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Project Report on

Cost of Capital
of Grasim Industries Ltd.

Submitted in Partial Fulfilment of the requirement of Master of Business Administration

Session :

Under the Guidance of :

Submitted by :

University

DECLARATION

I, ________________, Roll No. _____________, student of M.B.A., _________________________________________ hereby declare that the project report entitle "COST OF CAPITAL OF GRASIM INDUSTRIES LTD." is an original work and the same has not been submitted to any other institute.

(SIGNATURE OF THE CANDIDATE)

ACKNOWLEDGMENT

I express my sincere thanks and gratitude to all those who made it possible for me to complete this work. First of all, I would like to extend my thanks to ______________who exceeded to me request and allowed me to work on this project. He always gave valuable guidance through over the tenure of my work. I also provide thanks to ____________for their help & cooperation. I am also thankful to ___________________ (Guide) for providing me necessary guidance to prepare the report. Last but not the least, I would like to thanks all of them, who helped me directly or indirectly in completion of my work.

TO WHOM SOEVER IT MAY CONCERN

This is to certify that ________________________ , Student of _______ ___________________________________has successfully completed his research project titled Cost of Capital of Grasim Industries Ltd..

His conduct & behaviour was found to be excellent during the period. He is very sincere and hardworking person.

Supervisor Date : ___________

CONTENT

PROFILE OF GRASIM INDUSTRIES Introduction to Grasim Industries Ltd. Organization and Management Grasims Key Products The Aditya Vikram Birla Group of Companies Objectives of Company Brand of Company Brand Advertising History Structure of Finance Department in Company Significance Accounting Policy of Company

SCOPE OF STUDY REVIEW OF LITERATURE OBJECTIVES OF STUDY INTRODUCTION OF PROJECT REPORT Introduction to Cost of Capital Significance of Cost of Capital Problem in Determination of Cost of Capital Computation of Cost of Capital

COST OF DEBT. CAPITAL Cost of debt. (before tax) Cost of debt. (after tax) Cost of redeemable debt. Cost of debt which redeemable in installments.

COST OF EQUITY SHARE CAPITAL COST OF PREFERENCE SHARE CAPITAL COST OF RETAINED EARNING FINDINGS & SUGGESTIONS CONCLUSION LIMITATIONS OF STUDY RESEARCH METHODOLOGY BIBLIOGRAPHY

LIST OF TABLE

1. 2. 3. 4. 5.

Introduction of Cost of Capital Cost of debt capital Cost of equity share capital Cost of preference share capital Cost of retained earning

PREFACE
A student may acquire sufficient knowledge of business management by reading theory books during study period but actual and practical knowledge is must for any student. A student can gain this practical knowledge when he comes to same environment. He must have knowledge to tackle various types of problems, which arise in business. He can be able to do it, when he actually faces the problems. A student may have a sufficient attitude for his future job, but a systematic practical training is essential to bring in his confidence for job performance, mental preparation, which enable him to take a future job responsibility. As discussed above importance and objectives of training, besides all this, such training solves following purposes Developing Skills In this ability to perform work effectively & efficiently is being developed. Modifying Attitude Developing good attitude on the part of the training in regard to actual job requirement that is management skills, industrial relations, human relations. Transmitting Information Information about the company, its product, services & policies. The management of company offered excellent learning situation & sufficient facilities to fulfill the objectives of the training.

PROFILE OF GRASIM INDUSTRIES LTD.

INTRODUCTION

GRASIM INDUSTRIES LIMITED Incorporated on 25 August 1947 in the state of Madhya Pradesh, Grasim Industries Limited commenced operations in 1948 in Gwalior with a small Rayon weaving unit using imported rayon in 1954 Grasim quickly set its focus on the production of rayon i.e. a man made cellulose fiber. The company strengthened its position. in rayon in a cost-effective manner through horizontal and vertical integration. Developing indigenously the expertise for producing basic raw material-pulp, auxiliary chemicals and engineering for plant and equipment. Alongside Grasim diversified into other core sectors-cement and sponge iron-to emerges as one of the countries leading industrial conglomerates, committed to keep pace with India's much forward. To strengthen its position in cement, in 1998-99 Grasim acquired the Dharani cement additionally following the consolidation of the Aditya Birla Groups cement, businesses, Indian rayon's cement businesses was transferred to Grasim. With this, Grasim's aggregate cement capacity rises to 10.83 million tones, making it India's third largest producers.

Grasim has a leadership position in all key businesses 1. 2. 3. Viscose staple fiber :- India's largest producers Rayon Grade Wool Pulp - Largest producer in India. Caustic Soda - Largest Single Location Membrance Cell Plant, Second Largest Producer in India. 4. 5 Cement - Largest Producer in India. Gas Based Sponge Iron :- Third Largest Producer in India. With captive power facility at all its locations, the company has ensured reliable and economic power supply for its units.

