Mittal School of Business

Course Code: FINM542 Course Title: Corporate Finance-I

Course Instructor: Dr. Rohit Bansal Academic Task No.: 2

Academic Task Title: Calculate Cost of Capital Date of submission: 01-10-2022.

Student Name: Sahibjit Singh Saggoo. Section: Q2252.

Student’s Roll No: RQ2252B44. Student’s Reg. No: 12212362.

Group No. Registration Section Class Name of PEER Reason Work

for Number Roll Student Rating for done by
Assignment No. Giving the
PEER person
Rating
Group 15 12212362 Q2252 B44 Sahibjit Singh 5 /5 Group Actively
Saggoo work done Participated
Group 15 12212176 Q2252 B42 Ayush Anand 5 /5 Group Actively
work done Participated
Group 15 12212153 Q2252 B41 Pratik Choudhury 4 /5 Group Actively
work done Participated
Group 15 12212296 Q2252 B43 Siddharth Singh 4 /5 Group Actively
work done Participated

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 Index

Content Page No.

Company Introduction 03

1. COST OF EQUITY (Ke).

A) Dividend Discount Model (DDM). 04
B) Capital Asset Pricing Method (CAPM). 05
C) Earning Price Ratio Method. 06
2. COST OF DEBT CAPITAL (Kd). 07- 08

3. COST OF PREFERENCE SHARE (Kp). 09

4. Weighted Average Cost of Capital (Wacc). 10
5. Snapshot of Balance Sheet. 11
6. Snapshot of Profit &loss Statement. 12
5. CONCLUSION. 13
6. References. 13

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 ABOUT THE COMPANY

INTRODUCTION.

RAMCO CEMENTS PVT. LTD.

Ramco Cements embarked on its journey in 1961 under the stewardship of Shri P.A.C.
Ramasamy Raja. Over the years, we have established ourselves as one of the largest cement
manufacturers in the country, producing cement, dry mix and concrete across 11 state-of-the-art
production facilities located in India.

Ramco has come a long way: -

• From a initial capacity of 200 Tonnes Per Day (TPD) to capacity of 21 MTPA today.

• From operating the business in a single unit with single product in a heavily controlled era to
becoming multi product, multi-location company.

• From a team of few hundred people in 1961 to a team of more than 3,000 people today.

Stock Price: RAMCOCEM (NSE) Rs765.00 -25.75(-3.26%)

Parent: Ramco Group
Headquarters: India
Founded: 1961
Revenue: 51462.2 crores INR.
Key People: Venkatraman Raja, MD; A.V. Dharmakrishna, CEO
Subsidiaries: Ramco System, Ramco Windfarms ltd.

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Calculation of Cost of Capital for the RAMCO CEMENTS by following Methods
discuss below: -

1) Cost of Equity (Ke): - The cost of equity is the return an investor expects to receive
on a business venture. This price shows the amount that investors are willing to pay in the
market in exchangefor assuming ownership risk by purchasing firm shares. One approach
to figuring out the cost of equity is the dividend capitalization model, which primarily
bases its resultson the dividends paid out by a corporation.

BY USING: -

a) Dividend Discount Model (DDM): -

𝐷𝐼𝑉1
Formula Used: - 𝑃0 = (𝐾𝑒 −𝑔)
Where: -
Ke: - Cost of Equity.
Po: - Market Price of Share on NSE or BSE.
DIV1: - Dividend on Share for next Year.
g: - Growth rate in Dividend payment.

Now: -

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 Ke= DIV1/Po + g

Given: -
Po: - 754.50.
DIV1: - 3.
g: - 2.9.
by Substituting the values in the above formula: -

Ke = (3/754.50) + 2.9%
= 0.03297 x 100 (For Percentage Calculation)

Ke = 3.2% Ans.

b) Capital Asset Pricing Method (CAPM): - The Capital Asset

Pricing Model (CAPM) describes how the expected return and risk of
investing in securities are related (CAPM). It proves that the expected
return on a security is equal to the risk-free return plus a risk premium
determined by the asset's beta.

