in a strong sense of emotional ownership. the first in India to do so.
Ltd. Imported pet coke and the future plan to source it from Panipat refinery of IOCL will further bring down costs by around Rs. CEMENT MANUFACTURING Raw Material Preparation 25 . Although cost of production is lower because of addition of cheap fly-ash.. INCREASED BLENDING SCL is continuously trying to improve the ratio of sale of blended cement (ROC) to 50:50 very soon.300 per tonne. Jamnagar refinery. it commands higher prices due to rust-retarding properties.
A bucket wheel reclaimer is used to recover and further blend this raw material mix before kilns. Once these materials have been crushed and subjected to online chemical analysis they are blended in a homogenized transfer to the raw material grinding mills. the meal is heated up by the rising hot gases and reaches 800°C. This limestone is carefully blended before being crushed. which is heated by a 1. Fig 3: Kiln Fuels The heat required to produce temperatures of 1. stored and then ground in dedicated mills. At this temperature. The resulting ground and dried raw meal is sent to a homogenizing and storage silo for further blending before being burnt in the Fig 3: Kiln Fig 2: Limestone Extraction stockpile.Limestone of differing chemical composition is freely available in the quarries.800°C at the flame is supplied by ground and dried petroleum coke and/or fuel oil. Red mineral is added to the limestone at the crushing stage to provide consistent chemical composition of the raw materials.450°C. which completes the burning process of the meal. As it falls.800°C flame. The chemical analysis is again checked to ensure excellent quality control of the product. Raw Mill Transport belt conveyor transfers the blended raw materials to ball mills where it is ground. At Fig 5: Central Control Room this temperature the chemical changes required to produce cement clinker are achieved. the meal dehydrates and partially decarbonizes. The meal is heated to a temperature of at least 1. The meal then enters a sloping rotary kiln. The dry process 26 . Careful control of the mills ensures optimum fineness of the Petcoke and excellent combustion conditions within the kilns system. The Petcoke is imported via the companies' internal wharf. Fig 4: Inside of Kiln Burning The raw meal is fed into the top of a pre-heater tower equipped with four cyclone stages.
Cooler Units The clinker discharging from the kiln is cooled by air to a temperature of 70°C above ambient temperature and heat is recovered for the process to improve fuel efficiency. Constituents Different types of cement are produced by mixing and weighing proportionally the following constituents: • • • • Clinker Gypsum Limestone addition Blast Furnace Slag 27 . 99. Clinker is analyzed to closed storage areas. Metal conveyors transport the clinker to Filters Dedicated electrostatic precipitators dedust the air and gases used in the Clinker Production Line Process. All dust collected is returned to the process.9% of the dust is collected before venting to the atmosphere. Fig 6: Cement Plant ensure consistent product quality as it leaves the cooler. In this way. The remaining air is used as preheated secondary air for the main combustion burner in the kiln. Some of the air from the cooler is de-dusted and supplied to the coal grinding Plant.kiln is shorter than the wet process kiln and is the most fuel-efficient method of cement production available.
28 .Fig 7: Cement manufacturing from the quarrying of limestone to the bagging of cement.
we tapped information from internal & external sources. The researchers have adopted the contact through telephone for the purpose of collecting Primary data. .com). Objectives • • • • To understand the theory of capital and its implication in business structure To know about the various sources of funds in the company To find out the cost of various components of capital and how to minimize it To get a good insight of the cement industry 29 . We made use of Internet (such as search engine www. Analysis To make our research project most effective in a given time period of 40 days surveyed the information of the competitors.com And miscellaneous sources (such as brochures.shreecementltd. The data has been collected from both Primary as well as Secondary sources and we also did the fieldwork for which utmost care has been taken to keep project unbiased from personal opinion.google.Secondary Data Data sources: Primary Data Primary data is a data that is collected for the first time in the processing of the analysis.RESEARCH METHODOLOGY Data Sources . pamphlets) under external sources. Secondary Data Under Secondary sources.Primary Data. The researchers discuss with Team Manager and employees of the company to get information about competitors of SHREE. We undertook both Explorative as well as Conclusive Research Design. www.
Capital Structure and Cost of Capital. The project is being made as a part of summer training and gives good insight of the topic covered under it. 30 . different approaches of cost of capital. theory and its implication.Focus of the Project The project is structured for the purpose of getting good insight of. The Projects Focus On Cost Of Different Component Of Capital And Optimal Capital Structure For Minimizing The Cost And Risk. It also discusses the different sources of funds.
