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CIA III-calculation
CIA III-calculation
RIL has debt component of Rs. 2,11,069 Cr. These Long-Term liabilities are Divided into 4
parts. These are:
• Secured Debentures
• Unsecured Debentures
• Bonds
• Term Loans
Calculation of Cost of Debt will be done individually for each of these components and these
components will be taken separately for further calculation of WACC.
Secured Debentures:
Interest
The weighted average interest rate for all the Secured debentures is 8.301% (0.08301 x 100)
= 8.301% x (1-0.234)
= 8.301% x 0.766
= 6.35%
Unsecured Debentures:
Interest:
The weighted average interest rate for all the Unsecured debentures is 7.853% (0.07853 x 100)
= 7.853% x (1-0.234)
= 7.853% x 0.766
= 6.02%
Bonds
Interest:
The weighted average interest rate for all the Unsecured debentures is 4.083% (0.04083 x 100)
= 4.083% x (1-0.234)
= 4.083% x 0.766
= 3.128%
Term Loans
Interest:
Non-Current 109498
Current 18315
Total 127813
Finance Charges 1751
0.0136997
The weighted average interest rate for all the Unsecured debentures is 1.37% (0.013699 x 100)
= 1.37% x (1-0.234)
= 1.37% x 0.766
= 1.05%
Dividend paid by the company in the fiscal year 2020-21 is Rs. 6.5 Per Share.
Market Price of the share dated 9 April 2021 is Rs. 1,982 per share.
It is assumed that the growth rate is calculated through a successive percentage formula for the
last 3 year.
= (a+b+(a+b/100))%
= (8.33 + 0 + (8.33+0/100))
= (8.33 + 0.083)
= 8.41%
= (6.5/1982) + 8.41%
= 0.32 + 8.41
= 8.73%
Value of Equity:
= EBT/Ke
= 40,316/8.73
= 4,61,809
Source of Fund Amount (In Cr.) Proportion Cost (%) Weighted Cost
Therefore, when combined according to weights the weighted average cost of total capital is
6.8399%.
WACC = 6.8399%
= 6214900/6.8399
= 9,08,624
Therefore, as per the Net Income approach the value of the firm is Rs. 9,08,624 Cr.
Tata Consultancy Services
Cost of Debt
It is never necessary for a company to raise funds through borrowed funds and pay for the
money you use. This is what a Large Cap company in service sector like Tata Consultancy
Services believe. TCS is one of those companies in the market which is completely debt free.
When we went through the annual report of the company, we found out that the only Non-
Current Liabilities the company has are just the tax liabilities and the lease liabilities on
properties, cars, land, etc.
Therefore, for TCS we will be considering only the equity component in the calculation of
Weighted Average Cost of Capital as the Complete capital is made up of equity. The calculation
for the same is done further.
Cost of Equity
Cost of Equity (Ke) = (Dividend/Market Price) + Growth Rate
Dividend paid by the company in the fiscal year 2020-21 is 73 Rs. per share. This due to sudden
boom in the market company paid a lot of dividend, however in the previous years the dividend
was nearly half of it. In 2018-19 the dividend paid was Rs. 50 per share, and in 2017-18 the
dividend paid was Rs. 47 per share, in 2016-17 it was Rs. 43 per share
Market price of the company dated 9th April 2021 is Rs. 3,322 per share.
Growth Rate: Because of so many fluctuations again successive percentage formula will be
used.
= (15.68 + 0.16)
= 15.84%
Ke = Dividend/Market Price + Growth
= 73/3322 + 15.84%
= 2.20% + 15.84%
= 18.04%
Value of Equity
Value of Equity = EBT/Ke
Ke = 18.04%
= 4166800/18.04
= 2,30,975
WACC
As there is no debt component and only the equity component there will be no proportions in
the Capital Structure. Therefore, the complete weight will be applied to Equity Capital, this
means that the Weighted Average Cost of Capital is same as Cost of Equity (Ke).
Source of Fund Amount (In Cr.) Proportion Cost (%) Weighted Cost
Equity Capital 2,30,975 1.00000 18.040% 0.1804
Total 2,30,975 1 0.1804
WACC = 18.04%
= 4511200/18.04
= 250067
Therefore, as per the Net Income approach the value of the firm is Rs. 2,50,067 Cr.
Note
• Changes in dividend payout are fluctuating due to market activities, so, previous year’s
dividend changes are taken into consideration for growth rate.
• The cost of equity calculated is for equity shares, however the same cost is taken into
consideration for other elements like reserves and surplus.