MANAGEMENT OF GRASIM INDUSTRIES LIMITED

BOARD OF DIRECTORS Mr. Kumar Mangalam Birla - Chairman Mrs. Rajashree Birla Mr. M.L.Apte Mr. M.C.Bagrodia Mr. B.V.Bhargava Mr. R.C.Bhargava Mr. Y.P.Gupta Mr. Cyril Shroff Mr. S.G.Subrahmanyan Mr. Shailendra K. Jain

ADVISER Mr. D.P.Mandelia

CHIEF FINANCIAL OFFICER Mr. D.D.Rathi - Group Executive President & CFO

COMPANY SECRETARY Mr. Ashok Malu

GRASIMS KEY PRODUCTS

Products VSF

Works Located at Nagda (M.P.) Mavoor (Kerla) Harihar (Karnataka) Kharach (Gujarat)

Aggregate Capacity 246775 TPA

Rayon Grade Pulp Rayon Grade Caustic Soda Textile Fabric Textile Yarn Cement

Mavoor (Kerala) Harihar (Karnataka) Nagda (M.P.) Gwalior (M.P.) Bhiwani (Haryana) Bhiwani (Haryana) Malanpur (M.P.) Jawad (M.P.) Raipur (M.P.) Shambhupura (Raj.) Sikka Trichy Reddipalayan (Tamilnadu)

130000 160600 TPA 278 Looms 43488 Looms 10.83 Million TPA

Sponge Iron Software and Consultancy Exports

Salav (Maharashtra) Mumbai New Delhi.

900000 TPA

THE ADITYA VIKRAM BIRLA GROUP OF COMPANIES

Grasim Industries Limited Alexandra Carbon Black Company Bihar Caustic and Chemicals Limited Bina Power Supply Company Limited Birla Capital International AMC Limited Birla Communication Limited Birla Global Finance Limited Birla Telecom Limited Century Textile Company Limited Hindalco Industries Limited Hindustan Gas and Industries Limited Indian Rayon and Industries Limited Indogulf Fertilizers and Chemicals Corporation Limited Essel Mining and Industries Limited Indo Phil Textiles Mills Inc. Indo Thai Synthetic Co. Limited Kerala Spinners Co. Limited

Pan Century Edible Oils Sdn. Bhd. Pan Century Oil Chemicals Sdn. Bhd. P.T. Indo Bharat Rayon P.T. Indo Liberty Textiles Rosa Power Supply Company Limited Tanfac Industries Limited Thai Acrylic Fiber Company Limited The Carbon Black Company Limited Thai Epoxy and Allied Products Company Limited Thai Organnic Chemicals Limited Thai Peroxide Company Limited Thai Polyphosphate and Chemicals Company Limited Thai Rayon Company Limited Thai Sodium Sulphaiders and Chemicals Co. Limited Udyog Services Limited

OBJECTIVES OF THE COMPANY

Objectives are the way of achieving motives for profit or social services. Main objectives given in the MEMORANDUM OF

ASSOCIATION are as follows :

Improving work culture among employees. Introduce new product and create new market. Increasing Productivity of work force. Customer service and customer satisfaction. Improve the advertising effectiveness. Continuous innovation. To ensure that enlarge proportion of its sales is directed towards the rural and urban areas.

To maximize the profits of the company.

BRANDS OF THE COMPANY


1. GRASIM : Grasim suiting formerly known as Grasim Gwalior is a Rs. 100 Crores brand. It is a price leader in its segment through its wide range of designs.

BRAND ADVERTISING HISTORY : The Grasim brand is a present day avatar of the Gwalior Suiting brand. The Gwalior brand was known for its royal, aristocratic image all these years. Nawab Pataudi as the brand ambassador for around 15 years. Gwalior was one of the brands that were advertised on the television. It soon became a household name and was respected in the synthetic segment. Despite the popularity there was several issues that plagued the brand. Gwalior being the name of the city couldnt be registered as a trademark name and hence spurious goods by the name of Gwalior flooded the market. The poor quality of these goods hurt the brand prestige and image. It was then decided to change the brand name to Grasim Suiting. Some of the milestones that occurred in the history of the brand. 1984-85 1985-86 Launch of Golden Glade Gwalior relaunched with the caption in a closet of its own.

1986-87

Pataudi and Sharmila as models and the captions used were : Like the warmth in your heart A range of emotions Whos who collection.

1996-97

Scabal was launched and heavily promoted along with the sub brands like Royal Club, Old Trafford, Tussadi, Silkoi etc.

1997-98

Discontinued with Pataudi/Sharmila as models International Collections launched.

1998-99

Short film under the captions. When you are the news When the range is the news You never know when you will be in the news

1999-2000 2000-2003 2004-2005

Strain off Campaign introduced. Grasim relaunched as The power of fashion. Grasim launched Mr. India Contest.

GRASIM POSITIONING : The brand has been positioned on the fashion plank, as being young, dynamic and perennially contemporary. The brand is focused on the customers belonging to the age group 25-45 years.