The primary function of every financial manager is to arrange adequate capital for the firm. There are main two sources of capital for a company – shareholder and lender. the Management Should only invest in those projects which give a return in excess of cost of fund invested in the project of the business.e. Thus. Author Lutz has called it”BORROWING AND LANDING RATES”. On the other hand. The cost of capital is the rate of return the company has to pay to various suppliers of fund in the company. The cost of equity and cost of debt are the rate of return that need to be offered to those two groups of suppliers of the of capital in order to attract funds from them. determination of cast of difference sources of capital and overall cost of capital are being discussed. In this chapter. what the firm would earn by investing these funds elsewhere. Therefore. 31 . What should be this minimum return? The concept used to determine this minimum return is called Cost of Capital. debentures. On the basis of it the management evaluates alternative sources of finance and select the optimal one. This capital is invested in different projects of the firm for generating revenue. The various sources of funds to the company are in the form of equity and debt. The borrowing rates means the rate of interest which must be paid to obtained and use the capital. landing rate is the rate at which the firn discounts its profits. cast of capital is the price paid to the investor for the use of capital provided by him. Similarly. retain earning etc. On the other hand form the point of view of the firm using the capital.It may also the opportunity cost of the funds to the firm i. A business firm can raise capital from various sources such as equity and or preference shares. The difficulty will arise in determination of cost of funds. each project must earn so much of the income that a minimum return can be paid to these sources or supplier of capital. CONCEPT OF COST OF CAPITAL Cost of capital is the measurement of the sacrifice made by investors in order to invest with a view to get a fair return in future on his investments as a reward for the postponement of his present needs.COST OF CAPITAL The main objective of a business firm is to maximize the wealth of its shareholders in the long-run. concepts and implications of firms cast of capital. In practice the borrowing rates used indicate the cost of capital in preference to landing rates. cost of capital is reward for the use of capital. it is necessary for the firm to pay a minimum return to each source of capital. if is raised from different sources and different quantum.
The progressive management always likes to consider the cost of capital while taking financial decisions as it’s very relevant in the following spheres. If the return less then this. “The cost of capital is the rate of return in the firm requires from investment in order to increase the value of firm in the market place”. I. 5 Crore in such a way that it earn at least Rs. it is the investors required rate of return.e. Hear it’s the essential for the firm to invest these Rs. In the other word of John J. but its rate of return which it requires on the projects. rate of return at 11%. then the rate of dividend which the share holder are receiving till now will go down resulting in a decline in its market value thus the cost of capital is the reward for the use capital.Technically and Operationally. 5 crore at an interest of 11% P.e. I comparing the various specific 32 . then the cost of capital is 11%. has called “It the minimum required rate of return or the cut of rate for capital expenditure.” FEATURES OF COST OF CAPITAL It is not a cost in reality the cost of capital is not a cost as such. SIGNIFICANCE OF CONCEPT OF COST OF CAPITAL The cost of capital is very important concept in the financial decision making. MINIMUM RATE OF RETURN Cost of capital is the minimum rate of return a firm is required in order to maintain the market value of its equity shares. 55 lacks i. Cost of capital also refers to the discount rate which is used while determining the present value of estimated future cash flows. Business risks is the measurement of variability in profits due to changes un sales. For example if a firm borrows Rs. Solomon Ezra. the cost of capital define as the minimum rate of return a firm must earn on its investment in order to satisfy investors and to maintain its market value.A. Hampton.e.. the management has to consider the objective of maximizing the value of the firm and minimising cost of capita. while financial risks depends on the capital structure i. While designing it.. REWARDS FOR RISKS Cost of capital is the reward for the business and financial risk.. that equity mix of the firm. 1. Designing the capital structure: the cost of capital is the significant factor in designing a balanced an optimal capital structure of a firm.
