CHAPTER 1

INTRODUCTION

CHAPTER 2
PROFILE OF COMPANY

Cement Industry Overview

The Indian Cement industry dates back to 1914, with first unit was set-up at Porbandar with a
capacity of 1000 tones. Currently The Indian cement industry with a total capacity of about 170
m tones (excluding mini plants) in FY07-08, has surpassed developed nations like USA and
Japan and has emerged as the second largest market after China. Although consolidation has
taken place in the Indian cement industry with the top five players controlling almost 50% of the
capacity, the remaining 50% of the capacity remains pretty fragmented. Per capita consumption
has increased from 28 kg in 1980-81 to 115 kg in 2005. In relative terms, Indias average
consumption is still low and the process of catching up with international averages will drive
future growth. Infrastructure spending (particularly on roads, ports and airports), a spurt in
housing construction and expansion in corporate production facilities is likely to spur growth in
this area. South-East Asia and the Middle East are potential export markets. Low cost technology
and extensive restructuring have made some of the Indian cement companies the most efficient
across global majors. Despite some consolidation, the industry remains somewhat fragmented
and merger and acquisition possibilities are strong. Investment norms including guidelines for
foreign direct investment (FDI) are investor-friendly. All these factors present a strong case for
investing in the Indian market.

Now, the Indian cement industry is on a roll. Riding on increased activity in real estate, cement
production has registered a growth of 9.28 per cent in April, 2008, at 14 million tones as against
11.41 million tones in the corresponding period a year ago.
The growth trend has been on for some time now. If these trends are anything to go by, it will not
be long before the sector will match the demand supply gap.
During the Tenth Plan, the industry, which is ranked second in the world in terms of production,
is expected to grow at 10 per cent per annum adding a capacity of 40-52 million tones, according
to the annual report of the Department of Industrial Policy and Promotion (DIPP). The report
reveals that this growth trend is being driven mainly by the expansion of existing plants and
using more fly ash in the production of cement.

ABOUT THE ORGANISATION

Shree Cement Limited is a Beawar based company, located in Rajasthan. The Company is a part
of the Bangur Group and was incorporated on 25th October1979, at Jaipur with a Vision: To
register strong consumer surplus through a superior cement quality at affordable price.
Commercial production commenced from 1st May1985 with a installed capacity of 6 lacs tones
per annum in Beawar dist. Ajmer, the capacity of this plant was upgraded to 7.6 lacs tones per
annum during 1994-95 by a modernization and up gradation programme.

In 1995 - The

Company undertook the implementation of new unit of 1.24 MT capacity per annum named "Raj
Cement. In 1997 The Company commissioned its second cement plant - Raj Cement with a
capacity of 12.4 lacs tones per annum adjacent to its existing plant in order to take full advantage
of its existing infrastructure and already developed captive mining lease enough to sustain a new
cement plan. The cumulative capacity was enhanced by de-bottlenecking and balancing
equipment in December 2001 to 2.6 MTPA. A product called Tuff Cemento has also launched
by the company in April 2007. At present company is producing over 100% capacity utilization,
it is the largest single location cement producer in north India (sixth in country).

COMPANY

PROFILE

COMPANY

SHREE CEMENT LTD.

INCORPORATION YEAR

1979

REGISTERED OFFICE

BANGUR NAGAR, BEAWAR, AJMER

(RAJASTHAN)

