WEIGHTED AVERAGE COST OF CAPITAL

WACC = x + x (1- t)
 E = Market value of equity
 D = Market value of debt
 = Cost of equity
 = Cost of debt
 t = Tax rate
 FORMULAS

 Cost of Equity, = + Growth rate

 Cost of Debt, =
 Dividend per yield = Dividend per share / Book value
 Growth rate = Retention Ratio x ROE ; (1-Payout ratio) x ROE
 ROE = (Profit after tax - preference dividend)/ Equity Shareholder Fund
 Market Value of Equity =
 Market Value of Debt =
 ASIAN PAINTS
Particulars/Years Cost of Cost of Particulars 2021 2020 2019 2018 2017
Equity Debt (%)
Ratios
(%)
2021 22.67 8.38 Debt-Equity 0.10 0.12 0.10 0.07 0.06
ROCE(%) 34.30 33.33 34.09 36.52 39.17
2020 10.24 9.15
Retention Ratio (%) 89.76 35.64 60.40 51.54 60.68
2019 14.44 8.37
Return on Equity (%) 25.24 28.07 24.11 24.29 25.39
2018 13.24 7.77
Basic EPS (Rs.) 32.73 28.20 22.48 21.26 20.22
2017 16.40 6.66
 NET INCOME APPROACH
Particulars 2021 2020 2019 2018 2017
Market value of equity (E) 19391.17 36439.16 23660.45 24017.74 18273.59
Market value of debt (D) 1093.12 1118.50 1319.60 533.43 560.34
Total value of the firm (V = 20484.29 37557.66 24980.05 24551.17 18833.93
E+D)
Cost of equity (%) 22.67 10.24 14.44 13.24 16.40
Cost of debt (%) 8.38 9.15 8.37 7.77 6.66
Overall cost of capital (%) 21.90 10.20 14.11 13.12 16.10

 When cost of capital is lowest and the value of the firm is greatest, we call it the optimum capital structure for the firm
and, at this point, the market price per share is maximised.

Overall Cost of Capital = () + ()

 NET OPERATING INCOME APPROACH
Particulars 2021 2020 2019 2018 2017
Market value of Equity (E) 19391.17 36439.16 23660.45 24017.74 18273.59
Market value of Debt (D) 1093.12 1118.50 1319.60 533.43 560.34
Market value of Firm ( V = E+D) 20484.28 37557.66 24980.05 24551.17 18833.93
Cost of Equity
Cost of Debt
Overall Capitalization Rate 21.46 9.93 13.67 12.95 15.91

Overall Capitalization rate=

 LEVERAGES
Particulars 2021 2020 2019 2018 2017
Degree of Operating Leverage 2.26 0.52 0.51 1.82 2.40
Degree of Financial Leverage 1.11 0.66 0.70 2.78 0.87
Degree of Combined Leverage 2.01 0.43 0.39 5.04 2.16

 The ratios are well within the mid to low range when compared to the industry standards. The year 2018 indicates
a high combined leverage (5.04) meaning that the business owners may not be providing enough equity to fund a
business.
 KANSAI NEROLAC PAINTS
Particulars 2021 2020 2019 2018 2017 Particulars Cost of Equity (%) Cost of Debt (%)
Ratios 2021 8.10 13.71
Debt-Equity Ratio 0.04 0.04 0.02 0.01 0.01 2020 11.00 11.73
ROCE(%) 17.14 17.34 19.81 15.87 17.38 2019 9.71 9.23
Retention Ratio 55.23 73.10 69.05 68.56 67.69
2018 11.76 1.90
Return on Equity 13.46 14.37 13.67 17.28 19.16
2017 13.02 -
Basic EPS (Rs.) 9.83 9.67 8.40 9.55 9.44
 NET INCOME APPROACH
Particulars 2021 2020 2019 2018 2017
Market value of equity (E) 10657.77 7313.27 7749.94 6749.91 5663.59
Market value of debt (D) 173.10 178.22 107.95 35.16 -
Total value of the firm (V = 10830.87 7491.49 7857.89 6785.07 5663.59
E+D)
Cost of equity (%) 8.10 11.00 9.50 11.93 13.61
Cost of debt (%) 13.71 11.73 9.23 1.90 -
Overall cost of capital (%) 8.14 11.00 9.48 11.87 13.61

 When cost of capital is lowest and the value of the firm is greatest, we call it the optimum capital structure for the firm
and, at this point, the market price per share is maximised.

Overall Cost of Capital = () + ()

 NET OPERATING INCOME APPROACH
Particulars 2021 2020 2019 2018 2017
Market value of Equity (E)
Market value of Debt (D)
Total value of Firm (V=E+D)
Cost of Equity
Cost of Debt
Overall Cost of Capital
 LEVERAGE

Particulars 2021 2020 2019 2018 2017

Degree of Operational Leverage 3.02 0.30 0.62 0.68 3.70
Degree of Financial Leverage 1.26 1.24 1.16 1.10 1.09
Degree of Combined Leverage 3.80 0.37 0.71 0.74 4.03

 The ratios are well within the mid to low range when compared to the industry standards. The year 2017 and 2021
(4.03 & 3.80) indicates high risk involved in the business.