Fashion in the context Grasim Persons is a personal statement. It is a statement that announces the marriage of blending of both the Achievement and Youthfulness and Refinement and Relaxation. ROAD AHEAD : The brand has been repositioned as a result, of which there is a gap in the profile of the target customer and the existing customer. The biggest challenge for the brand is to retain the existing customer and to attract the new ones. Besides this the brand faces the threat of spurious goods by the name Gwalior and hence needs to concentrate on educating the customer as to what the original brand is. This is the only way by which it can prevent the customer and brand image loss. GRAVIERA : Graviera is a Rs. 80 crores brand that is into synthetic suiting in the popular segment. The brand name was coined in the year 1976 as Graviera Grasim Gwalior.

STRUCTURE OF THE FINANCE DEPARTMENT IN THE COMPANY

VICE PRESIDENT

G.M. FINANCE

MGR. ACC.

MGR. FIN.

DY. MGR. FIN.

DY.MGR. ACC.

ASS. MGR.

ASS. MGR.

ACCOUNTING POLICY OF THE COMPANY


DEPRECIATION : Method as per the rates specified in Schedule-XIV of the companies act 1956. On addition/disposal depreciation has been provided on pro-rata basis with reference to the month of addition/disposal.

INVESTMENT : Investments are stated at cost.

VALUATION OF INVENTORY : Inventories are valued at the lower of cost and net realizable value except waste/scrap which is valued at net realizable value. The cost is computed on weighted average basis. Finished goods and process stock include cost of conversion and other costs incurred in bringing the inventories to their present location and condition. Obsolete, defective and unserviceable stocks are duly provide for.

GRATUITY & OTHER RETIREMENT BENEFIT : Incremental liability for gratuity and leave encashment benefits for the current year accounted on accrual valuable basis.

GOVERNMENT GRANTS : Grants relating the Fixed Assets are shown as reductin from the gross value of the Fixed Assets and those of the nature of project capital subsidy are credited to capital reserves. Other Government grants are credited to Profit & Loss Account under the heading of Other Income or deducted from the related expenses.

CONTINGENT LIABILITIES : Contingent Liabilities are not provided for and are disclosed by way of notes.

TRANSLATION OF FOREIGN CURRENCY ITEMS : Foreign Currency Assets / Liabilities (other than under ERAS or covered by forward contact which are stated at contracted rates) in respect of fixed assets have been restated into rupees at the exchange rate prevailing at the year end and increase / decrease arising out of it, are adjusted to the cost of fixed assets and those relating to other items are adjusted in the profit & loss account exchange difference in respect of forward exchange contact (other than for acquisition of fixed assets) is recognized as income or expenses over the life of the contract.

SCOPE OF THE STUDY

SCOPE OF THE STUDY

Everybody is well aware that the economic environment has changed and is likely to change in the future. My project mainly deals with the COST OF CAPITAL for GRASIM INDUSTRIES LIMITED. Capital is basic need of business for smooth running in market. Without capital any business never success in market. Every firm have limited source of finance so firm takes help of outside finance. Capital may be in the form of debentures, equity share capital and retained earning. The project of cost of capital has been done to know cost of various source of finance such as cost of debentures, cost of equity, cost of retained earning of GRASIM INDUSTRIES LIMITED.

REVIEW OF LITERATURE

LITERATURE REVIEW The most recent Australian capital budgeting surveys were by McMahon (1981), Lilleyman (1984), and Freeman and Hobbes (1991). These surveys reveal a growing popularity for DCF 3 techniques and reliance on WACC as the discount rate. For example, Freeman and Hobbes (1991) found that 75% and 72% of respondents used NPV and IRR techniques respectively. However methods such as the payback period, accounting rate of return or discounted payback were still used by a substantial number of companies. Similar to McMahon (1981), Freeman and Hobbes found that 62% of respondent companies used WACC to calculate the hurdle rate used in the capital budgeting process. However, 39% of respondents said they relied on the cost of borrowing to determine hurdle rates. A more recent survey that included Australian companies in the sample, among companies from six Asia Pacific countries, was undertaken by Kester et al (1999). This survey confirmed the popularity of DCF methods in Australia. It was also found that 73% of companies surveyed used CAPM, a subject not included in previous surveys in Australia. The rate of CAPM usage was significantly higher than the usage in the other Asia Pacific countries surveyed, which included Hong Kong, Indonesia, Malaysia,

Philippines and Singapore. Numerous capital budgeting surveys have been conducted in US, UK, and Canada. Graham and Harvey (2001) carried out a comprehensive survey in the US covering the cost of capital, capital budgeting, and capital structure. Similar to the Australian results of Freeman and Hobbes (1991), the IRR and NPV were found to be the most frequently used capital budgeting techniques. Other techniques such as the payback period were less popular but were still being used by a majority of companies. Despite being advocated by academics as a method that could supplement, or replace DCF methods, real option techniques were relatively unpopular, they ranked eighth among twelve techniques considered by Graham and Harvey. Even so, 27% of respondents reported using real options techniques. Graham and Harvey found that CAPM was the most popular method of estimating the cost of equity with 73% of respondents relying mainly on the CAPM. So far, however, there is limited survey evidence on the use of real options. A notable exception being Graham and Harveys (2001) result that real options techniques were being used by a minority of companies in the US. Accordingly it is worthwhile to examine the use of real options in Australia, particularly as Australia has a large natural resource sector. 2 See Brealey et. al (2000) p.119 and Ch. 21. 5 In overseas surveys, the CAPM was found to

