MASTER OF BUSINESS ADMINISTRATION

Assignment Mark Sheet

Student ID Number: Cohort: Russia MBA-2008

Assignment: BFE2

Date Received: Marker:

Comments and suggestions for improvement:

All the information contained in Part1 of this report is proprietary of JSC “Sukhoi Civil
Aircraft”

Overall the response is well-written and shows excellent understanding.

The NPV is interesting but needs much more narrative to support the calculations – is this
confidentiality issue at work. The WACC/CAPM looks okay and the outcome is reasonable but with
a particularly strong discussion of issues and approaches which shows good knowledge.

The valuation discussion plus associated figures are also well developed but the
inflation/currency/interest-rate discussion needs much more support – I suggest a few tables and
graphs.

Overall - an impressive response to the questions are asked – well done

OVERALL
Question 1 Question 2 Question 3 Question 4
MARK 71
Mark obtained

Marker's signature: Steve Goodchild

Please note: The above marks are provisional and subject to ratification by the MBA External Board.


Assignment: Business and Financial Environment II

I certify that all the material in this paper which is not my own work has been identified and acknowledged
and that no material is included for which a degree has been previously conferred upon me.
Please sign:
KINGSTON UNIVERSITY BUSINESS SCHOOL

BUSINESS AND FINANCIAL ENVIRONMENT

Assignment 2, 2009

Kingston Students ID No:

Moscow
March 2009

2
 Acronyms
AC – aircraft

SCAC - JSC Sukhoi Civil Aircraft

SSJ100 - Sukhoi SuperJet100

DVM- Dividend valuation Model

Acknowledgements
Mr. Oleg Dobronravov, CFA (http://www.westlandfinance.com/) has contributed his ideas to
this assignment

3
CONTENTS

Acronyms.....................................................................................................................................3
Acknowledgements......................................................................................................................3
Part1 – A Brief AC Project Substantiation..................................................................................5
Part 2 - Cost of Capital Evaluation Based on Two Mining Industry Examples..........................6
Part 3 – Share Price as an Indicator of a Business Value of an Entity........................................8
Part 4 – Inflation, Interest Rates and Currency Movements in Russia of 2008.........................10
References..................................................................................................................................11
BIBLIOGRAPHY......................................................................................................................12
Appendices.................................................................................................................................13
Appendix 1- NPV and IRR calculation.............................................................................13
Appendix 2 – Norilsk Nickel WACC and CAPM calculations.......................................15
Appendix 3 – BHP Billiton WACC and CAPM calculations..........................................22
Appendix 4 – BHP Billiton (BHP) and Norilsk Nickel (NN) Share Price and
Capitalization.......................................................................................................................27

4
Part1 – A Brief AC Project Substantiation
In this section of the report an aircraft project will be briefly assessed from the investment
appraisal stand point.

Since a net present value and an internal rate of return are widely accepted as the most
indicative parameters of an investment appraisal from the time-value-of-money stand
point, we shall utilize them as well.

We shall briefly look at a new AC project of JSC Sukhoi Civil Aircraft (SCAC) (which is
not precisely named and specified for the purpose of confidentiality).

The new project is a bigger (over 100 seats) AC that SCAC is currently looking at due to a
number of reasons of a strategic marketing nature:
 Further development of 65-75seaters have been suspended due to the lack of
demand
 SCAC does not intend to be a company of one aircraft
 Demand for an aircraft of a passenger capacity bigger than 100 seats is obvious
from the marketing stand point

The new AC is planned for international marketing and hence it should boast at least all
the contemporary engineering and technology features of the SSJ100
(http://www.sukhoi.superjet100.com).

An initial capital outlay and a forecasted cash flow of the project are given in Appendix 1.
A discount rate that SCAC assumes is 11%.

We are now to see whether the reasons set out above can be supported financially on the
grounds of the anticipated cash flows.

From the calculation done by means of Excel (Appendix 1) we can see that the NPV is
positive (271.1 MLNUSD).

The IRR equal 18% is higher than the discount rate (11%), and hence the project needs
to be accepted by all means.

Apart from good NPV and IRR figures, having applied the payback method, we can also
see that the project brakes even in the middle of year 5, which is quite a quick return for
the aircraft industry.

Word count: 312 words

5
Part 2 - Cost of Capital Evaluation Based on Two Mining
Industry Examples

For the purpose of this task two mining companies, Norilsk Nickel and BHP Billiton have
been selected, not just because they are biggest Russian and the world mining companies
respectively but also because they signed a cooperation agreement in 2006 (description of
which is outside of the scope of this report) 1.

BHP Billiton is the world's largest mining company. It was created in 2001 by the merger
of Australia's Broken Hill Proprietary Company (BHP) and the UK's Billiton, which had a
Dutch and South African background. The result is a dual-listed company with head
offices in Melbourne and London. BHP Billiton Limited, which is the majority partner in
the dual-listed structure, is listed on the Australian Securities Exchange. BHP Billiton Plc
is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index2.

MMC Norilsk Nickel (RTS:GMKN MICEX:GMKN) is a nickel and palladium mining

and smelting operator in the Norilsk–Talnakh area, in northern Russia. Norilsk is
headquartered in Moscow and is also active in gold, platinum, copper and cobalt. The
company is the world's leading producer of nickel and palladium and is Russia's leading
gold producer. It is ranked among the top four world platinum producers, in association
with subsidiary Stillwater Mining Company of Billings, Montana. It is ranked among the
top ten copper producers3.

