Class Assignment-01

Of Corporate Finance
Company – P.I INDUSTRIES

Under supervision of Dr. MONIKA KALANI

Mittal School of Business,
Lovely Professional University,
Phagwara-144401, Punjab, India, 2021

NAME- RIA HEMBROM Roll no. – RQ2140A01

Registration no. – Course code- FINM551

12102014
Company Profile

P.I Industries was founded in 1946 and works with a unique business model across
the AgChem value chain from R&D to distribution by providing innovative
solutions by partnering with the best. The company focuses on building on the
foundation of trust, and shall be at the forefront of science by providing
opportunities and delivering innovative solutions.

Cost of Equity

Cost of equity is a return that a firm pays to its equity investors, i.e. shareholders to
compensate for the risk they take by investing their capital. The formula for cost of
Equity is given as – Ke=D(1+r) + rP0

2021
2021
Dividend per share (2021) = 5
Share Price ( as on 31.3.2021) = 28.97
Growth rate = ROE ( 1- DPR)
DPR = dividend / EPS * 100
EPS ( Basic ) = 48.57
DPR = 5 / 48.57 * 100 = 10.29%
ROE = 22.00%
Growth rate = 22 % ( 1 - 10.29%) = 19.73

Do(1+r)
Ke= +r
Po
5(1+0.1973)
Ke= 0.1973
28.97
= 4.03%
2020
2020
Dividend per share (2020) = 4
Share Price ( as on 31.3.2020) = 12.39.
Growth rate = ROE ( 1- DPR)
DPR = dividend / EPS * 100
EPS ( Basic ) = 32.04
DPR = 4/32.04 *100 = 12.48%
ROE = 23.00%
Growth rate = 23% (1 - 12.48%)= 20.12

Do(1+r)
Ke= +r
Po
4(1+0.2012) +
Ke=
12.39 0.2012
5.88%
2019
2019
Dividend per share (2019) = 4
Share Price ( as on 31.3.2019) = 10.19
Growth rate = ROE ( 1-
DPR)
DPR = dividend / EPS * 100
EPS ( Basic ) = 29.56
DPR = 4 / 29.56 * 100 = 13.53%
ROE = 25
Growth rate = 25% (1-13.53%)= 21.61

Do(1+r)
Ke= +r
Po
4(1+0.2161 ) +
Ke=
10.39 0.2161
=6.84%
Interpretation-
The cost of equity has fallen from 2019 to 2021 as it was 6.84% in 2019 and thus
decreased by 2.81%. This fall in dividend may have caused due to the Covid-19
breakout all over the world.

Cost of Debt

Cost of debt helps a company’s budgets to manage the finances of business.

Knowing the cost of debt for a business helps to work with business finances
understand their expenses and manage their cash flow. The formula for Cost of
Debt goes - Ke= Interest (1-Tax rate) * 100/ Total Debt

2021

2021
Interest=₹ 12.8 Crore
Long term Debt=₹ 257.40 crores
Tax expense =₹191.10
EBT = 746.1
Tax rate = Tax expense /
EBT*100
Tax rate = 191.10/746.1*100
Tax rate = 25.61%
Interest(1-Tax
Kd= Rate) X100
Debt
12.8(1-25.61%) X
Kd=
257.4 100
= 3.70%
2020

2020
Interest=₹13.2 crores
Long term Debt=₹399.40 crores
Tax expense = 152.10
EBT = 487.7
Tax rate = Tax expense / EBT*100
Tax rate = 152.10 / 487.7*100
Tax rate = 31.18 %
Interest(1-Tax Rate)
Kd= X100
Debt
13.2(1-31.18%)
Kd= X 100
399.4
= 2.27%
2019

2019
Interest=₹16.8 crores
Long term Debt=₹9.90 crores
Tax expense = 126.90
EBT = 425.7
Tax rate = Tax expense / EBT*100
Tax rate = 126.90 / 425.7*100
Tax rate = 29.75%
Interest(1-Tax Rate)
Kd= X100
Debt
16.8(1-29.75%)
Kd= X 100
10.9
=1.08%
Interpretation- The cost of debt has been increasing year after year; in 2019, the
cost of debt was 1.08 percent, but by 2021, it had rose to 3.70 percent. The drop in
the cost of capital was mostly due to lower interest rates and lower overall debt.

Expected Rate of Return

Expected Rate of ReturnThe expected rate of return is the amount that investors
can expect to make on their investment based on its historical rates of return. It is a
vital guide for investors since it tells what an investor can expect the return on the
given investment. It is given by the formula

Expected rate of return= Rf+Beta (Rm-Rf)

Where, Rf= risk-free rate.

Beta= beta of the investment,

Rm= return on market,

Rm-Rf= market risk premium.