Formula Used: - Ke = 𝑅𝑓 + 𝛽 (𝑅𝑚 − 𝑅𝑓 )

Where: -
Ke: - Cost of equity.
Rf: - Risk free rate of interest.
β: - Systematic risk.
Rm: - Return from market or index.

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 Now: -

Year Beta Rf Rm
2021-2022 -0.09 7.40% 13.4%

by Substituting the values in the above formula: -

Ke = 𝑅𝑓 + 𝛽 (𝑅𝑚 − 𝑅𝑓 )
= 7.40+(-0.09) *(13.4-7.40)

Ke = 6.86% Ans.

c) Earning Price Ratio Method: - The link between a company's stock

price and earnings per share is known as the price- earnings ratio (P/E
Ratio) (EPS). It is a well-liked ratio that helps investors understandsthe
worth of the organization. The price you must pay per unit of current
earnings is shown by the P/E ratio, which also displays market
expectations.

Formula Used: - Ke =E/Po

Where: -
E = Current Earnings Per Share.
Po = Market Share Price.

Now: -

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 Ke =E/Po
Given: -
E= 38.
Po=754.50.
by Substituting the values in the above formula: -

Ke =E/Po*100
=38/754.50
Ke =5% Ans.

2) Cost Of debt Capital: - The compensation a business gives to its creditors and
debt holders is known as the cost of debt. In order to cover any risk exposure
associated with lending to a company, thesecapital sources must be paid. This is
of two types. If time is not mention than it will callas a cost of irredeemable debt.
This amount needs not to pay back.

By Using Both shortcut and main formula: -

a) Debt issued at Par: -

𝐼𝑁𝑇
Formula Used: - Kd= i =
𝐵0

Where: -
Kd: - cost of debt.
INT: - Interest.
Bo: - Issue Price of Bond.

b) Debt issued at Premium/ Discount: -

𝐼𝑁𝑇 𝐵
Formula Used: - Bo= ∑𝑛𝑡=1 (1+𝐾 )𝑡 + (1+𝐾𝑛 )𝑛
𝑑 𝑑
Where: -
Bo: - Issue price of bond on debenture.
INT: - Interest.
Bn: - Redemption Price.
n: - No. of time period.

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c) Tax Adjustments: After tax cost of debt: -
Formula Used: - 𝐾𝑑 (1 − 𝑇)

Where: -
Kd: - Cost of debt.
T: - rate of tax.

d) SHORT CUT METHOD: -

𝐵𝑛−𝐵𝑜
𝐼𝑁𝑇+( )
𝑛
Formula Used: - 𝐾𝑑 = 𝐵𝑛+𝐵𝑜
( )
2

Where: -
INT: - Rate of Interest.
Bn: -Redemption Price of Bond.
Bo: - Issue Price of Bond.
N: - No. of years to maturity.

Now: -

(As Bn is zero& Bo is also zero)

𝐼𝑁𝑇
Kd= i =
𝐵0

Given: -
INT FOR 2022= 10.27
As Bo is not given, we will take Face value (FV).
FV= 1.00

by Substituting the values in the above formula: -

Kd= 10.27/1

Kd= 10.27% Ans.

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3) Cost of Preference Capital: - Cost of preference share capital is that part of cost of
capital in which we calculate the amount which is payable to preference shareholders in
the form of dividend with fixed rate. Hence the company didn’t issue any preference
share. Though we cannot calculate Preference Share Capital.
Formula Used: -

a) Cost of Irredeemable Preference: -

𝑃𝐷𝐼𝑉
Formula Used: - (𝐾𝑝 ) = 𝑃0
Where: -
Kp: - Cost of preference share.
PDIV: - Preference dividend.
Po: - Issue Price.