In order to evaluate the cost of each of these companies’ capital we shall use Weighted
Average Cost of Capital (WACC) method along with the Capital Asset Pricing Model
(CAPM). All the workings and copies of the relevant pages of the both companies’
financial statements are given in Appendix 2 and 3. We give the extract of these workings
below

Norilsk Nickel

 Cost of debt kd = 6.4%

 Cost of equity ke= 8.5% (g= 6.4%)
 Gearing = 29.3%
 Weight of Equity = 70.7%
 WACC = 6.7% (received by means of the dividend yield method)
 Return to share R = 23.9%
 WACCcapm= 17.6%

BHP Billiton

 Cost of debt kd = 6.2%

 Cost of equity ke= 32.5% (g=32.3%)
 Gearing = 29.3%
 Weight of Equity = 70.7%
 WACC = 24.2% (received by means of the dividend yield method)
 Return to share R = 17.25%
 WACCcapm= 13.4%

6
 It is quite a surprising result that both companies have the same gearing and the
same equity weight in their capital structure, which prompts a thought of these
companies’ partnership impact.

However its equity costs BHP Billiton almost 4 times as much according to a
dividend yield model, which may be confusing at the first glance but may be explained
by the fact that despite a much smaller dividend per ordinary share paid by BHP
Billiton (18.5 cents vs. $4.36 of Norilsk Nickel), BHP’s dividend in 2007 grew 5 times
faster, and with its high market share price this growth is almost equal the cost of
equity (according the dividend growth model).

If we remain with the dividend yield we should recommend BHP to reduce the
portion of its quite expensive equity and increase a portion of a much cheaper debt,
herewith increasing its gearing and somewhat - shareholders’ wealth.

However, bearing in mind that the cost of equity calculated against DVM accounts
for no financial risk, we believe that BHP shareholders would prefer to regard the
return to share as the cost of equity (see Fig.1).

Fig.1 Return

CAPM

WACC
Rf

Risk/beta
Fig.1 (Based on Business and financial Environment II, Kingston University, Kingston Business School,
edited by Ashley Carreras and Stuart Archbold, p. 7.18)

Therefore, having calculated this return by means of CAPM, we put it into the WACC
formula instead of the equity cost and receive 17.6% for Norilsk Nickel and 13.4% for
BHP.
These results are in line with what investors should expect to see in a Russian and a
Western company in terms of their cost of capital, since it should be lower in the West.

Thus we can make a conclusion that utilization of CAPM for the equity element of
WACC is more practical than dividend yield method of equity cost evaluation.

Word Count: 692 words

7
Part 3 – Share Price as an Indicator of a Business Value
of an Entity

A share price does have a direct impact on the value of a business entity for a
simple reason that investors in order to make their investment buy shares, and when they
do that they look not only at a share price but at a current state and prospective
development of an enterprise as well.
In other words a mere price of an enterprise share does not fully assess its “health”, for
which we need to look at a “patient’s profile”, i.e. the books.
Since as we have mentioned earlier 2008 Annual Report is not available for Norilsk
Nickel we have to compare pre-crisis statements of ’06 and ’07 for both companies for the
purpose of maintaining correlation.
The market capitalization Norilsk Nickel and BHP in 2007 was USD 42673mln and USD
918991.2 mln accordingly (see Appendix 4).
Let us now introduce a “book-to-value” factor equal Market capitalization/Total assets,
where Market Capitalization = share price*total number of shares.
For NN and BHP this factor in 2007 equals 1.19 and 15 respectively (see Appendix 4). This
shows that the market capitalization of Norilsk Nickel is almost 20% larger than the total
of its assets, which means that the company did OK in 2007, whereas BHP did incredibly
well in this regard.
Having this exercise repeated for 2006, we receive 1.16 for NN and 8.95 for BHP, which
is still was above 1 for the latter, however falling much faster. In order words book-to-
value ratio grew 40% from 2006 to 2007 for BHP and only 3% for NN.
Appendix 4 also gives us 2006 WACCcapm calculation for both companies.
A helpful way to look at all the received data would be in a form of a table (see below).

BHP Billiton Norilsk Nickel

2006 2007 2006 2007
Market capital. 434,520 918,991.2 18,876.7 42,673
Book-to-value 8.95 15 1.16 1.19
WACCcapm 23.2% 13.4% 29.7% 17.6%

As we can see from this table with the fall of WACC with a rate of roughly 40% for both
companies, the market capitalization (based on a share price) of both companies more
than doubled, whereas the book-to-value factor almost stayed the same for NN.
From this we can conclude that Norilsk Nickel may have been undervalued in regards to
its peers or the market expected it to make more profit.
BHP Book-to-value factor grows almost with the same rate as the market capitalization of
the company whereas WACC falls with a similar rate, prompting a conclusion about a
representative role of a share price for the companies’ value.

8
 It is worth saying however that the current share price does reflect an underlying
value of a business entity but does not fully define it, since this value is multidimensional.

Besides the financing dimension partially represented by shares, an intangible value of a

business entity is comprised of such things as organisational structure, management
(including HR), commercial success of the enterprise, its goodwill, etc.

In other words, the shares of an enterprise may still sell OK, whereas its sales fall and its
organisational structure propagates cracks, which is currently the case with some firms
within the economic downturn, which the world is going through. It is not just the mining
sector where systematic risk grows and where consequently investors would expect a
bigger return (illustrated by Fig.1 above).

In the present situation the statement made by BHP Billiton in its 2008 Annual Report
regarding support of its credit rating, becomes vary important for every company in every
industry to follow:
“The Group’s strong credit profile, diversified funding sources and committed credit
facilities ensure that sufficient liquid funds are maintained to meet its daily cash
requirements. The Group’s policy on counterparty credit exposures ensures that only
counterparties of a high credit standing are used for the investment of any excess cash”8.

This policy, if maintained, obviously should support the company’s share price.

