Cost Of Caital - Tata Chemicals

COST OF EQUITY - CAPITAL ASSET PRICING MODEL Cost Of Equity = Rf + ( Rm - Rf )* β

Date

INDEX

PERCENTAGE RETURN (daily) High

Low

PERCENTAGE RETURN

Average

2002 April May June July August September October November December January February March

3338.16 3125.73 3244.70 2987.65 3181.23 2991.36 2949.32 3228.82 3377.28 3311.03 3562.31 3469.35

-6.36 3.81 -7.92 6.48 -5.97 -1.41 9.48 4.60 -1.96 7.59 -2.61 -3.78

49.25 53.00 60.00 74.40 57.50 59.80 60.00 67.50 76.00 91.00 80.50 77.50

32.50 37.05 36.75 43.20 45.15 46.00 47.25 53.60 59.00 70.75 72.00 65.00

40.88 45.03 48.38 58.80 51.33 52.90 53.63 60.55 67.50 80.88 76.25 71.25

10.15 7.44 21.55 -12.71 3.07 1.37 12.91 11.48 19.81 -5.72 -6.56 0.70

April May June July August September October November December January February March

3338.16 3180.75 3607.13 3792.61 4244.73 4453.24 2960.87 5044.82 5838.96 5695.67 5667.51 5590.6

-4.72 13.41 5.14 11.92 4.91 -33.51 70.38 15.74 -2.45 -0.49 -1.36 1.15

77.00 114.90 122.20 145.00 176.00 182.00 189.00 184.80 222.00 216.00 160.10 150.00

66.50 75.60 86.55 109.20 130.00 141.10 151.65 162.00 174.00 140.00 132.00 121.05

71.75 95.25 104.38 127.10 153.00 161.55 170.33 173.40 198.00 178.00 146.05 135.53

32.75 9.58 21.77 20.38 5.59 5.43 1.81 14.19 -10.10 -17.95 -7.21 17.69

5655.09 4759.62 4795.46 5170.32 5192.08 5583.61 5672.27 6234.29 6602.69 6555.94 6713.86 6492.82

-15.83 0.75 7.82 0.42 7.54 1.59 9.91 5.91 -0.71 2.41 -3.29 -5.21

174.00 161.50 133.00 137.00 141.00 151.10 159.90 179.00 185.90 222.00 213.00 204.00

145.00 116.00 111.95 116.00 113.55 131.00 135.00 138.00 158.00 166.60 182.05 165.00

159.50 138.75 122.48 126.50 127.28 141.05 147.45 158.50 171.95 194.30 197.53 184.50

-13.01 -11.73 3.29 0.61 10.82 4.54 7.49 8.49 13.00 1.66 -6.59 -3.79

2003

2004 April May June July August September October November December January February March

2005 April May June July August September October November December January February March

6154.44 6715.11 7193.85 7635.42 7805.43 8634.48 7892.32 8788.81 9397.93 9919.89 10370.24 11279.96

9.11 7.13 6.14 2.23 10.62 -8.60 11.36 6.93 5.55 4.54 8.77 6.76

April 12042.56 Average(Monthly) Average(yearly)

3.41 40.98

188.00 257.00 263.00 254.00 246.00 272.70 240.95 241.00 308.00 319.00 295.00 389.00

167.00 175.00 227.00 209.00 206.30 230.00 202.70 212.30 291.10 251.00 240.50 254.00

177.50 216.00 245.00 231.50 226.15 251.35 221.83 226.65 299.55 285.00 267.75 321.50

434.00

285.00

359.50

2006

Source: www.nseindia.com * Share prices are adjusted after 30/12/2005 for split.