be the most popular method used in the estimation of the cost of capital. The only investigation of the usage of the CAPM in Australia was Kester (1999) which suggests extensive use of the CAPM. In light of academic criticism of the CAPM (Fama and French, 1992), it is of particular interest to see whether this criticism has had an impact on practice. Another area where there is little systematic evidence about practice is how, if at all, companies adjust project evaluations for the effect of imputation tax credits. The dividend imputation tax system was introduced in Australia in 1987, but it was not until Officers (1994) paper that there was a substantial theoretical analysis of how imputation might be incorporated into capital budgeting practice. In particular, how the cost of capital might be adjusted to accommodate the effect of imputation tax credits. Other theoretical papers have followed, for example, Monkhouse (1996) and most recently Dempsey and Partington (2004). However, we are aware of no study about how practitioners have dealt with imputation credits in capital budgeting.

OBJECTIVES OF THE STUDY

OBJECTIVES OF THE STUDY

Every firm wants to earn maximum profit with minimum cost. This objective may be fulfill when cost of capital is less than rate of return.

Main objective of cost of capital is to know cost of various source of finance. Select that finance source which have less cost of capital or minimum payment of interest on that amount.

By me help of cost of capital we evaluate the finance performance of any company. The actual profitability of the project is compared to the projected overall cost of capital and the actual cost of capital of funds raised to finance the project if the actual profitability of the project is more than the projected and actual cost of capital, the performance may be satisfactory.

Help to determinant of capital mix in capital structure decision. We know portion of debentures and equity capital in capital structure and evaluated the cost of both portion and select among that source which have minimum cost with profitability.

RESEARCH METHODOLOGY

RESEARCH METHODOLOGY
All the information for the project collected from the finance department. Various books and journals were also being concerned while preparing report. SOURCE OF DATA COLLECTION : 1. Secondary Data : Secondary data comprises of annual report. Ledger and past report. ANNUAL REPORT : Company has provide the annual report from 2006-2007 to 20082009. By the help of which, I had prepared my report. QUESTIONNING : Actually no particulars questionnaire was prepared. Questions related to problems and data tallied with FM, CA & Accountant of the company. ANALYSIS : Analysis of various types debt. are made during the study by using standard formulas. SAMPLE SIZE :
Not concerned sample in this project report.

PROJECT REPORT ON COST OF CAPITAL

INTRODUCTION OF COST OF CAPITAL

The concept of COST OF CAPITAL is very important in financial management. It is weighted average cost of various sources of finance used by a firm may be in form of debentures, preference share capital, retained earning and equity share capital. A decision to invest in a particular project depend upon the cost of capital of the firm or the cut off rate which is minimum rate of return expected by the investors. When a firm is not able to achieve cut off rate, the market value of share will fall. Infact, cost of capital is minimum rate of return expected by its investors. Every firm have different types of goals or objectives such as profit maximization, cost minimization, wealth maximization and maximum market share. If a firm have main objective is wealth maximisation then that firm earn a rate of return more than its cost of capital. The Cost of capital is the rate of return the firm requires from investment in order to increase the value of firm in market place. Hampton John J.

Conclusion of meaning of cost of capital : (a) Cost of capital is not a cost as such. It is minimum rate of return. It included three components risk involves in every investment.

The expected normal rate of return at zero risk level, example investment in banks.

(b) (c)

The premium for business risk. The premium for financial risk on account of pattern of capital structure.

SIGNIFICANCE OF THE COST OF CAPITAL

It is very important concept of financial management. It play a crucial role in both capital budgeting as well as decision relating to planning of capital structure. It is helpful to evaluate the performance of a firm. As a acceptance criterion in capital budgeting. As a determinant of capital mix in capital structure. Evaluate the performance of firm. Other decision : (a) (b) (c) (d) Dividend policy. Capitalization of profit. Making right issue and working capital. Leasing decision.

PROBLEM IN DETERMINATING OF COST OF CAPITAL

Determination of cost of capital of a firm is not a easy task because of both conceptual problem as well as uncertainties of proposed investment and the pattern of financing. Conceptual controversies regarding the relationship between cost of capital and the capital structure. Histories cost and future cost. Problem in computation of cost of capital. Problem in computation of retained earning. Problem in assigning weights.

COMPUTATION OF COST OF CAPITAL

Computation of overall cost of capital of a firm involves : Computation of cost specific source of finance. Computation of weighted average cost of capital.

COMPUTATION OF COST SPECIFIC SOURCE OF FINANCE : Computation of each specific source of finance viz. debt, preference share capital, equity share capital and retained earning. Cost of debt. capital. Cost of preference share capital. Cost of equity share capital. Cost of retained earning.

COMPUTATION OF WEIGHTED AVERAGE COST OF CAPITAL Weighted average cost of capital is average cost of various sources of financing. Weighted average cost of capital is known as composite cost of capital, overall cost of capital or average cost of capital.