Another thing that is being transformed within the global crisis is marketing. For many
companies the very basics of the 4P-s concept are being modified in terms of changing
products, their places, product pricings and ways of promotion. This might not be fully the
case for either Norilsk Nickel or BHP, but there is one thing so brightly expressed by
professor Quelch, that is very important to remember in regards to marketing:

“CEOs, often dismissive of marketing, are discovering a dangerous reality: aggressive

marketing and brand-building can boost stock prices by raising customer and investor
expectations. But the penalties for not delivering on marketing promises are fast becoming
as significant as not meeting quarterly earnings targets.”9

Word count: 773 words

9
 Part 4 – Inflation, Interest Rates and Currency
Movements in Russia of 2008

By the end of 2008 according to Rosstat inflation in Russia amounted to 13.13%.10

As the reasons of the inflation mentioned above, the Ministry of Finance gave a soft credit
policy in Russia, increase of budget spending and the global growth of foodstuffs11.
In the beginning of 2008 the Russian government did not seem to be able or wanting to
predict the forthcoming global crisis and subsequent deflation.

Interest rates adjustment as one of the basic means for curbing inflation, seemed to
be applied slow enough supposedly to allow the credit and spending boom, up to the fall
of 2008, when the crisis started approaching Russia.

Initially it was more of a fear for the approaching storm-cloud and the foreign
currency exchange rate was comparatively low up to the fall of 2008, when it started a
slow growth. Russia was not an exception in terms of large borrowings in the US, so the
Russian banks had to pay, having caused a huge deficit of dollars on one hand, helped by
runs on banks – on the other hand.

The Russian government was not in a hurry to help the ruble out, on the contrary is started
a policy of its gradual devaluation, supposedly in order to maintain the competitiveness of
Russian goods in the market in the conditions of total insolvency.

Word count: 232 words

10
References

1. - http://www.regnum.ru/news/655659.html
2. - http://en.wikipedia.org/wiki/BHP_Billiton
3. - http://en.wikipedia.org/wiki/Norilsk_Nickel
4. - http://www.metaltorg.ru/news/market_show.php?id=6839

5. - Business and financial Environment II, Kingston University, Kingston

Business School, edited by Ashley Carreras and Stuart Archbold, p. 5.20

6. - Business and financial Environment II, Kingston University, Kingston

Business School, edited by Ashley Carreras and Stuart Archbold, p. 5.12

7. - Business Evaluation, under edition of A.G.Gryaznova, Phd, M.A. Phedotova,

PhD, Financial Academy of the Russian Federation Government, Moscow, 1999

8. - http://www.bhpbilliton.com/bbContentRepository/docs/annualReport2008.pdf,
page 211

9. - http://hbswk.hbs.edu/item/5810.html

10. - http://www.lenta.ru/news/2008/12/31/inflation/
11. http://www.rian.ru/economy/20080130/98039341.html

11
BIBLIOGRAPHY

http://www.sukhoi.superjet100.com/superjet100/
http://www.nornik.ru/upload/report2007_eng.pdf

http://www.bhpbilliton.com/bbContentRepository/docs/annualReport2008.pdf

Business and financial Environment II, Kingston University, Kingston Business School,
edited by Ashley Carreras and Stuart Archbold

R. Brailey, C. Mayers, Principles of Corporate Finance (Russian translation), Moscow,

Olymp-business, 1997

Business Evaluation, under edition of A.G.Gryaznova, Phd, M.A. Phedotova, PhD,

Financial Academy of the Russian Federation Government, Moscow, 1999

12
Appendices
Appendix 1- NPV and IRR calculation

The calculation given below has been based on two assumptions:

1) The Russian Federation Government support

2) 200 aircraft should be sold in total for the whole period of the project

The following cash flow was made available by JSC “Sukhoi Civil Aircraft”:
Year Cash Flows,
№ Year MLNUSD DF at r=11% Present values
0 2002 -5 1,00 -5,00
1 2003 -20 0,90 -18,02
2 2004 -30 0,81 -24,35
3 2005 -85 0,73 -62,15
4 2006 -90 0,66 -59,29
5 2007 -250 0,59 -148,36
6 2008 -100 0,53 -53,46
7 2009 -80 0,48 -38,53
8 2010 100 0,43 43,39
9 2011 120 0,39 46,91
10 2012 130 0,35 45,78
11 2013 140 0,32 44,42
12 2014 270 0,29 77,18
13 2015 330 0,26 84,98
14 2016 330 0,23 76,56
15 2017 295 0,21 61,66
16 2018 280 0,19 52,72
17 2019 260 0,17 44,10
18 2020 210 0,15 32,09
19 2021 170 0,14 23,41
20 2022 45 0,12 5,58
21 2023 20 0,11 2,23
22 2024 70 0,10 7,05
23 2025 355 0,09 32,20
NPV $271,10

The Excel function on the internal rate of return gives us IRR=18%

 Present value of the project cashflows

100,00

50,00

0,00
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

-50,00 Ряд1

-100,00

-150,00

-200,00

14
Appendix 2 – Norilsk Nickel WACC and CAPM calculations

For WACC calculations the following formula is used

WACC= kd(1-t)Wd+kpWp+ksWs 1 , where

t- tax rate on a company’s profit

kd – cost of borrowed capital
Wd – portion of borrowed capital
kp - cost of preference capital
Wp – portion of preference capital
ke– cost of ordinary capital (cost of equity)
We– portion of equity capital (market value)

The profit tax rate can be derived from the company consolidated financial statement for
the year 2007 (the 2008 financial statement is not available) -
http://www.nornik.ru/upload/report2007_eng.pdf