CORPORATE OFFICE

21, STRAND ROAD, KOLKATA

INDUSTRY

CEMENT MANUFACTURING

CHAIRMAN

B.G. BANGUR

MANAGING DIRECTOR

H.M. BANGUR

EXECUTIVE DIRECTOR

M.K. SINGHI

EQUITY CAPITAL

34.84 CRORES

FACE VALUE OF SHARE

10

EQUITY CAPITAL

34.84 CRORES

FACE VALUE OF SHARE

10

Cement Limited is one of the fastest growing Cement Companies in India. Presently
Shree Cement has 9.1 MTPA capacity in three plants (Shree in Beawar 2.6 MTPA, Ras in Pali
District 3 MT and Khushkhera capacity is 3.5 MTPA) The organization has performed
exceptionally well in the year 2007-08 increasing the PBT by 95% the reasons for this
remarkable achievement and key strengths of the company are discussed in the report. For
the last 18 years, it has been consistently producing many notches above the nameplate capacity.
The company retains its position as north Indias largest single-location manufacturer. Shrees
principal cement consuming markets comprise Rajasthan, Delhi, Haryana, Punjab, Uttar Pradesh
and Uttranchal. Shree manufactures Ordinary Portland Cement (OPC) and Portland Pozzolana
Cement (PPC). It has three brands under its portfolio viz., Shree Ultra Jung Rodhak Cement,
Bangur Cement and Tuff Cemento.
The Shree Vision

To be one of the Indias most respected enterprise through best-in-class performance and
leading by low carbon philosophy making it a progressive organization that all stakeholders
proud to deal with.
The Shree Mission
The company continues to be one of the most operationally efficient and energy conserving
cements producers in the world. Its mission statement is

To harness sustainability through low-carbon philosophy

To sustain its reputation as one of the most efficient manufacture globally.

To continually have most engaged team.

To continually add value to its products and operation meeting expectations of all its

stakeholders.

To continually build and upgrade skills and competencies of its human resource for

growth

To be a responsible corporate citizen with total commitment to communities in which

it operates and society at large.

Origin of the Company

Promoted by the Bangur Group, Shree Cements is the largest cement producer in Rajasthan. The
company has a total installed capacity of 6.825 million tonne (opc basis)The plants are
strategically located in central Rajasthan, from where it can cater to the entire Rajasthan market
as well as Delhi and Haryana. The company has about 100 sales offices spread across the states
of Rajasthan, Uttar Pradesh, Uttaranchal, Delhi, Haryana, Punjab and Jammu & Kashmir. Its
cement is marketed under the brand name of Shree Ultra Cement with different grades like 33,
43 and 53 and sub-brand names like "red oxide cement", "Jung Rodhak Cement", etc.

Shree Cement Ltd (SCL) is located at Beawer, Rajasthan, Indias largest cement producing state.
It was incorporated in 1979. Commercial production at its 0.6 million tones per annum (mtpa)
cement plant in Rajasthan commenced in May 1985. Three companies of the Bangur group
promoted SCL. These companies are Shree Digvijay Company Ltd, Graphite India Ltd and Fort
Gloster Industries Ltd. Over the years, SCL's capacity rose and touched 2 mtpa by 1997-98. Its
current cumulative installed capacity stands at 2.6 mtpa & in 2003-04 the company produced
2.84 million tones of
cement making it the largest single location cement producer in north India. It is operating at
over 100% capacity utilization.
Shree caters to cement demand arising in Rajasthan, Delhi, Haryana, UP and Punjab. What is
strategic for SCL is that it is located in central Rajasthan so it can cater to the entire Rajasthan
market with the most economic logistics cost. Also, Shree Cement is the closest plant to Delhi
and Haryana among all cement manufacturers in its state and proximity to these profitable
cement markets renders the company an edge over other cement companies of the company in
terms of lower freight costs. Shrees total captive power plant capacity today stands at 101.5
MW. In 2000-01, the company has succeeded in substituting conventional coke with 100 per cent
pet coke, a waste from refineries, as primary fuel resulting in lower inventory and input costs. In
the past two years the price of coal has gone up. Earlier dependent on good quality imported
coal, the company's switch to pet coke could not have come at a better time. The company also
replaced indigenous refractory bricks with imported substitutes, reducing its consumption per
tonne of clinker. The company has one of the most energy efficient plants in the world. The
captive plant generates power at a cost of Rs 4.5 per unit (excluding interest and depreciation) as
compared to over Rs 5 per unit from the grid. In appreciation of its achievements in Energy
sector, the Company has been awarded the prestigious 'National Energy Conservation Award" for

the year 1997. Shree is rated best by Whitehople man, an international agency specializing in the
rating of cement plants.

