Summer Training

Presentation
On
Cost Of Capital
Of
Shree Cememt Limited
From:- J.ANSHUL CHAWRA

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Shree Cement Ltd is a Rajasthan based company of
Bangur Group, located at Beawar.
It started operations in the year 1985 and has been
growing ever since.
It has been participating in the infrastructure
transformation of India for over two decades now.
It has installed capacity of 13 mn tonnes per annum .
It will invest Rs 3,500 crore to expand its cement
production capacity by seven million tonnes in the next
five years.
It is a leading cement manufacture company in North
India.
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 The turnover of the company in 2009-10 was Rs 3,632
crore and it posted a net profit of Rs 676 crore
 Its manufacturing units are located at Beawar, district
Ajmer, and Ras, district Pali, in Rajasthan.
 It also has grinding units at Khushkhera, district Alwar
in Rajasthan, near Gurgaon.
 The company has also established two grinding units
one at Suratgarh (Rajasthan) and another at Roorke
(Uttaranchal).
 It has three brands under its portfolio viz. Shree Ultra
Jung Rodhak Cement, Bangur Cement and
Rockstrong Cement.

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Cost Of Capital
• The main objective of a business firm is to maximize the wealth of
its shareholders in the long-run, the Management Should only invest
in those projects which give a return in excess of cost of fund
invested in the project of the business.

• The difficulty will arise in determination of cost of funds, if is raised

from different sources and different quantum.

• The various sources of funds to the company are in the form of

equity and debt.

• The cost of capital is the rate of return the company has to pay to
various suppliers of fund in the company.

• There are main two sources of capital for a company – shareholder

and lender.

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An Example of Cost of Capital

• For example if a firm borrows Rs. 5 crore at an interest of

11% P.A., then the cost of capital is 11%.

• Hear it’s the essential for the firm to invest these Rs. 5
Crore in such a way that it earn at least Rs. 55 lacks i.e. rate
of return at 11%.

• If the return less then this, then the rate of dividend which
the share holder are receiving till now will go down
resulting in a decline in its market value thus the cost of
capital is the reward for the use capital.

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SIGNIFICANCE OF CONCEPT OF COST OF CAPITAL

1. Designing the capital structure.

2. Capital budgeting decisions.

3. Comparative study of sources of financing.

4. Evaluations of financial performance of top management.

5. Knowledge of firms expected income and inherent risks.

6. Financing and Dividend Decisions.

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COST OF DEBT CAPITAL

• Cost of Debt is the effective rate that a company pays on

its current debt. This can be measured in either before- or
after-tax returns; however, because interest expense is
deductible, the after-tax cost is seen most often. This is
one part of the company's capital structure, which also
includes the cost of equity.  

• Much theoretical work characterizes the choice between

debt and equity, in a trade-off context: Firms choose their
optimal debt ratio by balancing the benefits and costs.

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An Example of Cost of Debt

• Example-: If a company issues 12% debentures worth Rs. 5

lacs of Rs. 100 each at par, then it must be earn at least
Rs.60000(12% of Rs. 5 lacs) per year on this investment to
maintain the income available to the shareholders
unchanged.

• If the company earns less than this interest rate (12%) than
the income available to the shareholders will be reduced
and the market value of the share will go down.

• Therefore, the cost of debt capital is the contractual

interest rate adjusted further for the tax liability of the firm.

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Computation of Cost of Debt

The Cost of Debt (before tax) can be calculated as below:

Interest Expense of the company

= ---------------------------------------- X 100

Total Debt

• To get the after-tax rate, you simply multiply the before-tax

rate by one minus the marginal tax rate.

Cost of Debt = (before-tax rate x (1-marginal tax))

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COST OF PREFERENCE SHARE CAPITAL

• Preference share is another source of Capital for a company.

Preference Shares are the shares that have a preferential right
over the dividends of the company over the common shares. A
preference shareholder enjoys priority in terms of repayment vis-
à-vis equity shares in case a company goes into liquidation.
Preference shareholders, however, do not have ownership rights
in the company. In the companies under observation only India
Cement has preference shares issued.

• Cost of Preference Capital = Preference Dividend/Market Value of

Preference

• Shree Cement has not paid any dividend to the Preference

Shareholders. Thus the Cost of Preference Capital is 0 (Zero).

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COST OF EQUITY SHARE CAPITAL

• The computation of cost of equity share capital is relatively

difficult because nether the rate of dividend is predetermined nor
the payment of dividend is legally binding.
• When additional equity shares are issued, the new equity share
holders get propranate share in future dividend and
undistributed profits of the company.
• If reduces the earning per shares of existing share holders
resulting in a fall in marker price of shares.
• Therefore, at the time of issue of new equity shares, it is the duty
of the management to see that the company must earn at least so
much income that the market price of its existing share remains
unchanged.
• This expected minimum rate of return is the cast of equity share
capital.

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Methods to calculate Cost of Equity

(1)Dividend yield method:

Ke = DPS\mP*100

(2) Earning yield method:

Ke= EPS\mp*100

(3) Dividing yield plus growth in dividend method :

Ke= DPS\MP*100+G

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COST OF EQUITY SHARE CAPITAL (KE)

Particular 2009-10

Dividend Per share method 13

Earning Yeild Method 8.43

Dividend yield plus growth method 10.56

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WEIGHTED AVERAGE COST OF CAPITAL

• Once the specific cost of capital of the long-term sources i.e. the debt,
the preference share capital, the equity share capital and the retained
earnings have been ascertained, the next step is to calculate the overall
cost of capital of the firm.

• The capital raised from various sources is invested in different projects.

• The profitability of these projects is evaluated by comparing the

expected rate of return with overall cost of capital of the firm.

• The overall cost of capital is the weighted average of the costs of the
various sources of the funds, weights being the proportion of each
source of funds in the total capital structure.

• Thus, weighted average as the name implies, is an average of the cost of

specific sources of capital employed in the business properly weighted
by the proportion they held in firm’s capital structure.

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Conclusion

• Cost of Debt is decreased in 2009-10 as compared to 2008-

09.

• Cost of Equity is also decreased in 2009-10 as compared to

2008-09.

• And that is why the Overall Cost of Capital or Weighted

Average Cost of Capital is also decreased.

• Because, company’s debentures is decreased and earning

per share and dividend per share is increased from the
previous financial year.

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Thank You 16