From
Consolidated financial statements for the year ended 31
December _007

Consolidated income statement for the year ended 31 December _007

(US Dollars million)
Notes _007 _006

Revenue
Metal sales 7 15,909 11,550
Other sales 8 1,210 373
Total revenue 17,119 11,9_3
Cost of metal sales 9 (4,719) (3,158)
Cost of other sales 15 (1,163) (345)
Gross profit 11,_37 8,4_0
Selling and distribution expenses 16 (730) (536)
General and administrative expenses 17 (894) (554)
Impairment of goodwill 24 (1,079) –
Change in fair value of derivative financial liabilities held for 40 72 –
tradingnet operating expenses
Other 18 (1,175) (267)
Operating profit 7,431 7,063
Finance costs 19 (307) (79)
Income/(loss) from investments 20 223 (199)
Foreign exchange gain, net 21 146 25
Excess of the Group’s share in the fair value of net assets 5 166 –
acquired over the cost of acquisition
Share of profits/(losses) of associates 26 76 (33)
Profit before tax 7,735 6,777
Income tax 22 (2,459) (1,805)
Profit for the year from continuing operations 5,_76 4,97_
Profit for the year from discontinued operation 48 – 993
Profit for the year 5,_76 5,965
Attributable to:
Shareholders of the parent company 5,327 5,989
Minority interest (51) (24)
15
 5,_76 5,965
EARNINGS PER SHARE
Weighted average number of ordinary shares in issue during the year 34 182,362,986 188,767,177
Basic and diluted earnings per share from continuing and 29.2 31.7
discontinued operations attributable to shareholders of the parent
company (US Dollars)
Basic and diluted earnings per share from continuing operations 29.2 26.5
attributable to shareholders of the parent company (US Dollars)

Profit before tax equals 7,735 and

Income tax equals - 2,459

Therefore, t= Income tax/Profit before Tax = 2,459/7,735*100% = 31.8%

Since Norilsk Nickel borrows from different sources at a different rate, we shall use the
average interest rate calculated as Interest expense on borrowings /Average debt (see
the table below)

19. Finance costs

2007 2006

Interest expense on borrowings 284 60

Unwinding of discount on decommissioning obligations (refer to note 38) 23 19
Total 307 79

The interest expense on borrowings in 2007 amounts to USD284mln (see the table
above), while the average debt is derived from the Consolidated Balance Sheet (see
below) as the average of long and short term borrowings for 2007
[(4,103+632) + (3,973+158)]/2= USD 4,433mln

Therefore, kd = 284/4,433*100%= 0.064=6.4%

The amount of the borrowed capital is calculated based on the Balance Sheet (see below)
Debt = Long term borrowings + short term borrowings = 4,103+3,973= 8,076
MMC Norilsk Nickel Annual Report _007

Consolidated balance sheet at 31 December _007

(US Dollars million)
Notes 2007 2006

ASSETS
Non-current assets
Property, plant and equipment 23 14,981 8,075
Goodwill 24 3,360 25
Intangible assets 25 849 107
Investments in associates 26 879 208
Other financial assets 27 2,982 2,615
Other taxes receivable 28 38 44
Deferred tax assets 22 89 –
Pension plans assets 37 8 –
23,186 11,074
Current assets
Inventories 29 2,108 1,471
Trade and other receivables 30 949 697
Advances paid and prepaid expenses 31 183 153
Other financial assets 27 4,473 104
Income tax receivable 144 27
Other taxes receivable 28 585 575
Cash and cash equivalents 32 4,008 2,178
12,450 5,205
Assets classified as held for sale 33 60 –
12,510 5,205
16
TOTAL ASSETS 35,696 16,279

EQUITY AND LIABILITIES

Capital and reserves
Share capital 34 8 8
Share premium 1,390 611
Treasury shares 34 – (999)
Other reserves 35 3,765 2,562

Retained earnings 14,340 10,635

Equity attributable to shareholders of the parent company 19,503 12,817

Minority interest 2,318 319
_1,8_1 13,136
Non-current liabilities
Long-term borrowings 36 4,103 632

Employee benefit obligations 37 11 57

Environmental obligations 38 583 322
Derivative financial liabilities 40 3 –
Deferred tax liabilities 22 2,741 881
7,441 1,89_
Current liabilities
Short-term borrowings 36 3,973 158
Current portion of employee benefit obligations 37 378 259
Trade and other payables 39 586 370
Advances received 41 51
Income tax payable 422 244
Other taxes payable 28 197 149
Derivative financial liabilities 40 24 15
Dividends payable 804 5
6,4_5 1,_51
Liabilities associated with assets classified as held for sale 33 9 –
6,434 1,_51
TOTAL EQUITY AND LIABILITIES 35,696 16,_79

The Wp element of the WACC is not relevant since Norilsk Nickel converted all its
preference shares into ordinary shares in 20026, hence this component of the WACC
formula equals zero:

WACC= kd(1-t)D/(E+D) + ke*E/(E+D), where E-equity, D- debt7

The cost of Norilsk Nickel ordinary capital and its volume are derived from Notes 34 and
41 to the financial statement of the company and calculated according to the Dividend
Growth Model, ke=d(1+g)/(P0-d) + g 6, where d is dividend paid, P0- market share price, g-
dividend growth rate.
34. Share capital
2007 2006

Authorised, issued and fully paid share capital

31 December 2007: 190,627,747 ordinary shares at 8 –
par value of RUR 1 each
31 December 2006: 190,627,747 ordinary shares at – 8
par value of RUR 1 each
Total 8 8
Treasury shares
31 December 2007: 1,710,884 ordinary shares – –
31 December 2006: 9,209,834 ordinary shares – (999)
Total - (999)
Number of ordinary shares in issue at end of the year 188,916,863 181,417,913
Weighted average number of ordinary shares in 182,362,986 188,767,177
issue during the year

41. Dividends
17
 2007 2006

On 21 December 2007, the Company declared an interim dividend in respect of the year 792
ended 31 December 2007 in the amount of RUR 108 (USD 4.36) per share. The dividend
was paid to shareholders on 7 February 2008. The amount is net of USD 7 million due to
Group subsidiaries.
On 28 June 2007, the Company declared a final dividend in respect of the year ended 31 842 –
December 2006 in the amount of RUR 120 (USD 4.64) per share. The dividend was paid
to shareholders on 16 August 2007. The amount is net of USD 8 million paid to Group
subsidiaries.
On 24 November 2006, the Company declared an interim dividend in respect of the year – 399
ended 31 December 2006 in the amount of RUR 56 (USD 2.11) per share. The dividend
was paid to shareholders on 29 December 2006. The amount is net of USD 4 million paid to
Group subsidiaries.
On 29 June 2006, the Company declared a final dividend in respect of the year ended 31 – 373
December 2005 in the amount of RUR 53 (USD 1.98) per share. The dividend was paid
to shareholders on 15 August 2006. The amount is net of USD 4 million paid to Group
subsidiaries.