MULTIPLE COMPETITIVE BRANDS

Incisive execution of Shrees multiple competitive brand strategy has been delivering results
along anticipated lines. Consistency in brand strategy is helping Shree to sustain its brands
having lasting impression among its consumers.
The steady growth in Shreee volume especially year-on year in the last two fiscals, testifies to
the effectiveness of its multi brand marketing strategy.

SHREE ULTRA
Launched in 2002, Shree Ultra was the companys first brand, the first manifestation of Shrees
strategic move from commodity to brand marketing.
Its generic OPC version has been joined by a variant, Shree Ultra Jung Rodhak, on the functional
differentiator of rust prevention. Together the two variance have made Shree Ultra the flagship
brand of the company, contributing half of the Shrees total sales.
The brand was launched with powerful media and promotional support, the imaginative
advertising and the momentum has clearly sustained its growth over time.
Today it is present all of Shree Cements market territories. In 07-08 it chalked up its highest
volumes in the home market of Rajasthan, and in the NCR, the main focus of the construction
boom in north India.
Overall, Shree Ultra volumes reflects its acceptance by professional influencers. Which in turn
facilities acceptance by domestic consumers. Their support, as well as sustained local
promotions, has helped to improve brand recall, and prepared the ground for fresh initiatives in
the market place.

BANGUR CEMENT
Bangur Cement was launched in 2006 as a premium brand, competitive with best in the market
designed to full fill user aspiration for high quality construction, the brand tagline reflects its
promise of top-of-market value: Sasta Nahi, Sabse Achcha.
Given the premium profile design for it the brand is supported by a matching network of
business partners and business associates carefully selected for the track record in selling to high
end market segment.
Its early successes are founded on a two tier marketing and distribution programme. At one level
Shrees field forts takes the trades in to the confident with transparent terms and tested and
proven promotional offrings.
On a more exclusive level, it deploys special teams of highly professional technical sales experts
t conduct direct, one on one interaction with opinion builders and influencers if high standing
among the fraternity of respected construction space list.
Bangur Cement has achieved 95% of its total sales in the trade segment. It has made selective
penetration in both urban and rural markets. Bangur cement maintained its zero outstandings
status in this year as well.
TUFF CEMENTO
This is the latest brand offering from Shree Cement, directed at a highly competitive niche
market, with aggressive and establish competitors.
It has been position as rock strong- on the promise of high performance, able to withstand
exceptionally harsh environmental conditions.
Launched in the first month of the year under review, Tuff Cemento was able to secure a network
of the 1000 dynamic and resourceful dealers in a record time of about four months.

The brand is consolidated its position in the market, and the making further headway in
Rajasthan, Delhi, Haryana, parts of south Punjab and Western U.P.
While its current status would otherwise be regarded as reasonable. Tuff Cemento has an
altogether more ambitious agenda: to be aggressively competitive and become a leading brand in
the coming months, and to enable Shree Cement to achieve the maximum possible combined
market share in its market.

The Cement Industry Structure

Presently the total installed capacity of Indian Cement Industry is more than 175 mn tones per
annum, with a production around 168 mn tones . The whole cement industry can be divided into
Major cement plants and Mini cement plants.
Major Cement Plants:

Plants : 140

Typical installed capacity

Per plant : Above 1.5 mntpa

Total installed capacity : 170 mntpa

Production 07-08: 161 mntpa

All India reach through multiple plants

Export to Bangladesh, Nepal, Sri Lanka, UAE and Mauritius

Strong marketing network, tie-ups with customers, contractors

Wide spread distribution network .

Sales primarily through the dealer channel

Mini Cement Plants:

Nearly 300 plants & Located in Gujarat, Rajasthan, MP mainly

Typical capacity < 200 tpd

Installed capacity around 9 mn. Tones

Production around : 6.2 mn tones

Mini plants were meant to tap scattered limestone reserves. However most set up in

AP

Most use vertical kiln technology

Production cost / tonne - Rs. 1,000 to 1,400

Presence of these plants limited to the state

Infrastructural facilities not the best

Regional division
The Indian cement industry has to be viewed in terms of five regions:-

North (Punjab, Delhi, Haryana, Himachal Pradesh, Rajasthan, Chandigarh, J&K and

Uttranchal);

West (Maharashtra and Gujarat);

South (Tamil Nadu, Andhra Pradesh, Karnataka, Kerala, Pondicherry, Andaman &

Nicobar and Goa);

East (Bihar, Orissa, West Bengal, Assam, Meghalaya, Jharkhand and Chhattisgarh);

and

Central (Uttar Pradesh and Madhya Pradesh).