cost of capital measured the financial performance and determines acceptability of all investment proposals by discounting the cash flows. 5. If the actual profitability of the project is more then the actual cost of capital. Such as evaluations can be done by comparing actual profitability of the project undertaken with the actual cost of capital of funds raise o finance the project. which source should be used at a particular point of time is to be decided by comparing cost of different sources of financing. On the basis. Knowledge of firms expected income and inherent risks: investors can know the firms expected income and risks inherent there in by cost of capital. 6. 4. Acceptance or rejection of any investment proposal depends upon the cost of capital. risk is more and capital structure is imbalanced. decisions can be taken regarding dividend policy. If a firms cost of capital is high. Capital budgeting decisions: the cost of capital sources as a very useful tool in the process of making capital budgeting decisions. but equally important are the considerations of retaining control and of avoiding risks. 33 . in such situations. it means the firms present rate of earnings is less. Evaluations of financial performance of top management: cost of capital can be used to evaluate the financial performance of the top executives. In various methods of discounted cash flows of capital budgeting. 3. The source which bears the minimum cost of capital would be selected. Financing and Dividend Decisions: the concept of capital can be conveniently employed as a tool in making other important financial decisions. investors expect higher rate of return. the financial manager can select the best and the most economical source of finance and can designed a sound and balanced capital structure. Out of these. 2.costs of different sources of capital. the performance can be evaluated as satisfactory. A proposal shall not be accepted till its rate of return is greater then the cost of capital. capitalization of profits and selections of sources of working capital. Comparative study of sources of financing: there are various sources of financing a project. Although cost of capital is an important factor in such decisions.
the explicit cost of capital is the internal rate of return which a firm pays for procuring the finances. debenture.’ When a firm raises additional capital from only one sources (not different sources). Port field has defined the implicit cost as 34 . Preference share. But where capital from only one source is employed in the business. Historical Cost and future Cost Historical Cost represents the cost which has already been incurred for financing a project. Marginal cost is considered more important in capital budgeting and financing decisions. Specific Costs and Composite Cost Specific costs refer to the cost of a specific source of capital such as equity share. 4. the opportunity cost of the funds is the implicit cost. In financial decisions future costs are more relevant than historical costs. While evaluating a capital expenditure proposal. it is a weighted average cost of capita. the specific cost of those sources of capital alone must be considered.CLASSIFICATION OF COST OF CAPITAL 1. Average Cost and Marginal Cost Average cost of capital refers to the weighted average cost of capital calculated on the basis of cost of each source of capital and weights are assigned to the ratio of their share to total capital funds. its explicit cost will be zero percent as no cash outflow in the form of interest are involved. Marginal cost tends to increase proportionately as the amount of debt increase. than marginal cost is the specific or explicit cost. the implicit cost represents the rate of return which can be earned by investing the funds in the alternative investments. Marginal cost of capital may be defined as the ‘Cost of obtaining another rupee of new capital. retain earnings etc. 2. It is calculated on the basis of the past data. the composite cost of capital should be as an acceptance/ rejection criterion. Future cost refers to the expected cost of funds to be raised for financing a project. 3. Thus. In other words. Historical costs help in predicting the future costs and provide an evaluation of the past performance when compared with standard costs. When capital from more than one source is employed in the business. If a firm takes interest free loan. It is also termed as ‘overall costs of capital’. it is the composite cost which should be considered for decision-making and not the specific cost. In other words. On the other hand. Composite cost of capital refers to the combined cost of various sources of finance. Explicit Cost and Implicit Cost Explicit cost refers to the discount rate which equates the present value of cash outflows or value of investment.
retained earnings etc. the implicit cost of retained earnings is the rate of return which the shareholder could have earn by investing these funds. Computation of specific costs A firm can raise funds from different sources such as loan. Cost of each source of capital is determined on an after tax basis. The firm’s capital structure remains unchanged. Costs of previously obtained capital are not relevant for computing the cost of capital to be raised from specific source. The financial and business risks are not affected by investing in new investment proposals. explicit cost will arise only when funds are raised whereas implicit cost arises when they are used. equity shares. Therefore. For example. Computation of specific cost of capital helps in determining the overall cost of capital for the firm and in evaluating the decision to raise funds from a particular source. The computation procedure of specific costs is explained in the pages that follow – 35 . otherwise not. The cost of capital of these different sources is called specific cost of capital. All these sources are called components of capital.“the rate of return with the best investment opportunity for the firm and its shareholders that will be forgone if the project presently under consideration by the firm were accepted. preference shares.” Thus implicit cost arises only when funds are invested somewhere. if the company would have distributed these earning to them as dividends. the following assumptions are made: • • • • • The cost can be either explicit or implicit. Assumption of Cost of Capital While computing the cost of capital.