Total 1,634 77_

From the Dividend table we can conclude that a dividend growth rate between 2006 and 2007
amounts to [(4.64/4.36) -1]*100% =0.064=6.4%. DVM considers this rate constant

The dividend for 2007 equals USD 792 mln (Note 31), the total weighted number of
shares is 184.4 mln (Note 34 above).

The market share price of Norilsk Nickel ordinary shares in the end of 2007 was about
234$ per share (see the diagram below)

http://stock.rbc.ru/demo/rts.1/daily/GMKN.rus.shtml?show=2Y

Then, according to the Dividend Growth Model we receive, ke=d(1+g)/(P-d) + g

we receive ke= 0.064 + 4.64(1+0.064)/ (234– 4.64) = 0.085=8.5%

18
Wd=8,076/(8,076+19,503) = 0.293=29.3%
We=19,503 /(19,503 +8,076) = 0.707=70.7% (see the balance sheet above)

Thus WACCNN = 0.039(1-0.38)*0.293+0.085*0.707= 0.067=6.7%

***
CAPM for Rate of return calculation
R = (Rm-Rf)β + Rf where
Rm – market return, Rf – risk free return and β- measure of systematic risk respectively6.
Norilsk Nickel
Note 36 to the Financial Statement of Norilsk Nickel shows that the company bought
Exempt Facility Reversal Bonds Series 2000 at 8.75%, which we shall consider Rf (see
below)

36. Borrowings

Currency _007 _006

Rate,% Outstanding Rate, % Outstanding

balance balance

Bank loans
Societe Generale, syndicated loan (i) USD LIBOR 3,473 – –
(ii) + 0.53-0.63
BNP Paribas (iii) USD LIBOR 2,497 – –
+ 0.30-0.40
(iv)
Sberbank (v) RUR 8.75 612 – –
Societe Generale (vi) USD LIBOR 200 – –
(vii + 0.43
Toronto Dominion ) USD LIBOR 95 LIBOR 96
+ 2.50 + 3.25
(viii
ANZ Syndicate AUD BBSY 66 – –
) + 0.61-1.01
Gazprombank (ix) USD – – 5.95 120
West LB Vostok (x) USD – – 5.80 25
Other (xi) vary vary 25 vary 21
Promissory notes RUR 5.50 580 – –
Guaranteed notes USD 7.125 499 7.125 499
Exempt Facility Reversal Bonds Series USD 8.57 29 8.57 29
2000 (xi)
Total 8,076 790
Less: current portion due within twelve (3,973) (158)
months and presented under short-term
borrowings
Long-term borrowings 4,103 63_

β can be found through calculation of a complex regression of return for the company assets
vs. returns for the index, otherwise it can be found by a simpler method at the Moscow Stock
Exchange website
http://old.micex.ru/stockindices/index_analitycs.html?
indx=MICEXINDEXCF&sec=GMKN&fromMshFromDate=1235854800000&hFromDate
=1.3.2009&fromhFromDate=01.03.2009&fromMshToDate=1237928400000&hToDate=25.
3.2009&fromhToDate=25.03.2009&show=%CF%EE%EA%E0%E7%E0%F2%FC+
%E4%E0%ED%ED%FB%E5 - see below

