Group Assignments

Group Assignment – I
Group Assignment: 20 marks
Weightage: 10% 
Due for Submission: Feb 15, 2022 (EoD).  Use Excel File

Groups to select a unique company for this assignment.

1. Select a listed firm having +ve net income during the last three FYs.
2. Calculate FCFF and FCFE for FY21 (T = 0).
3. FCF is expected to increase by 20% for FY22.
4. For FY23 and FY24, the FCF is expected to increase by 15% YoY.
5. For FY25 and FY26, the FCF is expected to increase by 10% YoY.
6. After FY26, the FCF is expected to increase annually at a constant growth rate of ‘g’.
[Assume g = GDP growth rate of 7%]
7. Estimate the Equity Value (firm) using FCFF & FCFE valuation approaches.
8. Estimate the Intrinsic Value of a share and compare it with its Market Value
[Intrinsic Value = Equity Value/No. of Shares]
9. Other Relevant Information
Corporate Tax Rate = 30% [Assume]
Total Capital = Equity Capital + Debt Capital
Equity Capital = Equity Paid-up Capital + Reserves & Surplus [Balance sheet]
Debt Capital = LT Borrowings + ST Borrowings* [Balance sheet]
*Includes current portion of LT Borrowings
Cost of Debt (CoD) = Interest Expense/ Debt capital [Income & BS]

Note: when CoD is unreasonably high or low from the above equation
[Assume CoD = Yield on 10Y G-sec + 3%]

Cost of Equity (CoE) = Assume 8 per cent spread over the CoD

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 Group Assignment – II
Group Assignment: 20 marks
Weightage: 10% 
Due for Submission: March 04, 2022
Excel file submission
Step – 1: Select two listed firms (Firm A and B) of the same industry/sector. Assume Sensex
or Nifty-50 indices representing the market portfolio.
Step – 2: Get daily/weekly closing values (past six months) of both the stocks and the index.

Step – 3: Estimate the stock beta ( β e) of both the firm using

(a) Covariance/variance method or (b) Slope method
Step – 4: Using the Capital Asset Pricing Model (CAPM), calculate the cost of equity (or
expected equity return) of Firm A and Firm B

CoE = r e = r f + β e ( r m −r f )
r e = Annual return on the stock
r f = Annual return on 10Y Gsec Bond
r m = Annual return on the market index

Step – 5: Calculate the weights of debt and equity in both the firms

Step – 6: Calculate the stock beta-unlevered ( β 0) of Firm A and Firm B when they are all-
equity financed. Assume a tax rate of 25 per cent. Assume beta of debt ( β d ) is 10 per cent.
β e = β 0 + (β ¿ ¿ o−β d )¿ * (1 – T) * D/E

Step – 7: Calculate the cost of debt (CoD) using the methods given below and comment
a) CoD = Interest Expense/Total Debt
b) CoD = r f + credit-spread*
Note: Get the company’s ratings given by the credit rating agency (CRISIL, ICRA,
CARE, etc.). Select a corporate bond (preferably 10Y) having the same rating.
*Credit spread = Yield (Corporate bond) - Yield (10Y Gsec bond)
Step – 8: Calculate the WACC of the firms. For CoD, consider (b) when the COD from (a) is
more than 15 per cent; else, take higher of the two values (step-7).

Step – 9: Calculate the CoE (r 0 ) of Firm A and Firm B if all-equity financed.

r 0 = r f + β 0 ( r m −r f )

Step – 9: Calculate the equity betas of Firm A and Firm B by changing equity weights from
100% to 5%, decreasing by 5%.
β e = β 0 + (β ¿ ¿ o−β d )¿ * (1 – T) * D/E

Step – 10: Calculate the CoEs of Firm A and Firm B for all debt-equity levels in Step-9.

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 r e = r f + β e ( r m −r f )

Step – 11: Calculate the WACCs of Firm A and Firm B for all debt-equity levels in Step-9.
* Up to 50% debt level, assume CoD remains unchanged, and after that, it increases by one
percent for every 5 percent increase in the debt ratio.
Step – 12: Plot WACC (X-axis) versus debt-equity ratio (Y-axis) graphs for both the firms.
Step – 13: Compare and comment upon the optimal capital structure of Firm A and Firm B.

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 Group Assignment – III
Group Assignment: 10 marks
Weightage: 5% 
Due for Submission: March 10, 2022
Word/PDF file submission

1. Compare the following ratios of the two firms (FY21 only) you selected for GA-II and
comment.
a) Leverage Ratios (Debt Ratio and Debt-Equity Ratio)
b) Solvency Ratios (ICR and DSCR)
c) Activities Ratios
d) Gross and Net Operating Cycle