GILLETTE - COST OF CAPITAL CALCULATION

Name- Manvendra S

Roll No – 45206

APPROACH
➢ Cost of Equity Calculation: The Beta value for the company was calculated with
respect to S&P BSE 500 and comes out to be 1.56721969082548 using the
Capital Assets Pricing Method (C.A.P.M). The risk-free rate of return is
taken as 6.20% and the expected market return is 11.08%. The cost of equity is
calculated using the CAPM model.

Formula: Ke=Rf+ β (Rm-Rf)

Ke = Cost of Equity
Rf = Risk free rate of return
Rm = Expected market return
Β = Volatility of the stock

Rm-Rf = Market risk premium

Ke = Rf + beta (Rm – Rf)

= 6.2% + 1.567 (11.08% - 6.2%)
Ke = 23.69%

Beta 1.567

Rf (Risk Free Rate of Return) 6.20%

Rm (Expected market return) 11.08%

Cost of equity (Ke) 13.85%

Therefore, the cost of equity comes out to be 13.85%

➢ Cost of Debt Calculation: The Interest Coverage Ratio for the company comes out to
be 47, taking into account the Interest Expense and EBIT of the company from
“moneycontrol.com” (ICR = EBIT/Interest Expense). Using the Damodaran’s synthetic
rate table for large manufacturing firms, the Default Risk Spread corresponding to
the Interest Coverage Ratio is 0.75%. To get the cost of debt, The risk-free rate of
return was added to the Default Risk Spread.
EBIT 94 Cr

Interest 2 Cr

Interest Coverage Ratio 47

DRS (Default Risk Spread) 0.85%

Cost of Debt (Kd) = Rf+DRS 7.05%

Therefore, the cost of debt comes out to be 7.05%.

Cost of Capital Calculation: After calculating the cost of equity and debt, the weightsof equity and debt
were calculated from the Debt to Equity Ratio of the company that was taken from .company annual
report. Considering the tax rate of 33% the cost of capital comes out to 5.59%

% through the WACC method.

WACC=Ke*We + Kd*Wd*(1-T)
Ke (= Cost of equity
We = Weight of Equity
Kd = Cost of Debt
Wd = Weight of Debt
T = Tax Rate
Calculation:
WACC = 13.85%*(100%-90.485%)+7.05 x%*90.085%*(1-33%)
WACC = 5.59%
 Therefore, the cost of capital comes out to be 5.59%
This is the rate of return a business anticipates on a particular investment to justify
the use of resources.

REFERENCES:
1. https://www.moneycontrol.com/
2. https://finance.yahoo.com/
3. Company Annual Report