COST OF DEBT. CAPITAL

COST OF DEBENTURE CAPITAL

MEANING OF DEBENTURE : Debt. is includes debt. stock, loans and other securities of a company whether constituting a change on the assets of the company or not. Debt. is like as loan. A fix rate of interest payable on debenture either company earn profit or not. Interest on debt. is liability on company. Feature of Debenture : A debt. is issued under the seal of company. It contains a contract for repayment of principal sum of specific date. Debt. is issued in form of certificate. A debenture holders receive interest on his debt. at fix rate as mentioned in the certificate. COST OF DEBT. The cost of capital is the rate of interest payable on debt. The cost of debt. capital is measured as the rate of discount which equates the value of post tax interest and principal repayment with the net proceeds of debt. issue. Before tax cost of capital. After tax cost of capital.

BEFORE TAX COST OF DEBT. : Kdb =


I P

Kdb I P

= Before tax cost of debt. = Interest = Principal.

(Note : All figures in crores) (For the year of 2006-07, 2007-08) (GRASIM HAVE DIFFERENT TYPES & QUANTITY DEBT.) XVII series non convertible debt. I. Cost of debt. =
7.375 50 13.275 150 4.85 50 20.25 150 16.38 130

14.75%

XXXI Series non convertible debt. II. Cost of debt. = = 8.85%

XXIX Series non convertible debt. III. Cost of debt. = = 9.70%

XXI Series non convertible debt. IV. Cost of debt. = = 13.5%

XXIII Series non convertible debt. V. Cost of debt. = = 12.6%

XXVI Series non convertible debt.

VI.

Cost of debt.

12.9 120 12.9 120 7.575 75 7.25 50 6.75 60

10.75%

XXVIII Series non convertible debt. VI. Cost of debt. = = 10.75%

XXVI Series non convertible debt. VII. Cost of debt. = = 10.10%

XIX Series non convertible debt. VIII. Cost of debt. = = 14.5%

XXVII Series non convertible debt. IX. Cost of debt. = = 11.25%

Conclusion : XXXI series non convertible debenture have less cost than other series debentures.

AFTER TAX COST OF DEBT. : Kda Kda T = Kdb (1-t) or I/NP (1-t) = After tax cost of debt. = Rate of Interest

(Note : Tax rate 35%) XIII I. Series non convertible debt.


7.375 (1-35%) 50

9.5875 or 9.59

XIX Series non convertible debt. II.


7.25 50

(1-35%)

9.425 or 9.43%

XXI Series non convertible debt. III.


20.25 150

(1-35%)

8.77%

XXIII Series non convertible debt. IV.


16.38 (1-35%) 130

8.19%

XXVI Series non convertible debt. V.


12.9 120

(1-35%)

6.99%

XXVII Series non convertible debt. VI.


6.75 60

(1-35%)

7.31%

XXVIII Series non convertible debt. VII.


7.5785 (1-35%) 75

6.56%

XXIX Series non convertible debt. VIII.


4.85 50

(1-35%)

6.30%

XXXI Series non convertible debt. IX.


13.275 (1-35%) 150

5.75%.

CONCLUSION : When debt. is used in form of a source of a finance, the firm save considerable amount in repayment of tax as interest is allowed as a deductable expenses in computation of tax cost of debt. is reduced or after tax cost of debt. is minimum than before tax.

COST OF REDEEMABLE DEBT. : Some debt. is issued to be redeemed after a certain period during the life time of a company such types of debt. known as redeemable debt. Before tax cost of debt. After tax cost of debt.

BEFORE TAX COST OF DEBT. Kdb I P Np N = = = = =


I + 1 / n ( p np ) ( p + np )

Interest Proceeds at par. Net proceeds. Number of year in which debt. is to be redeemed.

(For the year 2006-07) XVIII Series non convertible debt.

(redeemable at par in three annual instalments) I. Kdb =


7.375 + i / i ( 50 50 ) ( 50 + 50)

14.75%

XIX Series non convertible debt. (redeemable at par in three annual installments) II. Kdb =
7.25 + i / i ( 50 50 ) ( 50 + 50)

14.5%

XXVI Series non convertible debt. III. Kdb =


12.9 + (120 120 ) (120 + 120 )

10.75%

XXVII IV. Kdb

Series non convertible debt. =


6.75 + 1 / 6 ( 60 60 ) ( 60 + 60)

11.25%

XXVIII V. XXIX VI. Kdb Kdb

Series non convertible debt. =


7.575 + 1 / 4 ( 75 75) ( 75 + 75)

10.10%

Series non convertible debt. =


4.85 + 1 / 4 ( 50 50 ) ( 50 + 50)

9.70%

AFTER TAX COST OF DEBT. Kda Kdb t = = = Kdb (1-t) Before tax cost of debt. tax rate

XVIII Kda =

Series non convertible debt. 14.75 (1-35%) = 9.59%

XIX Series non convertible debt. 14.5 (1-35%) = 9.43%

XXVI Series non convertible debt. 10.75 (1-35%) = 6.99%

XXVII Series non convertible debt. 11.25 (1-35%) = 7.31%

XXVIII Series non convertible debt. 10.10 (1-35%) XXIX = 6.56%

Series non convertible debt. = 6.30%

9.75 (1-35%) (For the year 2007-08)

XVIII Series non convertible debt.