19
The site gives 9 pages of beta, which we see unreasonable to copy here. We give the first and
the last page, having calculated that the average beta = 1.2
Analytical Indicators
Data Instrument Weight Impact Volatility α β Determination
09.01.2007 GMKNornik 7.42 -0.60 0.0171 -0.002119 1.014053 0.737041
10.01.2007 GMKNornik 7.38 -0.06 0.0171 -0.002428 1.024409 0.744260
11.01.2007 GMKNornik 7.60 0.37 0.0185 -0.001768 1.084170 0.724531
12.01.2007 GMKNornik 7.56 -0.08 0.0184 -0.001639 1.080830 0.726641
15.01.2007 GMKNornik 7.75 0.48 0.0205 -0.001495 1.159412 0.753792
16.01.2007 GMKNornik 7.72 -0.07 0.0204 -0.001803 1.183681 0.756721
17.01.2007 GMKNornik 7.85 -0.02 0.0201 -0.001391 1.134554 0.731777
18.01.2007 GMKNornik 8.16 0.29 0.0206 -0.000403 1.130578 0.669645
19.01.2007 GMKNornik 8.13 0.02 0.0203 -0.000289 1.118014 0.660685
22.01.2007 GMKNornik 8.16 0.21 0.0205 -0.000251 1.120381 0.668538
23.01.2007 GMKNornik 8.14 0.03 0.0203 -0.000329 1.116604 0.661452
24.01.2007 GMKNornik 8.17 0.02 0.0203 -0.000322 1.116903 0.661258
25.01.2007 GMKNornik 8.06 -0.02 0.0203 -0.000412 1.119549 0.655837
26.01.2007 GMKNornik 7.99 -0.12 0.0204 -0.000437 1.124383 0.659251
29.01.2007 GMKNornik 8.15 0.03 0.0200 0.000630 1.076625 0.652629
30.01.2007 GMKNornik 8.17 0.03 0.0200 0.000610 1.077306 0.652854
31.01.2007 GMKNornik 8.26 0.15 0.0200 0.001129 1.084483 0.663403
01.02.2007 GMKNornik 8.51 0.49 0.0214 0.001440 1.141604 0.675431
02.02.2007 GMKNornik 8.56 0.04 0.0210 0.001796 1.125975 0.668261
05.02.2007 GMKNornik 8.63 0.13 0.0211 0.001695 1.135151 0.672182
06.02.2007 GMKNornik 8.62 0.08 0.0210 0.001698 1.136353 0.671732
07.02.2007 GMKNornik 8.67 0.01 0.0210 0.001624 1.139012 0.673585
08.02.2007 GMKNornik 8.62 -0.27 0.0217 0.001582 1.148944 0.691338
09.02.2007 GMKNornik 8.64 0.10 0.0217 0.001670 1.147801 0.692506
12.02.2007 GMKNornik 8.50 -0.41 0.0227 0.000964 1.180894 0.732075
13.02.2007 GMKNornik 8.66 0.37 0.0234 0.001387 1.202254 0.743450
14.02.2007 GMKNornik 8.65 0.05 0.0234 0.001580 1.216997 0.751066
15.02.2007 GMKNornik 8.75 0.09 0.0234 0.001694 1.215533 0.748719
16.02.2007 GMKNornik 8.82 0.09 0.0234 0.001715 1.216360 0.748577
19.02.2007 GMKNornik 8.76 -0.04 0.0234 0.001658 1.219601 0.747920
19.12.2007 GMKNornik 7.28 0.09 0.0218 -0.002138 1.127635 0.381021
20.12.2007 GMKNornik 7.42 0.25 0.0222 -0.001840 1.156297 0.383832
21.12.2007 GMKNornik 7.35 -0.05 0.0222 -0.002062 1.158357 0.381534
24.12.2007 GMKNornik 7.30 -0.06 0.0222 -0.001955 1.161844 0.384447
25.12.2007 GMKNornik 7.35 0.01 0.0217 -0.001312 1.121183 0.370136
26.12.2007 GMKNornik 7.32 -0.09 0.0214 -0.001790 1.115792 0.377997
27.12.2007 GMKNornik 7.39 0.08 0.0213 -0.001443 1.104421 0.362310
28.12.2007 GMKNornik 7.37 -0.09 0.0213 -0.001460 1.104108 0.366307

20
For the estimation of the market premium we shall adopt the following assumption: since
S&P500 represents return on equity, we can roughly estimate Rm by taking S&P500 and
deducting a country risk from it.

According to San-Jose State University

(http://www.sjsu.edu/faculty/watkins/countryrisk.htm)
the country risk for Russia amounts to 6.5%
The S&P500 dynamics for 2007 can be taken from http://mfd.ru/marketdata/ticker/?id=1977
(see the table below)

March April May June July August September October November Decemb
1380,17 1426,867 1512,34 1539,267 1531,8 1432,4 1490 1539,133 1520 1461
1406,87 1438,133 1490,8 1490,073 1518,133 1493,067 1450,067 1565,467 1440 1516
1377,7 1484,467 1524,467 1532,933 1552,867 1404,733 1484 1500 1479 1445
1437,93 1495,4 1506,733 1481,933 1474 1479,867 1529,4 1549,867 1416,067 1497
1415,47 1481,467 1535,667 1507,067 1455 1432,8 1547,333 1507,933 1480,667 1466
1403,63 1465,267 1514,001 1510,255 1506,36 1448,573 1500,16 1532,48 1467,1468 1477,5
Average 1473,8

Thus Average S&P500 = 14.74% and the market premium for investment into stocks in
Russia = 14.74+6.5= 21.14%
Hence RNN = (21.14- 8.75)*1.2 +8.75= 23.93%

Let us now use the received return rate to calculate the WACC for Norilsk Nickel as if R NN
was its cost of equity
WACC NNcapm= 0.039(1-0.38)*8,076/(8,076+19,503)+0.239*19,503 /(19,503 +8,076)=
0.176=17.6%

21
Appendix 3 – BHP Billiton WACC and CAPM calculations
We shall use the same algorithm of WACC calculation for BHP Billiton, having used its
latest 2008 report, although for the sake of relevancy and comparability of received results
we shall use 2007 data.
CONSOLIDATED INCOME STATEMENT fortheyear ended30June2008

Notes 2008 2007 2006

US$M Restated
(a)
Restated (a)
US$M
US$M
Revenue 51,918 41,271 34,139
Group production 7,555 6,202 4,960
Third party products
2Revenue 2 59,473 47,473 39,099
Other income 648 621 1,229
3 Expenses excluding net finance costs (35,976) (28,370) (24,612)
4Profit from operations 24,145 19,724 15,716
Comprising: Group production 24,529 19,650 15,605
2 Third party products (384) 74 111
2
2 24,145 19,724 15,716
Financial income 293 264 222
6 Financial expenses (955) (776) (822)
6Net finance costs 6 (662) (512) (600)
Profit before taxation 23,483 19,212 15,116
Income tax expense (6,798 (5,305) (4,122)
Royalty related taxation (net of income tax benefit) 8 (723) (411) (460)
8Total taxation expense 8 (7,521) (5,716) (4,582)
Profit after taxation 15,962 13,496 10,534
Profit attributable to minority interests 572 80 84
Profit attributable to members of BHP Billiton Group 15,390 13,416 10,450
Earnings per ordinary share (basic) (US cents) 9 275.3 229.5 173.2
Earnings per ordinary share (diluted) (US cents) 9 275.1 229.0 172.4
Dividends per ordinary share - paid during the period (US cents) 10 56.0 38.5 32.0
Dividends per ordinary share - declared in respect of the period (US cents) 10 70.0 47.0 36.0

Again, from the Income Statement above we calculate the tax rate: Total taxation
expense/Profit before taxation = 7,521/23,483=0.32, so t=32%