 CALCULATION OF Rm
Closing price of NIFTY 50 on
28-12-2018 1799.8
Closing price of NIFTY 50 on
31-12-2019 12255.85

Closing price of NIFTY 50 on

31-12-2020 13981.95
Closing price of NIFTY 50 on
31-12-2021 17703.75

Year Calculation

2019 12255.85-10799.8/10799.8*100 = 13.48%

2020 13981.95-12255.85/12255.85*100 = 14.08%
2021 17703.75-13981.95/13981.95*100 = 26.61%

EXPECTED RATE OF RETURN

2021 2020 2019
Rf=7.15% Rf=7.15% Rf=7.15%
Rm(Nifty 50) = 13.48% Rm(Nifty 50) = 14.08% Rm(Nifty 50 ) = 26.61%
Beta=0.58 Beta=0.58 Beta=0.58

E(Ri)
= Rf+beta(Rm-Rf) E(Ri)= Rf+beta(Rm-Rf) E(Ri)= Rf+beta(Rm-Rf)
7.15%+0.58(13.48%- 7.15%+0.58 (14.08%- 7.15%+0.58(26.61%-
E(Ri)= 7.15%) E(Ri)= 7.15%) E(Ri)= 7.15%)
= 4.12% = 8.51% = 16.09%

Interpretation-

In the previous three years, the expected return on equity has plummeted. The lack
of growth in 2019 and the covid epidemic in 2020 were the causes of this drop.
The market did not increase much in 2019. The market crashed in 2020 as a result
of the covid pandemic, which resulted in a lower predicted rate of return.

LEVERAGE

Financial Leverage

The degree of Financial Leverage is used to measure the sensitivity of company’s

EPS i.e., earning per share to the fluctuations in its EBIT otherwise known as
Operating income.

Formula- DOFL= EBIT/EBIT-interest

Financial Leverage
2021 2020 2019
Interest = 12.8 Interest = 13.2 Interest = 16.8
EBT = 746.1 EBT = 487.7 EBT = 425.7
EBIT = Interest +
EBIT = Interest + EBT EBIT = Interest + EBT EBT
EBIT = 12.8+746.1 EBIT = 13.2+487.7 EBIT = 16.8+425.7
EBIT = 758.9 EBIT = 500.9 EBIT = 442.5
EBIT EBIT EBIT
Financial EBIT- Financial EBIT- Financial EBIT-
Leverage= Interest Leverage= Interest Leverage= Interest

= 758.9 = 500.9 = 442.5

758.9-12.8 500.9- 13.2 442.5-16.8
1.01 1.02 1.03
Interpretation-

The company's financial leverage is very close to every year, fluctuating between
1.01 percent and 1.03 percent. This indicates that the company's financial risk is
low. Here, a rise in interest will result in a significant drop in profitability.
 Operating Leverage

Operating Leverage
2021 2020 2019
% change in EBIT= % change in EBIT= % change in EBIT=
% change in sales= % change in sales= % change in sales=
% change in EBIT % change in EBIT % change in EBIT
Operating Leverage= % change in Operating Leverage= % change in Operating Leverage= % change in
sales sales sales
15.13% 11.31% 10.63%
= = =
12.93% 11.64% 12.47%
1.17 = 0.97 = 0.85

Interpretation-

In 2021, the operating leverage was 1.17, indicating that an increase in sales would
result in a loss in profitability. This sort of circumstance indicates that the firm was
having difficulties in that year. The operating leverage in 2020 and 2019 is greater
than only 0.12 times, indicating that the company's operational risk is rather
average.
 Combined Leverage

High earnings owing to fixed expenses are referred to as combined leverage. Fixed
operating expenditures are combined with fixed financial expenses. It denotes
fixed-quantity leverage advantages and dangers

Combined Leverage
2021 2020 2019
Financial Leverage= 1.01 Financial Leverage= 1.02 Financial Leverage= 1.03
Operating Leverage= 1.17 Operating Leverage= 0.97 Operating Leverage= 0.85

Com. Fin Leverage X Opr. Com. Fin Leverage X Opr. Com. Fin Leverage X Opr.
Leverage= Leverage Leverage= Leverage Leverage= Leverage
1.01 X 1.17 = 1.02 X 0.97 = 1.03 X 0.85
= 1.18 = 0.98 = 0.87

Interpretation-

The degree of combined leverage highlights the advantages and hazards associated
with this leverage. The operating leverage in 2021 is high as compared to the
cumulative leverage in 2020 and 2021. The combined leverage in 2021 is fairly
large. This indicates that the organization is at high risk overall and has struggled
in the years 2020 and 2019.
References
 https://www.moneycontrol.com/financials/piindust
ries/results/yearly/PII#PII
 https://www.moneycontrol.com/financials/piindust
ries/profit-lossVI/PII#PII