KIRLOSKAR INSTITUTE OF ADVANCED MANAGEMENT STUDIES

BATCH: B-20

Section - A

Subject: CORPORATE FINANCE ASSIGNMENT

Submitted to: Presented By:

Dr. Chetan GK Anannya Arya (H009)

Preeti Mishra (H075)

S Manish Kumar(H089)

Samir Rai(H091)

Soumen Mohanty(H103)
Beta

Beta is the responsiveness of the stocks returns in response to the index or market. Beta is just
one useful metric for evaluating a stock’s trading tendencies. Securities are volatile in nature
this means that the price of securities can change dramatically over a short period of time in
either direction.

A Beta of 1 indicates that the security’s price moves with the market. A beta of less than 1
means that the security is less volatile than the market. A beta of greater than 1 indicates that
the security’s price is more volatile than the market.

In our case, Tata Motors Ltd. has a beta of 1.62 i.e. greater than 1, offering the possibility of a
higher rate of return, but also posing more risk.

We calculated our Beta through Regression method, we applied the following formula:

n ∈ xy−∈ x ∈ y
β= 2 2
n ∈ x −(∈ x)

Rm or the market rate of return is the average market rate, which has generally been
assumed to be 11 to 12% over the past 80 years.

In our case, we got Rm as 12.404%

Assumptions: We have taken the weekly market prices of NSE for the past 6 years, we took
data for around 6 years because data above 6 years will become a bit irrelevant due to interest
rates and government policies. We didn’t take last three year’s data because that would
declare us biased towards the NDA Government.

Rfr or the risk free rate is the rate of return of an investment with no risk of loss. Most often,
either the current Treasury bill, or T-bill, rate of long term government bond yield is used as
the risk free rate. The risk free rate represents the interest an investor would expect from an
absolutely risk free investment over a specified period of time.

Assumption: In our case, we have gone for 6.79% Government Security having a return rate
of 7.4083 and will mature in the year 2027. We got the rate from Reserve bank of India’s
website.

We went for this government security because it was nearly 10 years in validity and we have
assumed that our company Tata Motors Ltd. will obviously run for at least more than 10
years.
Cost of Equity

A firm’s cost of equity represents the compensation the market demands in exchange for
owning the asset and bearing the risk of ownership. Cost of equity can be calculated through
Security Market Line method i.e. CAPM or Dividend Discount Model(DDM).

Empirical research has shown that SML method is more fool-proof for calculating Cos of
Equity capital.

Our calculated figures are:

Rfr: 7.4083%

Rm: 12.404%

Beta: 1.62

SML (CAPM ) =RFR+ β ( Rm−RFR)

Putting all the above values in the above formula, we got our Cost of Equity as 15.456%.

Assumption: We are not using the DDM method for calculating Cost of Equity, the reason
for such omission is very simple and straight. At Tata Motors Ltd. dividends paid are not
continuous and vary drastically from year to year, because of this our dividend growth is
coming negative and sometimes zero, thus we thought it might be appropriate to ignore this
method. Growth oriented companies like to invest the profits earned rather than giving it back
to the shareholders.

Competitor’s Beta:

We have taken 5 competitors as mentioned in the question namely:

Eicher Motors

Ashok Leyland

Bharat Forge Ltd.

Sml Isuzu

M&M

Average Beta that we got from these 5 competitors was 1.158, that is quite lower than what
we got at Tata Motors.
We have used the SML method for calculating Cost of Equity, Replacing Tata Motors beta
with Competitor’s Beta we are getting Cost of Equity as 13.18% which in comparison to
previous Cost of Equity is significantly lower.

Cost of Debt

A company’s cost of debt is the interest a company pays on its debt obligations, including
bonds, mortgages, and any other forms of debt the company may have. It is expressed as a
percentage rate. Because interest expense is deductible, it is generally more useful to
determine a company’s after-tax cost of debt. Cost of debt, along with the cost of equity,
makes up a company’s cost of capital. Cost of debt can be useful when assessing a
company’s credit situation, and when combined with the size of debt, it can be a good
indicator of overall financial health.

Our company Tata Motors Ltd. has Non-Convertible Debentures as Debt in its balance
sheet:

9.95% Non-Convertible Debentures due 2020 for Rs. 200 crores

10.25% Non-Convertible Debentures due at various time periods for Rs. 500 crores.

We have used Trial & Error method and Short-cut method to find our Cost of Debt.

Short-cut Method:

Cost of Debt=
∫ +(FV −Po)/n
( 0.6∗Po ) + ( 0.4∗FV ) ¿
¿

According to the shortcut method, our pre-tax cost of debt came around 11.21%. we have
taken tax rate as 31%.

Our post-tax cost of debt after applying the formula: P(1-T), came around 7.7397%.

Trial & Error Method:

The formula we applied for calculating Cost of Debt is:

L+ ( VL−CMP
VL−VH )
∗(H −L)

Pre-Tax Cost of Debt we got from this method is 10.79%.

Taking tax rate as 31%, our Post-Tax cost of Debt is 7.45%.

Cost of term loans
A Term Loan is a monetary loan that is repaid in regular payments over asset period of time. Term loans
usually last between one and ten years, but may last as long as 30 years in some cases. A term loan usually
involves an unfixed interest rate that will add additional balance to be repaid. Term loans are a good way
of quickly increasing capital in order to raise a business’ supply capabilities or range.

In our co. Tata Motors Ltd., we have a term loan of Rs. 621.57 crores which is bifurcated into loans of 581
crores and 31.69 crores. Both these loans were taken at a simple interest of 10%. But for calculating our
cost of Term Loan we have taken the current term loan rate as 11% which is being charged by SBI.

For taking out post-tax cost of term loan we just have this simple technique: P(1-T).

In this case also we are using the same tax rate i.e. 31%.

Our Post-Tax Cost of Term Loan is 7.59%.

Cost of Capital
The capital funding of a company is made up of two components: debt and equity. Lenders and equity
holders each expect a certain return on the funds or capital they have provided. The cost of capital is the
expected return to equity owners (or shareholders) and to debtholders, so WACC tells us the return that
both stakeholders- equity owners and lenders - can expect. WACC, in other words, represents the
investor's opportunity cost of taking on the risk of putting money into a company.

Cost of capital is an important component of business valuation work. Because an investor expects his or
her investment to grow by at least the cost of capital.

Formula for calculating WACC:

E D P
r WACC = [ ][ ][
∗r + ∗r D ( 1−T ) + ∗r P ( 1−DT )
V E V V ]
Cost of capital calculated by us is 15.398%. This means that for every Rs. 1 raised from investors,
Tata Motors must pay its investors almost Rs. 0.15 in return.