you simply multiply the before-tax rate by one minus the marginal tax rate. Example-: If a company issues 12% debentures worth Rs. the cost of debt capital is the contractual interest rate adjusted further for the tax liability of the firm.or after-tax returns. Cost of Debt = (before-tax rate x (1-marginal tax)) The before tax rate of interest can be calculated as below: = Interest Expense of the company ---------------------------------------Total Debt 100 X Net Proceeds: 1. 2. If the company earnws less than this interest rate (12%) than the income available to the shareholders will be redused and the market value of the share will go down. then it must be earn at least Rs. tax savings that occur because interest is deductible while equity payout is not have been modeled as a primary benefit of debt. the relation of the interest rate is to be established with the actual amount realised or net proceeds from the issue of debentures. At par At premium At Discount = Par value – Floatation cost = Par value + Premium – Floatation cost = Par value – Discount – Floatation cost 36 . Firms with high corporate tax rates also tend to have higher debt ratios and use more debt incrementally. This is one part of the company's capital structure. because interest expense is deductible. because riskier companies generally have a higher cost of debt. the after-tax cost is seen most often. A company will use various bonds. however. 3. 100 each at par. so this measure is useful for giving an idea as to the overall rate being paid by the company to use debt financing. Much theoretical work characterizes the choice between debt and equity. to know the real cost of debt.COST OF DEBT CAPITAL Cost of Debt is the effective rate that a company pays on its current debt. 5 lacs) per year on this investment to maintain the income available to the shareholders unchanged. loans and other forms of debt. 5 lacs of Rs. in a trade-off context: Firms choose their optimal debt ratio by balancing the benefits and costs. which also includes the cost of equity. This can be measured in either before. The measure can also give investors an idea as to the riskiness of the company compared to others. Therefore. To get the after-tax rate. But. Traditionally. Large firms with tangible assets and few growth options tend to use a relatively large amount of debt.60000(12% of Rs.
A preference shareholder enjoys priority in terms of repayment vis-à-vis equity shares in case a company goes into liquidation.COST OF PREFERENCE SHARE CAPITAL Preference share is another source of Capital for a company. In the companies under observation only India Cement has preference shares issued. do not have ownership rights in the company. Preference shareholders. however. Cost of Preference Capital = Preference Dividend/Market Value of Preference Shree Cement has not paid any dividend to the Preference Shareholders. Thus the Cost of Preference Capital is 0 (Zero). Preference Shares are the shares that have a preferential right over the dividends of the company over the common shares. 37 .
the DPS and market price per share would show an increase at the rate of 10%. Earning yield method: Ke= EPS\mp*100 Eps= earning per share 3.s capital does not carry any cost but this is not true. For example if the EPS increase at the rate of 10% per year. then adjustment for this increase is essential to compute the cost of capital. Therefore. Divideng yield plus growth in dividend method: While computing cost of capital under dividend yield(d\p ratio)method. if the management astimates that companies prestnet dividend will increased continuisly for the year to come. cost of equity 38 . therefore.project in order to leave unchanged the market price of its shares. Therefore. The growth rate in dividend is assumed to be equal to the growth rate in earning per share. Thus. When additional equity shares are issued. under this method. it is the duty of the management to see that the company must earn atleast so much income that the market price of its ecisting share remains unchanged. If reduces the earning per shares of excisting share holders resulting in a fall in marker price of shares. The cost of equity can be computed by any of the following method: 1.COST OF EQUITY SHARE CAPITAL The computation of cost of euity share capital is relatively diffiult because nether the rate of dividend is predetermind nor the payment of dividend is legally binding. the new equity share holders get propranate share in future dividend and undistributed profits of the company. cost of equity sahre capital may be define as the minimum rate of return that a firm must earn on the equity financed portion of a investment. This expected minimum rate of return is the cast o equity share capital. Dividend yield method: Ke = DPS\mP*100 Ke= cost of equity capital Dps= current cash dividend per share Mp=current market price per share 2. at the time of issue of new equity shares. it had been asumend that present rate of dividend will remail the same in future also. some financial experts hold the opinion the p. But.