Average debt expenses (finance costs) for kd calculation again are extracted from the
income statement and consolidated balance sheet (see below).
CONSOLIDATED BALANCE SHEET as at 30 June 2008
Notes 2008 2007
US$M Restated
(a)

US$M
ASSETS
Current assets
Cash and cash equivalents 30 4,237 2,449
Trade and other receivables 11 9,801 6,239
Other financial assets 12 2,054 1,059
Inventories 13 4,971 3,744
Other 498 265
Total current assets 21,561 13,756
Non-current assets
Trade and other receivables 11 720 642
Other financial assets 12 1,448 899
Inventories 13 232 166
Property plant and equipment 15 47,332 42,261
Intangible assets 16 625 713
Deferred tax assets 8 3,486 2,832

22
Other 485 135
Total non-current assets 54,328 47,648
Total assets 75,889 61,404
LIABILITIES
Current liabilities
Trade and other payables 17 6,774 5,137
Interest bearing liabilities 18 3,461 1,640
Other financial liabilities 19 2,088 655
Current tax payable 2,022 2,193
Provisions 20 1,596 1,383
Deferred income 418 299
Total current liabilities 16,359 11,307
Non-current liabilities
Trade and other payables 17 138 140
Interest bearing liabilities 18 9,234 10,780
Other financial liabilities 19 1,260 595
Deferred tax liabilities 8 3,116 2,260
Provisions 20 6,251 5,859
Deferred income 488 545
Total non-current liabilities 20,487 20,179
Total liabilities 36,846 31,486
Net assets 39,043 29,918
EQUITY

Share capital - BHP Billiton Limited 21 1,227 1,221

Share capital - BHP Billiton Plc 21 1,116 1,183
Treasury shares held 21 (514) (1,457)
Reserves 22 750 991
Retained earnings 23 35,756 27,729
Total equity attributable to members of BHP Billiton Group 38,335 29,667
Minority interests 24 708 251
Total equity 24 39,043 29,918

26. Financial risk management continued

Capital management
2008 2007
US$M US$
M
Cash and cash 4,237 2,449
equivalents Current debt 3,461 1,640
Non-current debt 9,234 10,780
Net debt 8,458 9,971
Net assets/Total equity 39,043 29,918
Gearing 17.8% 25.0%

kd is calculated as Debt expenses /Debt. The debt will be calculated as a sum of interest
bearing liabilities for 2007, thus Debt = 10,780+1,640=12,420, and kd =
776/12,420=0.062=6.2% (see the income statement above)

The preference shares are mentioned in the BHP Billiton 2008 annual report but their
amount of the value of the preference capital is now shown, hence we can conclude that
this value is negligible and again use the following formula: WACC= kd(1-t)Wd + keWe.
The figures for the portion of debt can be taken from one of the tables below
Wd=D/(D+E)= 12,420/(12,420+29,918) = 0.293 =29.3%

23
We= E/(D+E)= 29,918/(12,420+29,918) =0.707=70.7%
Ke again is calculated on the dividend growth model 6, ke=[d(1+g)/(P-d)] + g, where
dividend per share d= 18.5 US cents (see below) =0.185USD
10. Dividends
2008 2007 2006
US$M US$M US$M
Dividends paid during the period
BHP Billiton Limited 1,881 1,346 1,148
BHP Bill iton Plc - Ordinary shares 1,252 923 790
- Preference shares (a) - - -
3,133 2,269 1,938
Dividends declared in respect of the period
BHP Bill iton Limited 2,351 1,605 1,275
BHP Bill iton Plc - Ordinary shares 1,545 1,097 885
- Preference shares (a) - - -
3,896 2,702 2,160

2008 US 2007 US 2006 US

cents cents cents
Dividends paid during the period (per share) 27.0 18.5 14.5
Prior year final dividend interim dividend 29.0 20.0 17.5

56.0 38.5 32.0

Dividends declared in respect of the period (per share) 29.0 20.0 17.5
nterim dividend Final dividend 41.0 27.0 18.5

70.0 47.0 36.0

Dividend growth rate can be seen from article 3.7.6 of BHP financial statement, Dividend
and capital management
“On 18 August 2008, the Board declared a final dividend of 41.0 US cents per share. This rebased dividend
represents a 51.9 per cent increase over last year’s final dividend of 27.0 US cents per share. This brings the
total dividends for FY2008 to 70.0 US cents per share, an increase of 23.0 US cents per share, or 48.9 per cent,
over last year and 150.0 per cent over the past three years. The Board’s declaration represents our thirteenth
consecutive dividend increase and signals our confidence in the outlook and our ability to consistently deliver
future earnings and cash flow. Our dividend has increased by more than 530 per cent since the interim dividend
paid in FY2002. Our compound annual dividend growth rate has been 32.3 per cent over this period. We
intend to continue with our progressive dividend policy from this new base, with further increases
dependent upon the expectations for future market conditions and investment opportunities”.

The share price for 2007 can be seen at http://finance.yahoo.com/echarts?

s=BHP#chart14:symbol=bhp;range=1y;indicator=volume;charttype=line;crosshair=on;ohlcvalues
=0;logscale=off;source=undefined

As we can see from the chart below (see the next page), BHP shares reached their peak in October
of 2007 at 87.33 GBP (then $157.2)
Therefore, ke= d(1+g)/(P0-d)+g = 0.185(1+0.323)/( 157.2 -0.185) + 0.323 =0.325=32.5%
and
WACC= 0.062(1-0.32)*0.293 +0.325*0.707=0.242=24.2%

