FINANCING DECISIONS

DEBT TO EQUITY RATIO

Year 2021 2020 2019 2018 2017

DEBT TO EQUITY

Equity 17807 15,342.60 18,159.26 15,256.54 14,678.05

Debt 1,34,474.51 1,22,505.16 1,40,462.40 1,05,485.27 90,470.41

Ratio 7.551777952 7.984641456 7.73502885 6.91410176 6.16365321

*CALCULATED ON EXCEL

DEBT-TO-EQUITY RATIO=TOTAL DEBT/TOTAL SHAREHOLDER’S EQUITY

IDFC FIRST BANK Ltd. debt to equity ratio measures for the 5 consecutive years(2017 to
2021) is 7.55,7.98,7.73,6.91,6.16. Debt equity ratio clearly states that the company is has
higher debt to higher ratio which shows that company is high risk.

INTEREST COVERAGE RATIO

Coverage ratio
11128.28 12168.73 7000 8395.3 8268.85
EBIT

8587.6 10232 8749.08 7131.91 6515.39

Int Expense

1.1771460
Coverage ratio 1.295854488 1.189281665 0.800084123 9 1.26912587
*CALCULATED ON EXCEL

INTEREST COVERAGE RATIO=EBIT/INTEREST EXPENSE

Coverage ratio is a ratio to measure firm’s ability to pay its financial obligations. Higher ratio
indicates that the firm is more able to pay the obligations.
Interest coverage ratio for IDFC FIRST BANK LTD. for the last five years from 2017-21 is
1.26,1.17,0.80,1.18,1.29. There is a variation between the ratios during the 5 years, The
average of the ratio of 5 years is 1.14 which implies that the firm has covered interest
charges. The coverage is low which implies that company is burdened with expenses.
COST OF DEBT
Cost of Debts
Cost of Debts
2021 2020 2019 2018 2017
PBT 475.78 -2,378.52 -3,295.19 1027.3 1,470.96
PAT 452.28 -2,864.21 -1,944.18 859.3 1,019.74
PBT-PAT 23.50 485.69 -1,351.01 168.00 451.22
Tax rate 0.049392576 -0.204198409 0.409994568 0.16353548 0.30675205
Tax rate % 4.93925764 -20.41984091 40.99945678 16.3535481 30.6752053
Interest expense 8,587.60 10,232.00 8,749.08 7,131.91 6,515.39
Total debt 1,34,474.51 1,22,505.16 1,40,462.40 1,05,485.27 90,470.41
pre tax 0.06386043 0.083523012 0.062287701 0.06761048 0.07201681
pre tax % 6.3% 8.3% 6.2% 6.7% 7.2%
1-tax rate 0.950607424 1.204198409 0.590005432 0.83646452 0.69324795
After tax 6.07061986 10.05782787 3.675008206 5.65537697 4.99255032
Cost of Debt 6.090276644 6.09519084 4.774311831 5.323963643 4.992550317
*CALCULATED ON EXCEL

PRE-TAX COST OF DEBT=INTEREST EXPENSE/TOTAL DEBT

COST OF DEBT= PRE-TAX COST OF DEBT*(1-TAX RATE)
IDFC FIRST BANK cost of debt over the can be seen varying for 5 years , in 2020 and 2021
there is only a minor difference and the average cost of debt for 5 years period is 4.25

BOND RATING

Instrument / Issuer Amount (in Currency Rating

Rating million)
Bond 100000 INR IND AA+ /
Negative
Bond 184930 INR IND AA+ /
Negative

The credit rating of the IDFC FIRST BANK BOND has been given AA rating which is
negative and indicates high risk . For consecutive years bond rating has remained unchanged.
COST OF CAPITAL
WACC=E/(E+D)*COST OF EQUITY+D/(E+D)*COST OF DEBT*(1-TAX RATE)
 WEIGHTS:
Company’s assets are financed by debt and equity, We need to calculate the weight of
equity and weight of debt.

“Market Cap” is the market value of an equity(E) , Market capitalization of IDFC

FIRST BANK IS Rs 99936.890 Million.

Market value of debt is difficult to find, it is therefore good to use book value of debt
(D).Calculated by adding last 2 year short term debt and capital lease obligation and
long term debt & capital lease obligation together.
As of September,2021 , Idfc’s short term debt was 0 and long term debt is rupees
424.3 million.

Book value of debt or Debt(D) is Rs 424.3 milion:

a) Weight of equity = E/(E+D) = 99936.890/(99936.890+424.3)=0.9958

b) Weight of debt=D/(E+D)=424.3/(99936.890 +424.3)=0.0042

 COST OF EQUITY:

COST OF EQUITY= RISK FREE RATE OF RETURN + BETA OF ASSET *

(EXPECTED RETURN OF THE MARKET- RISK FREE RATE OF RETURN)

To calculate have cost of equity current risk free rate is calculated and the current risk free
rate for IDFC first bank is 6.36%

Now we will calculate beta, Beta is the sensitivity of the expected excess asset returns to the
expected excess market returns beta for idfc first bank calculated is 1.52
(return of the market - risk free rate of return) is also called market premium market premium
for IDFC first bank is 6% calculated

cost of security = 6.36%+1.52*6%=15.48%

 COST OF DEBT

As of March 2021, IDFC interest expense in positive number was ₹130,000,000

Update does 424.3 Mil.

COST OF DEBT = 130.4/424.3=30.733%

 1- AVERAGE TAX RATE:

 Is limited to between 0% and 100% if the calculated tax is less than 0% it is set to 0% and if it
is higher than 100% it is set to 100%

Since the latest 2 Wheeler average tax rate is less than 0% and it's set 0%

WACC= E/(E+D)*COST OF EQUITY+D/(E+D)*COST

OF DEBT*(1-TAX RATE)

= 0.9958*15.48%+0.0042*30.733%*(1-0%)
=15.44%

ANALYSIS
It costs money to raise capital. Companies that generate a higher ROIC percentage than the
cost to the company to raise the capital needed for that investment generate excess returns. In
the future, companies that expect to continue to generate positive excess returns on new
investments will increase in value as they grow, and companies that generate returns that
exceed the cost of capital will destroy value as they grow.

RETURN ON EQUITY
PAT 452.28 -2,864.21 -1,944.18 859.3 1,019.74
Total
shareholder
funds 17,807.89 15,342.60 18,159.26 15,256.54 14,678.05
0.05632338
ROE 0.025397731 -0.186683483 -0.107062733 7 0.069473806
ROE% 2.53% 18.66% 10.75% 5.63% 6.94%
*Calculated on excel

ROE= Profit After Tax/Total Shareholder’s Funds

IDFC FIRST return on YouTube years is 2.53% , 18.66% ,10.75% ,5.63% respectively. Cost
of capital as compared to return on equities on higher side which means that the investor
could not easily get more return as compared to what they invest .