CASE ANALYSIS

DIVISIONS
Particulars Cement Fertilizers Power Solidaire
SALES 700 450 350 1500
PAT 29 17 24 70
ASSETS 550 230 420 1200
CA 210 100 20 330
EQUITY (MARKET VALUE) 1000
DEBT 1800

Answer

Particulars Formula
Risk Premium Avg Rm- Rf
Debt equity ratio Debt/Equity
Target Debt equity ratio Industry Debt/ Industry Equity 870 470
Debt Equity Ratio +1
Current Market Value Debt Equity Ratio/Debt equity ratio +1
Unlevered Beta Equity Beta*(1-Current value of Debt Ratio)
Levered Beta Unlevered Beta/(1-Target Debt Ratio)
Cost of Equity
WACC Ke*(1-Target Debt Ratio)+Kd*Target Debt Equity
Debt equity ratio Debt Ratio Of Comparable Firms
Input Data
Equity Beta of SIC 1.50
Rf 5.6%
Rm 18%
Average Rf 7.8%
Debt equity ratio 1.8:1
Target Debt equity ratio 2.5:1
Kd 8%
Target Debt equity ratio (Cement Division) 2.5:1

Figures
9.80%
1.8
1.85106382978723
2.8
0.642857142857143 64.28571428571
0.535714285714286
1.87443766869939
23.6%
0.135714285714286
1.46666666666667
 Competitors Data
Kisan Camel
Particulars Fertilisers Cement
Sales 550 850
PAT 23 41
Assets 320 700
Current assets 140 300
Market Value of Equity 150 320
Debt 220 650
Equity beta (Levered Beta) 1.2 1.36

2.67857142857143
Case 9.2: Solidaire Infrastructure Company

(₹ in million)
Cement Fertiliser Power Solidaire
Sales 700 450 350 1,500
PAT 29 17 24 70
Assets 550 230 420 1,200
Current assets 210 100 20 330
Equity (Market value) 1,000
Debt 1,800

(₹ in million)
Kisan Camel
FertilisersCement
Sales 550 850
PAT 23 41
Assets 320 700
Current assets 140 300
Market Value of Equity 150 320
Debt 220 650
Equity beta 1.2 1.36
Risk-free rate 5.6%
Risk premium 9.8%
Average market return 17.6%
Average risk-free rate 7.8% Case 9.2: Solidaire Infrastructure
Company 1.5
Company equity beta 1.500
Current market value debt ratio 64.3%
Unlevered beta 0.536
Target debt ratio 71.4%  1 
u  l   
Levered beta 1.875  E /V 
Cost of equity 24.0% E
l  u 
After cost of debt 8.0% V
WACC 12.6%
Fertiliser Division
Leveraged beta of comparable firm 1.200
Debt ratio of comparable firm 59.5%
Unlevered beta for comparable firm 0.486
Fertiliser Division's target debt ratio 66.7%
Fertiliser division's levered beta 1.459
Cost of equity 19.9%
After-tax cost of debt 8.0%
WACC 12.0%
Cement Division'
Leveraged beta of comparable firm 1.360
Debt ratio of comparable firm 67.0%
Unlevered beta for comparable firm 0.449
Cement Division's target debt ratio 71.4%
Cement division's levered beta 1.570
Cost of equity 21.0%
After-tax cost of debt 8.0%
WACC 11.7%
Power Division
Power Division's unlevered beta 0.677
Target debt ratio 80.0%
Levered beta 3.383
Cost of equity 45.2%
After-tax cost of debt 8.0%
WACC 15.4%
Solidaire Infrastructure Company (SIC)
The main
Question 1
The following is the capital structure of ABC Ltd

Sources Amount COST OF CAPITAL

Equity 2000000 11%
PS 500000 8%
Retained Earnings 1000000 11%
Debentures 7.5% 1500000 4.50%

Answer
WACC Based on book value Weights

Sources Amount BOOK VALUE WEIGHT COST OF CAPITAL

Equity 2000000 0.4 11%
PS 500000 0.1 8%
Retained Earnings 1000000 0.2 11%
Debentures 7.5% 1500000 0.3 4.50%
5000000

WACC Based on Market value Weights

Sources Amount Market VALUE WEIGHT COST OF CAPITAL

Equity 1733333.33333 0.3843311160384 11%
PS 500000 0.1108647450111 8%
Retained Earnings 866666.666667 0.1921655580192 11%
Debentures 7.5% 1410000 0.3126385809313 4.50%
4510000 1.00

WN MARKET VALUE OF EQUITY 2600000

Equity 1733333.33333
Retained Earning 866666.666667

WN Debentures 1500000
Market Value Of debt 1410000
 Presently debentures are traded at 94%, PS at par and ES Rs 13 per share.
ES and Retained earnings are in ratio of 2:1 in capital structure
Find out WACC Based on Book Value weights and market Value Weights

WACC Sources Amount BOOK VALUE WEIGHT COST OF CAPITAL

0.044 Equity 2000000 0.4 11%
0.008 PS 500000 0.1 8%
0.022 Retained Earnings 1000000 0.2 11%
0.0135 Debentures 7.5% 1500000 0.3 4.50%
0.0875 8.75 5000000

WACC 8.75

WACC Sources Amount Market VALUE WEIGHT COST OF CAPITAL

0.042276 Equity 1733333 0.35 11%
0.008869 PS 500000 0.10 8%
0.021138 Retained Earnings 866667 0.17 11%
0.014069 Debentures 7.5% 1410000 0.28 4.50%
0.086353 8.635255 4510000

WACC 8.63525498891353
Weighted Capital
220000
40000
110000
67500
437500

Weighted capital
190666.666666667
40000
95333.3333333333
63450
389450
 STEPS of Pure Play Technique (For calculating BETA)

1 Identify Comparable firms

2 Estimate Equity Betas or Levered Betas for comparable firms
3 Estimate Asset Betas or Unlevered Betas for comparable firms. Calculated on the basis of Debt Ratio
4
5
 E SEE PHOTO
D
V
Bl
s of Debt Ratio BU