Calculations

Reliance Industries Limited

Cost of Debt:

RIL has debt component of Rs. 2,11,069 Cr. These Long-Term liabilities are Divided into 4
parts. These are:

• Secured Debentures
• Unsecured Debentures
• Bonds
• Term Loans

Calculation of Cost of Debt will be done individually for each of these components and these
components will be taken separately for further calculation of WACC.

Secured Debentures:

Interest

Rate of Interest Proceeds (In Cr.) Weights Rate

7.97% 1,000 0.07201 0.00574
8.00% 3,886 0.27985 0.02239
8.25% 3,000 0.21604 0.01782
8.32% 2,000 0.14403 0.01198
8.70% 3,500 0.25205 0.02193
8.75% 500 0.03601 0.00315
Total 13,886 1 0.08301

The weighted average interest rate for all the Secured debentures is 8.301% (0.08301 x 100)

Thus, we get I = 8.301%

Corporate Tax rate

Tax rate = Tax Paid/EBT

Tax Paid = Rs. 9,413 Cr.

EBT = Rs. 40,316 Cr.

Tax Rate = 9413/40316 = 0.23348 *100 = 23.35%

Cost of Debt (After Tax) = I x (1 – tax rate)

= 8.301% x (1-0.234)

= 8.301% x 0.766

= 6.35%

Therefore, Secured Debentures Cost of Debt is 6.35%

Unsecured Debentures:

Interest:

Rate of Interest Proceeds Weights Rate

6.78% 2,500 0.06295 0.00427
6.80% 2,500 0.06295 0.00428
6.95% 2,500 0.06295 0.00438
7.00% 5,000 0.12590 0.00881
7.07% 2,500 0.06295 0.00445
7.17% 5,000 0.12590 0.00903
8.30% 7,000 0.17626 0.01463
8.65% 2,415 0.06081 0.00526
8.70% 1,000 0.02518 0.00219
8.95% 2,655 0.06685 0.00598
9.00% 1,000 0.02518 0.00227
9.05% 3,143 0.07914 0.00716
9.25% 2,500 0.06295 0.00582
Total 39,713 1 0.07853

The weighted average interest rate for all the Unsecured debentures is 7.853% (0.07853 x 100)

Thus, we get I = 7.853%

Corporate Tax rate

Tax rate = Tax Paid/EBT

Tax Paid = Rs. 9,413 Cr.

EBT = Rs. 40,316 Cr.

Tax Rate = 9413/40316 = 0.23348 *100 = 23.35%

Cost of Debt (After Tax) = I x (1 – tax rate)

= 7.853% x (1-0.234)

= 7.853% x 0.766

= 6.02%

Therefore, Unsecured Debentures Cost of Debt is 6.02%.

Bonds

Interest:

Rate of Interest Proceeds Weights Rate

1.87% 882 0.03502 0.00065
2.06% 865 0.03435 0.00071
2.44% 979 0.03887 0.00095
2.51% 1,021 0.04054 0.00102
3.67% 6,053 0.24035 0.00882
4.13% 7,567 0.30047 0.01241
4.88% 5,675 0.22534 0.01100
5.00% 1,513 0.06008 0.00300
7.63% 38 0.00151 0.00012
8.25% 257 0.01020 0.00084
9.38% 167 0.00663 0.00062
10.25% 94 0.00373 0.00038
10.50% 73 0.00290 0.00030
Total 25,184 1 0.04083

The weighted average interest rate for all the Unsecured debentures is 4.083% (0.04083 x 100)

Thus, we get I = 4.083%

Corporate Tax rate

Tax rate = Tax Paid/EBT

Tax Paid = Rs. 9,413 Cr.

EBT = Rs. 40,316 Cr.

Tax Rate = 9413/40316 = 0.23348 *100 = 23.35%

Cost of Debt (After Tax) = I x (1 – tax rate)

= 4.083% x (1-0.234)

= 4.083% x 0.766

= 3.128%

Therefore, Unsecured Debentures Cost of Debt is 3.128%.

Term Loans

Interest:

Non-Current 109498
Current 18315
Total 127813
Finance Charges 1751
0.0136997

The weighted average interest rate for all the Unsecured debentures is 1.37% (0.013699 x 100)

Thus, we get I = 1.37%

Corporate Tax rate

Tax rate = Tax Paid/EBT

Tax Paid = Rs. 9,413 Cr.

EBT = Rs. 40,316 Cr.

Tax Rate = 9413/40316 = 0.23348 *100 = 23.35%

Cost of Debt (After Tax) = I x (1 – tax rate)

= 1.37% x (1-0.234)

= 1.37% x 0.766

= 1.05%

Therefore, Unsecured Debentures Cost of Debt is 1.05%.

Cost of Equity
Ke = (Dividend/Market Price) + Growth Rate

Dividend paid by the company in the fiscal year 2020-21 is Rs. 6.5 Per Share.