Return for period April 2002 To March 2006 (Rm)

40.98

Risk Free Rate(Rf)

10

Beta(β)

0.12

Cost Of Equity = Rf + ( Rm - Rf )* β

13.72

Computation Of Weighted Average Cost(CAPM) Source Equity Reserves Debt Total

Amount(crore) Proportion 8.42 4.04 92.29 44.29 107.66 51.67 208.37 100.00

After Tax Cost(%) 13.72 13.72 5.19 WACC

Weighted Cost(%) 0.55 6.08 2.68 9.31

21.69 13.43 -5.51 -2.31 11.14 -11.75 2.18 32.16 -4.86 -6.05 20.07 11.82

COST OF DEBT Table - Total Debt

TATA CHEMICALS

Mar 2005

Mar 2006

12 mths

12 mths

cash/packing credit

53.33

23.88

l term loan

87.46

89.24

from financial term loans

60.81

47.31

foreign currency convertible bonds

655.95

669.3

short term loans from banks

466.67

624.76

1324.22

1454.49

9.29

24.57

Total Debt Interest

Since cost of short term debt and long term debt is not given, the after tax weighted average cost of capital is calculated as follows:

Cost Of Debt (Before Tax) =Total Interest / ( Long term debt + Short term debt) 9.29/1324.22 = 8.60 / (107.66) =

0.01 7.00%= % 7.98%

Cost Of Debt(After Tax)[Kd ]= Interest Rate ( 1 - T ) 0.01=(1-0.35) 0.0798 ( 1 - 0.35 ) =

0.05= .0519

=

4.55=%5.19%

COST OF EQUITY BY DIVIDEND GROWTH MODEL ke = (DIV1/P0) + g Estimation of growth rate (1) Internal Growth g = Retention Ratio * ROE Year 2005 2006

DPS 5.17 5.58

EPS 15.83 16.14

BV 135.04 156.76

MV 148.88 245.35

PAT 340.55 353.03

NW 1997.84 2167.7

ROE (%) 17.05 16.29

Average

5.38

15.99

145.90

197.12

346.79

2082.77

16.67

DY (%) Retention(%) 3.47 67.34 2.27 65.43 2.87

66.38

Since in year 2006, there is decline in the PAT and hence EPS. Therefore to calculate growth the average values of last 6 years are consifered.

Therefore, g = 0.1214 * 0.5711 0.29 *0.6638) = 0.0693 or 6.93% 0.19 (2) Past Average Growth Year 2005 2006

gDPS

1 + gDPS 1.00 0.0793 1.08

DPS 5.17 5.58

SUM 0.08 2.08 Arithmetic Average = (∑ gDPS) / n = 0.2718 0.08/2or 27.18% 0.04 Geometric Mean = ∑( 1 + g n) - 1 = (DPSn/DPS0)1/n - 1 = 0.2395 or1.08 23.95%

ESTIMATE OF GROWTH RATE and COST OF EQUITY Method Internal growth Arithmetic Average Geometric mean

Growth Rate (%) 19 4

Cost of equity (%) = [ DIVo (1 + g ) / P 0 + g

10.8

13.67

21.87 6.87

Computation Of Weighted Average Cost Of Capital(Geometric Mean) Source Equity Reserves Debt Total

Amount (crore) 215.16 1952.54 1454.49 3622.19

Proportion 5.94 53.90 40.15 100.00

After Tax Cost(%) 13.67 13.67 4.55 WACC

Weighted Cost(%) 0.81 7.37 1.83 10.01

Computation Of Weighted Average Cost Of Capital(Arithmetic Mean) Source Equity Reserves Debt Total

Amount (crore) 215.16 1952.54 1454.49 3622.19

Proportion 5.94 53.90 40.15 100.00

After Tax Cost(%) 6.87 6.87 4.55 WACC

Weighted Cost(%) 0.41 3.70 1.83 5.94

Computation Of Weighted Average Cost Of Capital(Internal Growth) Source Equity Reserves Debt Total

Amount (crore) 215.16 1952.54 1454.49 3622.19

Proportion 5.94 53.90 40.15 100.00

After Tax Cost(%) 21.87 21.87 4.55 WACC

Weighted Cost(%) 1.30 11.79 1.83 14.92

etention(%) 81.84 0.33