FM 1 - Project Report/Term Paper Description and Guidelines:

The project report in this FM-I course expects each student to estimate the cost of capital of a chosen
company. The detailed approach to undertake the project report is given below.
1. Each student has to choose a company listed on either BSE or NSE.
2. The Professor of FMI-I of the Section, will provide the list of companies.
3. Every student in the section should choose a different company for his/her report. No two students
will submit a report on the same company.
4. The cost of debt of the chosen company is to be estimated as the ratio of “Financial Expenses” of
a company and “Interest Bearing Debt Funds”. In this approach, each candidate has to gather the
data on these two variables from the last 5 years financial statements and take a 5 year simple
average of this ratio.
5. Wherever the company is using preference shares, the approximation method needs to be used to
estimate the cost of preference shares based on current market price and number of years to
maturity. The balance number of years to maturity can be extracted from the annual report of the
company as on March, 2023. If the preference share is not traded preference dividend may be
assumed to be the cost of preference shares.
6. Cost of equity of the chosen company has to be estimated in two ways:
a. The first method would be based on CAPM approach, where each student has to estimate
the Market Beta of the company based on last 5 years’ monthly data of company’s equity
share price and NSE 500 as the proxy for market portfolio. Later, the ongoing 10-year
government bond yield should be considered as the Risk Free Rate of Return (R f). The
equity/market risk premium(Rm- Rf) can be taken from either Prof. Damodaran’s website
or Prof. J.R. Verma’s website for the Indian equity markets for the years ending March,
2020 or for the period 2022-2023. A minimum of 55 months’ data on equity share price is
required. If not the student should change the company.
b. The second method of cost of equity would be based on the Dividend Discounting Model,
where the last dividend paid per share as on 31st March, 2023, the Market Price of the
equity share as on 1st July, 2023, and the dividend growth rate for the last 5 years ending
March, 2023 should be considered.
7. The average tax bracket of the company has to be extracted from the PBT and PAT figures of the
company based on the last 5 years of data.
8. Using the tax rate, cost of equity, cost of preference shares and 5 year average cost of debt, the
weighted average cost of capital(for the year 2023) has to be calculated based both on book value
and market value weights.
9. Finally, each student has to summarise the cost of capital in the following table and interpret the
same.

CAPM Cost DDM Cost of

of Equity Equity

Book Value Weighted Cost of Capital

Market Value Weighted Cost of Capital