e. it is not possible to realise the marlet price per share. 4. The company’s risk doe not change i. compnay’s do not distribute the entire profits by way of dividend among their share holders. Realised yield methd: In case where future dividend and market price are uncertain. dividend and growth rate are stable. brokerage etc. companies create sufficiat fund fior the fianancing thrugh internal sources. But . including underwriting commission. A part of such profit is reatianed for future expantion and development. To acertain the cost of capital. nether the company 39 . elsewhere for the investor. the realised yield is discounted at the present value factor. and then compare with value of investment this method is based on these assumptions. and The market of equity share of the company does not fluctuate widly. dividend per share or EPS is divided by the amount of net proceeds. the amount of net proceeds is calculated by deducting the issue expenses form the expected marlet value or issue price. Any of the following formulae may be used for this purpose: Ke= DPS\NP*100 Or Ke= EPS\NP*100 Or Ke=DPS\NP*100+G COST OF RETAIN EARNINGS OR INTERNAL EQUITY Generally. it is very difficult to estimate the rate of return on investment. In order to overcome this difficulty. so. yield the return wshich is equal to realised yiels in the company. the average rate of return actually relise in the past few year by the investors is used to determine the cost of capital. Ke= DPS\MP*100+G G= Growth rate in dividend. The alternative investment opportuinities. Cost of newly issued equity shares when new equityshare are issued by a company. Thus year by year. because the company has to incur some expenses on new issue. Unddr this method.capital is computed by adjusting the present rate of dividend on the basis of expected future increase in company’s earning.
pays any cost nor incur any expenditure for such funds. If the company would have distributed the earnings by way of dividend instead of retaining in the busieness. 40 . Therefore. Thus. It is equal to the income what a share holders culd have earn otherwise by investing the same in an alternative investment. income forgone or sacrifised is the cost of retain earnings which the share holders expects from the company. Though ratain earnings like retained earnings like equity funds have no explicit cost but do have opportunity cost. The opportunity cost iof retained earnings is the income forgone by the share holders. it is assumed to cost free capital that is not true. every share holders expects from the company that much of income on ratined earnings for which he is deprived of the income arising o its alternative investment. Therefore .
the concept of weighted average cost of capital is very simple. the use of market value weights for calculating the weighted average cost of capital is more appealing due to the following reasons: • • The market value of securities is closely approximate to the actual amount to be received from the proceeds of such securities. is an average of the cost of specific sources of capital employed in the business properly weighted by the proportion they held in firm’s capital structure. In order to calculate the market value weights.WEIGHTED AVERAGE COST OF CAPITAL Once the specific cost of capital of the long-term sources i. The profitability of these projets is evaluated by comparing the exprcted rate of return with overall cost of apital of the firm. The overall cost of capital is the weighted average of the costs of the various sources of the funds. But. the next step is to calculate the overall cost of capital of the firm. the preference share capital. Weight can be either ‘book value weight’ or ‘market value weight’. Yet there are many problems in its calculation. It is also termed as ‘Composite Cost of Capital’ or ‘Overall Cost of Capital’ or ‘Average Cost of Capital’. the proportion of each source at its market value. Assignment of Weights : First of all. sometimes. weights have to be assigned to each source of capital for calculating the weighted average cost of capital. Moreover. weights being the proportion of each sources of funds in the total capital structure. Its computation requires : 1. no market value is 41 . the assignment of the weight on the basic of market value is operationally inconvenient as the market value of securities may frequently fluctuate. WEIGHTED AVERAGE. The capital raised from various sources is invested in different projects.e. the debt.e. The book value weight can be easily calculated by taking the relevant information from the capital structure as given in the balance sheet of the firm. weighted average as the name implies. the equity share capital and the retained earnings have been ascertained. Theoretically. The cost of each specific source of finance is calculated according to the prevailing market price. the firm has to find out the current market price of each security in each category. How to calculate? Though. Book value weights are the relative proportion of various sources of capital to the total capital structure of a firm. Market value weights may be calculated on the basic on the market value of different sources of capital i. Thus.