VII. Kdb

7.375 + 1 / 1 ( 50 50 ) ( 50 + 50 )

14.75%

XIX Series non convertible debt. VIII. Kdb =


7.25 + i / i ( 50 50 ) ( 50 + 50)

14.5%

XXVI Series non convertible debt. IX. Kdb =


12.9 + 1 / 4 (120 120 ) (120 + 120 )

10.75%

XXVII X. Kdb

Series non convertible debt. =


6.75 + 1 / 6 ( 60 60 ) ( 60 + 60)

11.25%

XXVIII XI. Kdb

Series non convertible debt. =


7.575 + 1 / 4 ( 75 75) ( 75 + 75)

10.10%

XXIX Series non convertible debt. XII. Kdb =


4.85 + 1 / 4 ( 50 50 ) ( 50 + 50)

9.70%

Series short term Minor Linked Debentures : XXXI XIII. Kdb Series non convertible debt. =
8.35 + 1 / 7 (100 100 ) (100 + 100 )

8.35%

XXXII XIV. Kdb XXXIII XV. Kdb XXXIV XVI. Kdb XXXV XVII. Kdb XXXVI XVIII. Kdb

Series non convertible debt. =


4.1 + 1 / 5 ( 50 50 ) ( 50 + 50 )

8.20%

Series non convertible debt. =


7 + 1 / 5 ( 50 50 ) ( 50 + 50 )

14%.

Series non convertible debt. =


1.89 + 1 / 5 ( 25 25) ( 25 + 25)

7.55%

Series non convertible debt. =


6.75 + 1 / 7 (100 100 ) (100 + 100)

6.75%

Series non convertible debt. =


6.80 + 1 / 7 (100 100 ) (100 + 100)

6.08%

XXXII series non convertible debt. have less cost among all debt. company pay interest @ 8.20% on XXXII series non convertible debt.

COST OF DEBENTURE REDEEMABLE IN INSTALMENTS : Financial institutions generally require principal to be amortized in installments. A company may also issue bond or debenture to bond or debenture to be redeemed periodically. In such a case, principal amount is repaid each period instead of a lump sum at maturity and hence cash flows each period include interest and principal. The amount of interest goes on decreasing each period as it is calculated on the outstanding amount of debt.

Formula : Vd Vd I1, I2 .... In = = =


I1 + P I + P2 I + Pn 1 + 2 + + n (1 + Kd )1 (1 + Kd ) 2 (1 + Kd ) n

Present value of bond or debenture. Annual interest in period 1,2 ......, and so on. Periodic payment of principal in period 1,2 ... and so on.

P1, P2 .... Pn =

N Kd

= =

Number of years to maturity. Cost of debt. or required rate of return.

(For the year 2006-07, 2007-08) XIII series non convertible debt. (redeemable at par in three equal annual installments) I. 45 =
4.95 + 15 3.3 + 15 1.65 + 15 + + ( 1 + k d ) 1 (1 + k d ) 2 (1 + k d ) n =

12%.

XVI series non convertible debt. (redeemable at par in three equal annual installments) II. 50 =
5.5 + 16.67 3.67 + 16.67 1.84 + 16.67 + + (1 + k d ) 1 (1 + k d ) 2 (1 + k d ) n = 12.2%

XVII series non convertible debt. (redeemable at par in three equal annual installments) III. 85 =
9.35 + 28.34 6.23 + 28.34 3.12 + 28.34 + + (1 + k d ) 1 (1 + k d ) 2 (1 + k d ) n = 12.2%

XX series non convertible debt. (redeemable at par in three equal annual installments of 35%, 35% and 30% respectively) IV. 530 =
64.93 + 200 40.43 + 200 15.93 + 200 + + (1 + k d ) 1 (1 + k d ) 2 (1 + k d ) n = 12.28%

XXVI series non convertible debt. (redeemable at par in three equal annual installments) V. 240 = (1 + k ) + (1 + k ) + (1 + k ) = 12.73% d 1 d 2 d n
31.8 + 80 21.2 + 80 10.6 + 80

XXIII series non convertible debt. (redeemable at par in three equal annual installments of 33%, 33% and 34% respectively) VI. 390 =
49.14 + 130 32.76 + 130 16.38 + 130 + + (1 + k d ) 1 (1 + k d ) 2 (1 + k d ) n = 12.52%

XXV series non convertible debt. (redeemable at par in three equal annual installments) VII. 120.59 =
13.26 + 40.19 8.81 + 40.19 4.423 + 40.19 + + = 12.19% (1 + k d ) 1 (1 + k d ) 2 (1 + k d ) n

(Series short term miner linked debt).

VIII. 30 = (1 + k ) + (1 + k ) + (1 + k ) = 12.56% d 1 d 2 d n XIII series non convertible debt have less cost than other debt. Company only pay interest @ 12% p.a.

3.3 + 10

2.2 + 10

1.1 + 10

COST OF DEBT.