b) Cost of Redeemable Preference: -

𝑃𝐷𝐼𝑉 𝑃𝑛
Formula Used: - (𝑃0 ) = ∑𝑛𝑡=1 (1+𝐾 𝑡
+
𝑑) (1+𝐾𝑝 )𝑛
Where: -
Po: - Issue price.
Pn: - Redemption Price.

c) SHORT CUT METHOD: -

𝑃𝑛−𝑃𝑜
𝑃𝐷𝐼𝑉+( )
𝑛
Formula Used: - 𝑃𝑛+𝑃𝑜
( )
2
Where: -
PDIV: - Preference Dividend.
Pn: - Redemption Price for Preference share.
Po: - Issue Price for Preference share.
N: - No. of years to maturity.

Now: -

Value of Kp= 0

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4) Weighted Average Cost of Capital (Wacc): - A company's weighted
average cost of capital (WACC), which accounts for debt, commonstock, and
preferred stock, is a gauge of its overall cost of capital. The cost of each type
of capital is multiplied by the proportion of the total capital that it makes up.

Formula Used: - 𝑊𝑎𝑐𝑐 = [𝐾𝑑 (1 − 𝑇)𝑊𝑑 ] + [𝐾𝑒 𝑊𝑒 ] + [𝐾𝑝 𝑊𝑝 ]

Where: -
Kd: - Cost of debenture/debt.
Wd: - Weight of Preference Share.
Ke: - Cost of Equity.
We: - Weight of Equity capital.
Kp: - Cost of Preference Share.
Wp: - Weight of Preference Share.
1-T: - After Tax cost debt.

Now: -
Market Value of Equity(E) = Rs178282.601 Mil.

As Market Value of debt is difficult to calculate, therefore we use Book Value of

debt(D)
Book Value of Debt(D)= Rs35297.25 Mil.

Market Value of Preference Share(P)= 0.

As company Has not issued any preference Share for the year2021-2022.

Given: -
We= 0.8347.
Ke = 6.86%
Wd=0.1653.
Kd=10.27%.
T = 11.045%.
Kp=0

by Substituting the values in the above formula: -

𝑊𝑎𝑐𝑐 = [𝐾𝑑 (1 − 𝑇)𝑊𝑑 ] + [𝐾𝑒 𝑊𝑒 ] + [𝐾𝑝 𝑊𝑝 ]

= (10.27*(1-11.045%) *0.1653) +(6.86*0.8347) +(0)

Wacc =7.23% Ans

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11
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Conclusion: - As Today Ramco Cements weighted average cost of capital is 7.23%. Ramco
cements generates higher returns on Investment than it costs the company to raise the capital
needed for that investment. It is earning excess returns. A FIRMS that excepts to continue
generating positive excess returns on new investments as it values increase its growth increases.

1. As per all the calculations done above on the basis of balance sheet,
income statementand cash flow statement, we can conclude that the
company is working effectively andefficiently.
2. As we see the cost of debt it is 7.70% which is not more as
compared to other debts present in the market and if we see it after
tax i.e., 5.03% which is also less than inflationrate of INDIA. So
that we can say that the company is taking finance at a very
reasonable rate.
3. As per the cost of equity which we have find out in the above
analysis the company is earning at a very good rate but does not
giving the dividend to its shareholders and company is using that
money in its business purpose. Due to this there is a very positive
change in the shares of this company in previous five years.
4. If we see the weighted average cost of capital of the company, i.e.,
reducing every yearwhich means that the company is reducing its
minimum cost in previous years, which is beneficial for the
company.
5. At last, if we see the shares of this company as an investment
purpose, so that accordingto us the company is giving a positive
results in past five years and also the main pointis that company is
also earning a good amount in the era of covid-19 pandemic. So that
it is beneficial for everyone to invest in this company because if this
company continueitself as its past position than the investor can get
the good return in limited time.

References: -

• www.moneycontrol.com.
• www.ramcocements.com.
• www.finbox.com.
• www.screener.com.

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