Market Price of the share dated 9 April 2021 is Rs. 1,982 per share.

It is assumed that the growth rate is calculated through a successive percentage formula for the
last 3 year.

% change in 2018 to 2019 = (6.5 – 6.0)/6.0 x 100 = 8.33%

% change in 2019 to 2018 = (6.5 – 6.5)/6.5 x 100 = 0%

Successive Percentage (Avg. Growth Rate)

= (a+b+(a+b/100))%

= (8.33 + 0 + (8.33+0/100))

= (8.33 + 0.083)

= 8.41%

So, the average dividend growth rate is 8.41%

Cost of Equity (Ke) = (dividend/Market Price) + Growth rate

= (6.5/1982) + 8.41%

= 0.32 + 8.41

= 8.73%

Therefore, the Cost of Equity for RIL in 2020 is around 8.73%.

Value of Equity:

= EBT/Ke

= 40,316/8.73

= 4,61,809

Therefore, the value of equity is Rs. 4,61,809 Cr.

Weighted Average Cost of Capital

Source of Fund Amount (In Cr.) Proportion Cost (%) Weighted Cost

Equity Capital 4,61,809 0.69091 8.730% 0.060316613

Secured Debentures 13,886 0.02077 6.350% 0.001319202
Unsecured Debentures 39,713 0.05941 6.020% 0.003576758
Bonds 25,184 0.03768 3.128% 0.00117856
Term Loans 1,27,813 0.19122 1.050% 0.002007819

Total 6,68,405 1 0.068398952

Therefore, when combined according to weights the weighted average cost of total capital is
6.8399%.

Value of Firm (Net Income Method)

Value of Firm = EBIT/WACC

EBIT = Rs. 62,149 Cr.

WACC = 6.8399%

Value of the firm = 62149/6.8399%

= 6214900/6.8399

= 9,08,624

Therefore, as per the Net Income approach the value of the firm is Rs. 9,08,624 Cr.
Tata Consultancy Services
Cost of Debt
It is never necessary for a company to raise funds through borrowed funds and pay for the
money you use. This is what a Large Cap company in service sector like Tata Consultancy
Services believe. TCS is one of those companies in the market which is completely debt free.
When we went through the annual report of the company, we found out that the only Non-
Current Liabilities the company has are just the tax liabilities and the lease liabilities on
properties, cars, land, etc.

Therefore, for TCS we will be considering only the equity component in the calculation of
Weighted Average Cost of Capital as the Complete capital is made up of equity. The calculation
for the same is done further.

Cost of Equity
Cost of Equity (Ke) = (Dividend/Market Price) + Growth Rate

Dividend paid by the company in the fiscal year 2020-21 is 73 Rs. per share. This due to sudden
boom in the market company paid a lot of dividend, however in the previous years the dividend
was nearly half of it. In 2018-19 the dividend paid was Rs. 50 per share, and in 2017-18 the
dividend paid was Rs. 47 per share, in 2016-17 it was Rs. 43 per share

Market price of the company dated 9th April 2021 is Rs. 3,322 per share.

Growth Rate: Because of so many fluctuations again successive percentage formula will be
used.

% Change in 2018 to 2019 = 50-47/47*100 = 6.38%

% Change in 2019 to 2020 = 47-43/43*100 = 9.30%

Growth Rate = (a+b+(a+b/100))%

= (6.38 + 9.30 + (15.68/100)

= (15.68 + 0.16)

= 15.84%
Ke = Dividend/Market Price + Growth

= 73/3322 + 15.84%

= 2.20% + 15.84%

= 18.04%

Therefore, the Cost of Equity for RIL is 18.04%.

Value of Equity
Value of Equity = EBT/Ke

EBT = Rs. 41,668 Cr.

Ke = 18.04%

Value of Equity = 41668/18.04%

= 4166800/18.04

= 2,30,975

Therefore, the value of equity of TCS is Rs. 2,20,975

WACC
As there is no debt component and only the equity component there will be no proportions in
the Capital Structure. Therefore, the complete weight will be applied to Equity Capital, this
means that the Weighted Average Cost of Capital is same as Cost of Equity (Ke).

Source of Fund Amount (In Cr.) Proportion Cost (%) Weighted Cost
Equity Capital 2,30,975 1.00000 18.040% 0.1804
Total 2,30,975 1 0.1804

Therefore, the WACC of Tata Consultancy Services is around 18.04%.

Value of the Firm
Value of Firm = EBIT/WACC

EBIT = Rs. 45,112 Cr.

WACC = 18.04%

Value of the firm = 45,112/18.04%

= 4511200/18.04

= 250067

Therefore, as per the Net Income approach the value of the firm is Rs. 2,50,067 Cr.

Note
• Changes in dividend payout are fluctuating due to market activities, so, previous year’s
dividend changes are taken into consideration for growth rate.
• The cost of equity calculated is for equity shares, however the same cost is taken into
consideration for other elements like reserves and surplus.