20. especially in case of retained earnings can indirectly be estimated by Gitman’s method. Computation of Specific Cost of Each Source : After assigning the weight.the capital structure of a company consists of 40. The following formula may be used for this purpose : Kw = ∑XW/∑W Here.000*4. it has to be converted in to ‘after tax’ cost.20. Kw = Weighted average cost of capital X = After tax cost of different sources of capital W = Weights assigned to a particular source of capital Example: Following information is available with regard to the capital structure of ABC Limited : Sources of Funds Amount(Rs. This total of weighted costs is the weighted average cost of capital.00. if the market price of company’s equity share is Rs. 18.) After tax cost of Capital 42 . all costs are ‘after tax’ costs.00. retained earnings are treated as equity capital for calculating cost of specific sources of funds.00. According to him.000 (40. 2.000*1.00. 10 each ad retained earning of Rs.44.000 equity shares of Rs.000 =Rs. The market value of equity share may be considered as the combined market value of both equity shares and retained earnings or individual market value (equity shares and retained earnings) may also be determined by allocating each of percentage share of the total market value to their respective percentage share of the total values.20. the weighted average cost is calculated by multiplying the cost of each source by its appropriate weights and weighted cost of all the sources is added. specific costs of each source of capital. as explained earlier. 1. if any source has ‘before tax’ cost.000 =Rs. Market Value of Retained Earnings= 7. For example:. In financial decisions. Therefore.available for the particular type of security. than total market value of equity shares and retained earnings would be Rs.000. 7.00. are to be calculated. Computation of Weighted Cost of Capital : After ascertaining the weights and cost of each source of capital.000* 18) which can be allocated between equity capital and retained earnings as followsMarket Value of Equity Capital = 7.000/5.000. 5.000/5. 1. 3.76.000.
12 .09 tax Weighted Cost (5)= (3) * (4) .00.13 .000 2.09 You are required to calculate the weighted average cost of capital. Capital 1. Capital 3.000 .E.10850 or 10.00.000 .00.0420 .18 Kd (after tax) = Interest Rate Before Tax – Tax Rate ( 30%.10 Debentures 3.0200 .10 .0270 .000 1.000 1. Capital Debentures 3.09 Total 10.S.72 Kd (before tax) = ---------------------113373.50% X 100 43 .18 + 800 = 113373.85% CALCULATION OF COST OF CAPITAL OF SHREE CEMENT LTD.12 .18 lacs Total Interest Paid = 9636.S.) X 100 = 8. Cost of Debt Capital: For the year 2008-09: Total Debt Capital = Term loan from Banks + Debts = 112573.50.10 . Computation of Weighted Average Cost of Capital Source Amount Rs.000 3.13 .000 .00 Weighted Average Cost of Capital (WACC) Weights After Cost (4) .1085 .35 Retained Earning 2.000 .20 P.50.00.00.50.0195 . Capital Retained Earning P. (1) (2) (3) E.S.50.000 .72 lacs Tax Rate Kd (before tax) = = 30% Interest Expense of the company -------------------------------------------Total Debt 9636.S.
02+1400 = 84827.02 lacs Tax Rate Kd (before tax) = 30% 6573.21 Kd (before tax) = ---------------------30617.33+2000= 30617.21lacs Tax Rate = 30% 2143.33 Kd (after tax) = 7% .30% = 4.50% .42% X 100 = 7.Kd (after tax) For the year 2007-08 = 8.02 = ---------------------84827.75% .90% X 100 = 7% COMPARATIVE CALCULATION OF Kd FOR THREE YEAR 44 .33lacs Total Interest Paid = 2143.30% = 5.95% Total Debt Capital = Term loan from Banks + Debts = 83427.30% = 5.02lacs Total Interest Paid = 6573.75% For the year 2006-07 Total Debt Capital = Term loan from Banks + Debts = 28617.02 Kd (after tax) = 7.
of Shares (In lacs) DPS Given Market Price (at the end of 2008-09 348.37 8 1079.85 50.75% 5.50 NA NA 311270.73 6 921.33 2143. COST OF EQUITY CAPITAL: EQUITY SHARE CAPITAL Particular No.96 2006-07 348.50% 2007-08 83427.33+2 000 =30617.73 5 893.95% Rate Before Tax – Tax Rate 30%.40 2007-08 348.21 7% 4.18 9636.61 March) Earning per equity share 74.01 Lacs) 1. 10(in Rs.86 7.98 on equity share (in lacs) Market Capitalisation (in 376033.18+ Interest Rate (After Tax)= Interest 5.90% Total Debts (Term loan from 112573.81 Not given 321146.02 6573. Dividend yield plus growth in dividend method:Ke = DPS\mP*100 + G 45 .) Proposed final dividend 2786.74 of rs.Particular Bank+Debts) Total Interest paid Interest Rate (Before Tax) 2008-09 800 =113373.72 8.02+1 400 =84824.42% 2006-07 28617.
