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EL Assignment Group 104-Consolidated
EL Assignment Group 104-Consolidated
COST OF CAPITAL
ANALYSIS FOR
BAJAJ FINANCE
WILP, BITS-PILANI
COST OF CAPITAL ANALYSIS FOR BAJAJ FINANCE
GROUP NO-104
Group Members
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1. Results of Analysis of WACC for BAJAJ FINANCE for different years
WACC is computed for period of 18 years starting from year 2004 to 2021
TABLE 1
Year WACC
2003-04 0.45
2004-05 0.12
2005-06 0.56
2006-07 0.07
2007-08 0.20
2008-09 -0.11
2009-10 0.25
2010-11 0.98
2011-12 0.01
2012-13 0.06
2013-14 0.19
2014-15 0.06
2015-16 0.02
2016-17 0.05
2017-18 0.05
2018-19 0.04
2019-20 0.05
2020-21 0.29
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2. Graph for WACC for BAJAJ FINANCE year wise
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4. Interpretation
WACC- The cost of capital, generally calculated using the weighted average
cost of capital, includes both the cost of equity and the cost of debt. The overall
cost of capital is a weighted average of the various sources, including debt,
preferred stock, and common equity:
WACC = Weighted Average Cost of Capital
WACC = After-tax costs x weights of each source
Cost of Debt- The cost of debt is the effective rate that a company pays on its
debt, such as bonds and loans after tax.
Cost of Equity- Cost of equity is the return that a company requires for an
investment or project, or the return that an individual requires for an equity
investment.
WACC Vs Beta-
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In general, a higher WACC is a sign of a firm with higher risk, while a lower WACC is a sign of
a firm with lower risk. This is because higher WACC's imply that the company is paying more to
service any debt or equity they're raising. Therefore, an increase in the WACC denotes a lower
firm valuation as well, as investors require additional return for taking on more risk.
In summary, the WACC is calculated by multiplying the cost of each financing source (debt and
equity) by its appropriate weight, and then adding the products together to determine the final
value. Investors can then use the WACC as a discount rate in valuation models to discount
future cash flows, such as in a discounted cash flow (DCF) model or dividend discount model
(DDM). After discounting future cash flows with the WACC, this can give investors an idea on
the intrinsic/fair value of a company's stock price.
For the year 2003-2004 - The WACC is high (0.46) and you see it gradually decreasing. For the
year 2008-09 we see a negative Cost of Equity (-19.92%), in other words, negative equity will
make the WACC arithmetically negative, as the cost of capital for distressed companies is higher
due to risk. As we move forward the WACC increases gradually.
2020 was the year of pandemic and this affected the company’s stock. As a result, the Cost of
Equity reduced to -57%. The following year the Cost of Equity increased and the WACC
stabilized.
At the end of 2021, the risk is decreasing and it denotes higher firm evaluation as well.
For the year 2003-2004 – Beta value is 0.38 and the cost of equity is 50.73%
For the year 2008-2009 – Beta value is 0.4 and cost of equity is -19.92%
For the year 2020-2021 – Beta value is 3.7 and the cost of equity is 77.13%
The higher the beta, the higher the cost of equity because the increased risk investors take (via
higher sensitivity to market fluctuations) should be compensated via a higher return.
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5. Exhibits
5.1.1Balance Sheets
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5.1.2 Balance Sheets
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5.1.3 Balance Sheets
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5.1.4 Balance Sheets
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5.2.1 Profit and Loss Statements
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5.2.2 Profit and Loss Statements
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5.2.2 Profit and Loss Statements
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5.2.4 Profit and Loss Statements
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5.3.1 Yearly Results
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5.3.2 Yearly Results
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5.3.3 Yearly Results
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