POLICIES
Quality Policy:

To provide products conforming to national standards and meeting customers

requirements to their total satisfaction.

To continually improve performance and effectiveness of quality management system

by setting and reviewing quality objectives for:

Customer Satisfaction

Cost EffectivenessSs

Energy Policy:

To reduce to the maximum extent possible the consumption of energy without

imparting productivity which should help in:

Increase in the profitability of the company

Conservation of Energy

Reduction in Environmental pollution at energy producing areas Since Energy is

Blood of Industry, It is the responsibility of all of us to utilize energy effectively and efficiently

Environment Policy:
To ensure :

Clean, green and healthy environment

Efficient use of natural resources, energy, plant and equipment

Reduction in emissions, noise, waste and greenhouse gases

Continual improvement in environment management

Compliance of relevant environmental legislation

Water Policy:

To provide sufficient and safe water to people & plant as well as to conserve water, we

are committed to efficient water management practices viz,

Develop means & methods for water harvesting

Treatment of waste discharge water for reuse

Educate people for effective utilization and conservation of water

Water audit & regular monitoring of water consumption

Health & Safety Policy:

To ensure good health and safe environment for all concerned by:

Promoting awareness on sound health and safe working practices

Continually improving health and safety performance by regularly setting and

reviewing objectives & Targets

Identifying and minimizing injury and health hazards by effective risk control

measures

Complying with all applicable legislations and regulations

Human Resource Policy:

We at Shree Cement are committed to

Empower People

Honour individuality

Non discrimination in recruitment process

Develop Competency

Employees shall be given enough opportunity for betterment

None of the person below the age of 18 years shall be engaged to work

Incidence of Sexual Harassment shall be viewed seriously

Statute enacted shall be honoured in letter & spirit & standard Labour Practices shall

be followed. Every employee shall be accountable to the law of the land & is expected to follow
the same without any deviation

Management will appreciate observance of Business ethics & professional code of

conduct

To follow safety & Health. Quality, Environment, Energy Policy

IT Policy:
To provide a robust IT platform suitable to the business processes and integrated management
practices of the company, resulting into better speed, efficiency, transparency, internal controls
and profitability of business

COST OF CAPITAL

The main objective of a business firm is to maximize the wealth of its shareholders in the longrun, 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. The cost of equity and cost of debt are the rate of
return that need to be offered to those two groups of suppliers of the of capital in order to attract
funds from them.

The primary function of every financial manager is to arrange adequate capital for the firm. A
business firm can raise capital from various sources such as equity and or preference shares,
debentures, retain earning etc. This capital is invested in different projects of the firm for
generating revenue. On the other hand, it is necessary for the firm to pay a minimum return to
each source of capital. Therefore, each project must earn so much of the income that a minimum
return can be paid to these sources or supplier of capital. What should be this minimum return?
The concept used to determine this minimum return is called Cost of Capital. On the basis of it
the management evaluates alternative sources of finance and select the optimal one. In this
chapter, concepts and implications of firms cast of capital, determination of cast of difference
sources of capital and overall cost of capital are being discussed.

CONCEPT OF COST OF CAPITAL

Cost of capital is the measurement of the sacrifice made by investors in order to invest with a
view to get a fair return in future on his investments as a reward for the postponement of his
present needs. On the other hand form the point of view of the firm using the capital, cast of
capital is the price paid to the investor for the use of capital provided by him. Thus, cost of
capital is reward for the use of capital. Author Lutz has called itBORROWING AND
LANDING RATES. The borrowing rates means the rate of interest which must be paid to
obtained and use the capital. Similarly, landing rate is the rate at which the firn discounts its
profits.It may also the opportunity cost of the funds to the firm i.e. what the firm would earn by
investing these funds elsewhere. In practice the borrowing rates used indicate the cost of capital
in preference to landing rates.