37 = 8 X 100 = 6. 74. Mp = Current market price per share G Ke = Growth rate 8 = -------------------1079.92% X 100 + 10% = 10. Dividend per share method:Ke = Proposed final dividend on Equity Share / No. Mp = Market prise = 1079.40 3.40 2. = 10% COST OF EQUITY SHARE CAPITAL (KE) Particular Dividend Per share method Earning Yeild Method Dividend yield plus growth method 2008-09 8 6.98 Lacs No. Earning yield method:Ke= EPS\mp*100 Eps = earning per share = 74.92 10.74 Ke = -------------------1079.40 Rs.74 46 .74 Rs.40 Rs.98 Ke = -------------------348.Dps = Current cash dividend per share = 8 Rs. of Equity Share = 348.74% = 1079. of Equity Share Proposed final dividend on Equity Share = 2786.37 Lacs 2786.
WEIGHTED AVERAGE COST OF CAPITAL (WACC) WACC = (We * Ke) + (Wd * Kd) Where……….74 5.628% Weight s After tax Cost (4) 10.95 ) = 9.628% WACC OF SHREE CEMENT LIMITED Source (1) E.768 * 10.232 1.00 9. Ke = Cost of Equity Share capital Kd = Cost of Debt.0 1 113373.74) +( 0. (2) 376033.S.379 9..768 .95 Weighted Cost (5)= (3) * (4) 8.1 8 489406.248 1..1 (3) .232 *5. We = Weight of equity Wd = Weight of Debt.628 9 Weighted Average Cost of Capital (WACC) 47 . capital WACC = ( 0. Capital Debentures Total Amount Rs.
It offers a number of advantages including the followings1. It is because the weighted average cost recognises the relatively low debt cost and the need to continue to achieve the higher return on the equity financed assets.MERITS OF WEIGHTED AVERAGE COST OF CAPITAL The WACC is widely used approach in determining the required return on a firm’s investments. It depicts the overall cost of capital as the some of the cost of the individual components of the capital structure. 48 . the weighted average cost of capital reflects each element in the capital structure. Straight forward and logical : It is the straightforward and logical approach to a difficult problem. the firm incur a loss. the firm will be in a high financing risk. LIMITATION OF WEIGHTED AVERAGE COST OF CAPITAL The weighted Average cost approach also has some weaknesses. 2. It employs a direct and reasonable methodology and is easily calculated and understood. Unsuitable in case of Excessive Low-cost Debts : Short term loan can represent an important sources of fund for firm experiencing financial difficulties. 3. it is based upon individual debt and equity components. Small changes in the capital structure of the firm will be noted by small changes in overall cost of capital of the firm. If the firm accepts low-return projects on the basic of this low WACC. If an investment proposal is accepted below this limit. Therefore. This cut-off rate determines the miimum limit for accepting an investment proposal. Ideal Creation for Capital Expenditure Proposals : With the help of weighted average cost of capital. this cut-off rate is always decided above the weighted average cost of capital. the finance manager decides the cut-off rate for taking decisions relating to capital expenditure proposals. important among them are as follows : 1. the inclusion of such debts in the calculation of cost of capital will result in a low WACC. 4. Accurate when Profits are Normal : During the period of normal profits. Responsiveness to Changing Condition : Since. When a firm relies on Zero cost (in the form of payables) or low cost short term debt. the weighted average cost of capital is more accurate as a cut-off rate in selecting the capital budgeting proposals.
49 .2. 3. but it is not always correct. market value is more appropriate than book value. Normally. the problem is which type of weight should be assigned. not earning profit as compared to other firms in the industry. Three types of capital structure are there i. but the market value of each component of capital of a company is not readily available. Though. Generally. 4. current capital structure. marginal capital structure and optimal capital structure. Hence. current capital structure is regarded as the optimal structure. Which of these capital structure be selected. These two type of weights give different results. Unsuitable in Case of Low Profits : If a firm is experiencing a period of low profits. the problem becomes more intricate. WACC will be inaccurate and of limited value.(i) book value weights and (ii) market value weight. When the securities of the company are unlisted. there are two type of weights. Selection of Capital Structure : The selection of capital structure to be used for determining the WACC is also not easy job.e. Difficulty in Assigning Weights : The main difficulty in calculating the WACC is to assign weight to different components of capital structure.
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