12.80%

12.73%

12.60%

12.52%

12.56%

12.40% 12.28% 12.20% 12.00% 12.20% 12.20% 12.19%

12.00%

11.80%

11.60% Series XIII Series XVI Series XVII Series XX Series XXVI Series XXIII Series XXV Series XXVI

Types of Debt.

Rate of Interest

COST OF EQUITY SHARE CAPITAL

MEANING OF EQUITY SHARE CAPITAL

Equity share are those share which are paid dividend only when profit left after the preference share holders. There will be no fixed rate of interest. If company not earn sufficient profit equity share holders will received nothing. Equity share holders have voting rights. KINDS OF SHARE CAPITAL : (1) (2) (3) (4) (5) (6) Authorized or registered share capital. Issued share capital. Subscribed share capital. Called up share capital. Paid up share capital. Reserve share capital.

COST OF EQUITY SHARE CAPITAL : The cost of equity share capital is a function of the expected return by its investors. The cost of equity capital is not the out-of-pocket cost using equity share capital as the share holders are not paid dividend at a fixed rate every year. Payment of dividend is not a legal binding. It may or may not be paid. But it does not mean that equity share capital is cost free

capital. Equity share holders is the owner of the company. Equity share is the part of capital of company. THERE ARE FOUR METHOD OF COMPUTATION OF COST OF EQUITY SHARE CAPITAL : 1. 2. 3. 4. Dividend yield method or Dividend/Price ratio method Dividend yield plus growth in dividend method Earning yield method Realised yield method

DIVIDEND YIELD METHOD OR DIVIDEND/PRICE RATIO METHOD : The cost of equity capital is the discount rate that equates the present value of expected future dividend per share with the net proceeds or current market price of a share. ASSUMPTIONS : 1. 2. Dividend rate of company unchanged. Risk in the company remains unchanged.

FORMULA : Ke =
D or NP D MP

Expected dividend per share Net proceeds Market price per share.

NP = MP =

(Note : All the figures in crores). (For the year 2006-07) Earning per share = Earning per share = Ke =
Dividend available for share holder No. of equity share 81 = 9.01 Rs. per share. 9.2 9.01 = 1.72% 524

(For the year 2006-07) Earning per share = Ke =


83 = 9.02 per share. 9.2 9.02 = 1.72% 524

(For the year 2007-08) Earning per share = Ke =


103 = 11.25 Rs. per share. 9.16 11.25 = 2.14% 524

CONCLUSION : Every year earning per share increase in 2006-07 EPS 9.01 Rs. and in 2007-08 EPS is 11.24 Rs. Cost of equity share also increase. LIMITATIONS OF THIS METHOD : It does not consider future earning or retained earning. It does not consider capital gain. This method suitable only when company has stable earning and stable dividend policy over a period of time.

DIVIDEND YIELD PLUS GROWTH IN DIVIDEND METHOD : This method used when the growth rate and dividend rate constant. According this method the cost of equity capital is based on the dividend and the growth rate. Formula : Ke D1 Ke = = =
D1 +G NP

Dividend. Cost of equity capital.

NP G

= =

Net proceeds per price. Growth rate.

(Grasim have not issued share on discount, premium) Ke Ke MP G = = = =


D1 +G NP

Cost of equity capital. Market price of share Growth rate

(For the year 2006-07) Ke =


9.01 + 12% = 13.72% 524

(For the year 2007-08) Ke =


9.02 + 12% = 13.72% 524

(For the year 2008-09) Ke =


11.25 + 12% = 14.14% 524

Earning Yield Method : Ke =


Earning per share Market price per share

EPS MP

(For the year 2006-07) Earning per share = Earning per share = Ke =
Dividend available for share holder No. of equity share 81 = Rs. 9.01 Rs. per share. 9.2 9.01 = 1.72% 524

(For the year 2007-08) Ke =


9.02 = 1.72% 524

(For the year 2008-09) EPS Ke = = 103/9.16 = 11.25 Rs. Per Share.
11.25 = 2.15% 524

USE OF THIS METHOD : Earning per share are expected to remain constant. Companys pay-out-ratio is 100% or when retention ratio is zero or all available profits distribute as dividend.

REALISED METHOD : All Ist three method have some drawbacks regarding future dividend and earning. It is not possible to estimate future dividend and earning correctly, both of these depend upon the many uncertain factors. This method remove all drawbacks of 1st three method. In this method calculate actual average rate of return realised in the past, dividend received in past along with the gain realized at the time of sale of shares should be considered.

