Frozen Foods Products: Cost of Capital

Input
Sustainable growth rate 0.05 1
Target Capital Structure 1:3 [D/E] FCF EBIT(1-T) +DEP +/Chan
YTM of 10-yr govt bond 0.08 (Rf) high
Market Risk Premium 0.08 (Rm-Rf) FCF xx
FCF1
Cost of Debt 0.08

Tax Rate 0.3

FCF
al
horizon period perpetual life
2 3 4 5 6 7. . infinity
EBIT(1-T) +DEP +/Change in NWC -CAPEX 0 1 2 3 4
high growth phase sustainable growth rate
xx xx xx xx
FCF2 FCF3 FCF4 FCF5 FCF5(1+g)
FCF5(1+g) FCF5(1+g)^2 FCF5(1+g)^3 . .
Calculate PV of these cash flows
TV FCF6/(WACC-g) FCF5(1+g)/(WACC-g)
Terminal Value
perpetual life
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.853785967035685
R Square 0.728950477507059
Adjusted R Square 0.638600636676079
Standard Error 0.194992838908545
Observations 5

ANOVA
df SS MS F Significance F
Regression 1 0.306767 0.306767 8.068088 0.065623
Residual 3 0.114067 0.038022
Total 4 0.420833

Coefficients Standard Error t Stat P-value Lower 95%Upper 95%Lower 95.0%

Intercept 0.069350829464245 0.092389 0.750638 0.507382 -0.224673 0.363374 -0.224673
X Variable 1 -2.36048732088388 0.831029 -2.840438 0.065623 -5.005194 0.284219 -5.005194
Upper 95.0%
0.363374
0.284219
WACC = WAMCC (Weighted Average Marginal Cost of Capital)

Wd Kd (1-T) x

Market Value Based YTM

Book Value
Market Value
Target Capital Structure Weights
al Cost of Capital) PV FCF/K

We Ke

DCF Ke = D1/P0 + g g= sustainable growth rate g=b x ROE

CAPM Ke = Rf + (Rm-Rf) b
Bond Yield + Risk Premium Approach govt bond rate
(10 yr)
YTM = R* + RP
YTM = R*+ IP
10% Rm
(It - It-1)/It-1

time NI (monthlRm
1 1200
2 1300 0.083333
3 1250 -0.038462
4 1100 -0.12
Weekly/
Monthly/ 5 1300 0.181818
Annual? 6 1400 0.076923

Weekly 2 yrs Avg Rm 0.036723

Monthly 5 yrs Annual
g=economic growth

(Rm-rf) time P I R Rm
1 230 1200 R Rm
2 180 1300 -0.217391 0.083333
3 240 1250 0.333333 -0.038462
4 320 1100 0.333333 -0.12
5 256 1300 -0.2 0.181818
6 170 1400 -0.335938 0.076923

b Cov(Rm, Rj) -0.025992 y a + bX

var(m) 0.013764 Rj= a + b*Rm
Y = 0.2 + 1.3 x Rm
beta -1.88839
beta 1.7 aggressive
beta 0.34 defensive
 Calculation of Cost of Equity for Private Company
Steps: Pure Play Method
1 Identify proxy companies (Companies in similar line of business with similar characteristics)
2 We obtain their beta
3 We calculate unlevered beta / Asset beta of proxy firms
4 We average unlevered beta of proxy firms
5 We calculate levered beta of our company
6 We use the beta for calculation of cost of equity for our firm

SN Proxy FirmEquity/Levered Beta Equity Debt D/E Proxy firms

1 AIL 0.5472 8704 5738 0.659237132353
2 BIL 0.2638 58237 281 0.004825111184
3 GCH 0.0959 121160 0 0
4 JFL 0.9856 74938 0 0
5 KDL 0.6357 6116 4248 0.694571615435
6 RAL 0.5393 8966 38540 4.298460852108
7 VIL 0.669 4669 985 0.210965945599
8 XWL 0.5372 15336 0 0

Average Unlevere

Frozend Foods

D/E 0.333333 (1:3)

T 0.3

Levered Beta 0.52435284682479 Bl = Bu [(1+ (1-T) X D/E)]

Cost of Equity Rf+(Rm-Rf) B 0.12194823

WACC Wd X Kd (1-T) + We X Ke Wd=? D/E = (1:3)

10.5425
Wd 0.25
We 0.75
Kdt 5.6
Ke 12.19
lation of Cost of Equity for Private Company

similar characteristics) [Companies similar like us hav

(Equity beta/ Levered beta)
[Hamada Equation: Levered (Equity) Beta = Unlevered Beta(Asset Beta)*

B unlevered = B lev/[1+(1-T) D/E]

0.374418565162021
0.262911994277275
0.0959
0.9856
0.427735125858124
0.134524922101046
0.582917047681254
0.5372

0.425150956884965 (As our company is similar in nature with proxy firms our unlevered beta should also

Wd = D/V = D/(D+E) = 1/4

 [Companies similar like us have similar business like ours]

= Unlevered Beta(Asset Beta)* [1+ (1-T) D/E] Beta

Measure of Risk (Systematic Risk)

Comprises of two parts

1. Business Risk
2. Financial Risk [Due to Use of Debt in capital structure

our unlevered beta should also be 0.42)

se of Debt in capital structure]