24
CAPM
Only latest beta equal 1.731 has been available from the LSE
(http://uk.finance.yahoo.com/q/tt?s=BLT.L).
Nevertheless, bearing the current crisis in mind we can with a good degree of precision state
that in 2007, when the crisis just started to unfold, the systematic risk could not have possibly
been any bigger, so for our purpose we accept beta of 1.7
For the Rf as a mere price of waiting we take a yield on the 10-year UK government bonds,
which equals 3.29% (http://www.bloomberg.com/markets/rates/uk.html)
Having used the same method for Rm estimate, we can see quite a different dynamics for
S&P500, when the index goes down consistently from 1470 to 900 points in the end of 2008
(http://mfd.ru/marketdata/ticker/?id=1977)
Having taken the average of this range we receive 1150 points or 11.5%.
Since BHP Billiton operates in Algeria, Angola, Australia, Brazil, Canada, Chile,
Colombia,Guinea, Indonesia, Iraq, Mozambique, New Zealand, Pakistan, Papua New
Guinea, Peru, South Africa, Suriname, Trinidad & Tobago, United Kingdom (zero
risk)and the USA (zero risk) - we take the average of these countries’ risk premiums
available (http://www.sjsu.edu/faculty/watkins/countryrisk.htm):
(0.65Australia +5.50Brasil + 0.65Canada+ 1.2Chile+ 1.45Colombia + 6.5 Indonesia + 0.65NewZealand+7.5Pakistan +
4.5Papua New Guinea + 4.0Peru + 1.45South Africa + 2.5Trinidad&Tobago ) / 12 = 3.1%

Therefore R = (Rm-Rf)β + Rf = (11.5 – 3.29)*1.7+ 3.29 = 17.25%

and

25
WACCcapm= 0.062(1-0.32)*0.293 +0.172*0.707=0.134=13.4%

26
Appendix 4 – BHP Billiton (BHP) and Norilsk Nickel (NN) Share
Price and Capitalization
Book-to-value NN
2007 - From Appendix2 we take a number of NN shares issued in 2007 and multiply it by
a share price: 182,362,986 *234=42,672,938,724 = USD 42673mln
Market capitalization/Total assets = 42,673/35,696=1.19
2006 – from http://stock.rbc.ru/demo/rts.1/daily/GMKN.rus.shtml?show=5Y we derive
that the NN average share price in 2006 was appr. $100, hence the Market capitalization
was roughly $18,876,717,700=USD18,876.7mln
Market capitalization/Total assets 18876.7/16,279=1.16
***
Book-to-value BHP
2007- The number of shares issued by BHP in 2007 are taken from Note 9 to the financial
statement (see below)
9. Earnings per share

2008 2007 2006

Basic earnings per ordinary share (US cents) 275.3 229.5 173.2
Diluted earnings per ordinary share (US cents) 275.1 229.0 172.4
Basic earnings per American Depositary Share (ADS) (US cents) (a) 550.6 459.0 346.4
Diluted earnings per American Depositary Share (ADS) (US cents) (a) 550.2 458.0 344.8
Basic earnings (US$M) 15,390 13,416 10,450
Diluted earnings (US$M) (b) 15,419 13,434 10,456

The weighted average number of shares used for the purposes of calculating diluted earnings per share reconciles to the
number used to calculate basic earnings per share as follows:
Weighted average number of shares 2008 2007 2006
Million Million Million
Basic earnings per ordinary share denominator 5,590 5,846 6,035
Shares and options contingently issuable under employee share ownership plans 15 20 31
Diluted earnings per share denominator 5,605 5,866 6,066
(a)
Each ADS represents two ordinary shares.

Thus BHP capitalization = 5846*157.2 USD (see Appendix3) = USD 918991.2 mln
Market capitalization/Total assets = 918,991.2 /61,404 =15

2006- having used the same chart http://finance.yahoo.com/echarts?

s=BHP#chart3:symbol=bhp;range=5y;indicator=volume;charttype=line;crosshair=on;ohl
cvalues=0;logscale=off;source=undefined for 5 years we can see that the average share
price in 2006 was roughly 40GBP=$72
Hence capitalization=6,035*72=USD 434,520mln
Market capitalization/Total assets =434,520/48,516=8.95
(http://www.bhpbilliton.com/bbContentRepository/bhpbarfinstatements06.pdf)

2006 (NN) - WACC

The calculation below is identical to the one in Appendix 2, from which all the data below
is derived
ke = (Rm-Rf)β + Rf , where Rf=8.57 (the same for 2006, see Note 36, Appendix2)

27
(Rm-Rf)=S&P5002006+6.5% (country risk)
β=1.156 http://old.micex.ru/stockindices/index_analitycs.html?
indx=MICEXINDEXCF&sec=RU14GMKN0408%2CRU14GMKN0507&fromMshFromD
ate=1136062800000&hFromDate=1.1.2006&fromhFromDate=01.01.2006&fromMshToDat
e=1167512400000&hToDate=31.12.2006&fromhToDate=31.12.2006&show=%CF%EE
%EA%E0%E7%E0%F2%FC+%E4%E0%ED%ED%FB%E5
S&P5002006 =1310.356 - http://mfd.ru/marketdata/ticker/?id=1977
ke = (13.1+6.5)%*1.156+8.57=31.22%
kd= 0.076=7.6% , t=0.266=26.6%
WACCcapm= 0.076*(1-0.266)*(632+158)/(632+158+12817) + 0.3122*12817/
(632+158+12817) =0.297=29.7%

2006 BHP - WACC

ke = (Rm-Rf)β + Rf = (13.10+3.1)*1.6+3.29 = 29.21%
Since BHP 2008 Annual report has been used for majority of the calculations, the balance
sheet data for 2006 is not available in Appendix 2 and has been taken from
http://www.bhpbilliton.com/bbContentRepository/bhpbarfinstatements06.pdf
t=3,632/14,166=0.256=25.6%
kd= 822/(1,368+7,648)=0.091=9.1%
D=1,368+7,648=9,016; E=24,455
WACCcapm=0.091*(1-0.256)* 9,016 /(24,455+9,016)+ 0.2921*24,455/(24,455+9,016)=
=0.232=23.2%

28