Cost of Equity Capital

14.2 14.1 14 13.9 13.8 13.7 13.6 13.5 2006-07 2007-08 13.72 13.72

14.14

2008-09

Cost of Equity Capital

Years

COST OF PREFERENCE CAPITAL

MEANING OF PREFERENCE SHARE CAPITAL

Preference share are those which carry the followings two right: 1) Preference share holder have a right receive dividend at fixed rate before equity shareholder. 2) When company is wound up preference shareholders have a right to the return of capital before that of equity share. COST OF PREFERENCE CAPITAL : A fixed rate of dividend is payable on preference shares. Dividend is payable at the discretion of the Board of directors and there is no legal binding to pay dividend, yet it does not mean that preference capital is cost free. In case dividends are not paid to preference shareholders, it will be affect the fund raising capacity of the firm. Hence, dividend are usually paid regularly on preference share except when there are no profits to pay dividends. Formula of Calculation cost of Preference Capital : Kp Kp = =
D P

Cost of Preference Capital

D P

= =

Annual Preference Dividend Preference Share Capital

(Preference shares are issued at premium or discount of floatation cost are incurred to issue preference shares). Kp NP = =
D P

Net Proceeds

Some times Redeemable preference share are issued which can be redeemed or cancelled on maturity date. The cost of redeemable preference share capital can be calculated following formula :Kpr Kpr D = = =
D + ( MV - NP ) / n 1 / 2 ( MV + NP )

Cost of redeemable Preference Shares Annual Preference Dividend. Maturity value of preference shares Net Proceeds of Preference shares.

MV = NP =

(There is no preference share issued by Grasim Industries Ltd.)

COST OF RETAINED EARNING

MEANING OF RETAINED EARNING

Retained earning those earning which is not distribute among shareholders. Company retained earning for the contingency works, other works. Main purpose of retained earning is for smoothing running the business in future and fulfill their needs. Kr After Tax Kr B = = or Kr = Ke (1-t) . (1-b)
D + G. (1-t) . (1-b) NP

D +G NP

Cost of purchasing new securities or brokerage costs.

(For the year 2006-07) Kr = 13.72% (1 - .35) (1-0) = 8.92%

(For the year 2007-08) Kr = 13.72% (1 - .35) (1-0) = 8.92%

(For the year 2008-09) Kr = 14.14% (1 - .35) (1-0) = 9.19% (Grasim Industries have not issued the share on discount or premium)

Cost of Retained Earning


9.19 9.2 9.15 9.1 9.05 9 8.95 8.9 8.85 8.8 8.75 2006-07 2007-08 2008-09 8.92 8.92

YEARS

COMPUTATION OF WEIGHTED AVERAGE CAPITAL

MEANING OF WEIGHTED AVERAGE COST OF CAPITAL

It is also known as composite cost of capital. In this method weights are provide to specific cost of capital in proportion of various sources of funds source. The weights may be given either by using the book value or market value of the source. If there are differences between both then difference case weighted average cost of capital. LIMITATIONS : It is difficult to determine the market value because frequent fluctuations. FORMULA : Kw W X = = =
XW W

Weight, proportion of specific source of finance. Cost of specific source of finance.

LIMITATIONS OF STUDY

The study was conducted in limited area. I concern only annual report of Grasim Industries Limited.

The time of study was less. Employees felt unnecessary burden. Scope of study was very wide.

FINDINGS & SUGGESTIONS

FINDINGS & SUGGESTIONS

Companys gross profit is good. Company must increase its exports as it has become more effective and catchy.

Company should make their profitability investment policies which gave more profits.

Company should give prefer to low rate loans such as bank loan. Not be issued high rate of debentures.

Company should be issued preference shares. Company should not be distributed all amount along shareholders some part of profit made reserve or keep for contingency.

As far as cost of equity share capital is concerned I had found its satisfactory, but company should try to keep low rate of debentures.

CONCLUSIONS

CONCLUSIONS

Cost of capital is a long term decision. It is very important task for any company because more capital of company involved in long term decision. A company takes wrong decision regarding long term decision. Company should bear more loss on that type decision. After Cost of Capital with Grasim Industries Limited the conclusion that the firm is going successfully running. The earning per share of Grasim Industries Limited increase. In 2006-07 EPS was 27 Rs. and in 2008-09 EPS is 59 Rs. The cost of debentures is less than cost of equity capital. In 2008-09 cost of different types debt. b/w 12% to 12.73% (red. in installments) and cost of equity capital is 14.14% in 2008-09. The dividend per share also increasing. In 2007-08 DPS was 8 Rs. and in 2008-09 dividend per share 10 Rs. Number of debentures also increasing. In 2007-08 debentures was 1263.53 crores Rs. now it is 1398.54 Crores Rs. Last five years equity share capital same. No new share issued in market.

BIBLIOGRAPHY

BIBLIOGRAPHY
BOOKS : 1. Gupta Sashik. (2005) COST OF CAPITAL, FINANCIAL ANALYSIS, Page No. (17.1 to 17.30) 2. Chandra Prasanna (1997) : THE COST OF CAPITAL, FINANCIAL MANAGEMENT, Page No. (163-189). 3. Khan M.Y. & Jain P.K. (2000) COST OF CAPITAL, FINANCIAL MANAGEMENT, Page No. (7.1 to 7.58).

ANNUAL REPORT OF GRASIM INDUSTRIES LIMITED (Year 2006-07) (Year 2007-08) (Year 2008-09)

JOURNAL : Journal of ACCOUNTING AND FINANCE, APRIL-SEPT., (2001), Vol. 15.

WEBSITES : www.google.com/search/cost of capital www.wiki.com www.grasim.com