Technically and Operationally, the cost of capital define as the minimum rate of return a firm
must earn on its investment in order to satisfy investors and to maintain its market value. I.e. it is
the investors required rate of return. Cost of capital also refers to the discount rate which is used
while determining the present value of estimated future cash flows. In the other word of John J.
Hampton, The cost of capital is the rate of return in the firm requires from investment in
order to increase the value of firm in the market place. For example if a firm borrows Rs. 5
crore at an interest of 11% P.A., then the cost of capital is 11%. Hear its 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. Solomon Ezra, has called It the minimum required rate of return or the cut
of rate for capital expenditure.

FEATURES OF COST OF CAPITAL

It is not a cost in reality the cost of capital is not a cost as such, but its rate of return which it
requires on the projects.

MINIMUM RATE OF RETURN

Cost of capital is the minimum rate of return a firm is required in order to maintain the market
value of its equity shares.

REWARDS FOR RISKS

Cost of capital is the reward for the business and financial risk. Business risks is the
measurement of variability in profits due to changes un sales, while financial risks depends on
the capital structure i.e. that equity mix of the firm.

SIGNIFICANCE OF CONCEPT OF COST OF CAPITAL

The cost of capital is very important concept in the financial decision making. The progressive
management always likes to consider the cost of capital while taking financial decisions as its
very relevant in the following spheres...
1.Designing the capital structure: the cost of capital is the significant factor in designing a
balanced an optimal capital structure of a firm. While designing it, the management has to
consider the objective of maximizing the value of the firm and minimising cost of capita. I
comparing the various specific costs of different sources of capital, the financial manager can
select the best and the most economical source of finance and can designed a sound and balanced
capital structure.
2.Capital budgeting decisions: the cost of capital sources as a very useful tool in the process of
making capital budgeting decisions. Acceptance or rejection of any investment proposal depends
upon the cost of capital. A proposal shall not be accepted till its rate of return is greater then the
cost of capital. In various methods of discounted cash flows of capital budgeting, cost of capital
measured the financial performance and determines acceptability of all investment proposals by
discounting the cash flows.

3.Comparative study of sources of financing: there are various sources of financing a project.
Out of these, which source should be used at a particular point of time is to be decided by
comparing cost of different sources of financing. The source which bears the minimum cost of
capital would be selected. Although cost of capital is an important factor in such decisions, but
equally important are the considerations of retaining control and of avoiding risks.

4.Evaluations of financial performance of top management: cost of capital can be used to

evaluate the financial performance of the top executives. Such as evaluations can be done by
comparing actual profitability of the project undertaken with the actual cost of capital of funds
raise o finance the project. If the actual profitability of the project is more then the actual cost of
capital, the performance can be evaluated as satisfactory.

5.Knowledge of firms expected income and inherent risks: investors can know the firms
expected income and risks inherent there in by cost of capital. If a firms cost of capital is high, it
means the firms present rate of earnings is less, risk is more and capital structure is imbalanced,
in such situations, investors expect higher rate of return.

6.Financing and Dividend Decisions: the concept of capital can be conveniently employed as a
tool in making other important financial decisions. On the basis, decisions can be taken regarding
dividend policy, capitalization of profits and selections of sources of working capital.

CLASSIFICATION OF COST OF CAPITAL

1.Historical Cost and future Cost
Historical Cost represents the cost which has already been incurred for financing a project. It is
calculated on the basis of the past data. Future cost refers to the expected cost of funds to be
raised for financing a project. Historical costs help in predicting the future costs and provide an
evaluation of the past performance when compared with standard costs. In financial decisions
future costs are more relevant than historical costs.

2.Specific Costs and Composite Cost

Specific costs refer to the cost of a specific source of capital such as equity share. Preference
share, debenture, retain earnings etc. Composite cost of capital refers to the combined cost of
various sources of finance. In other words, it is a weighted average cost of capita. It is also
termed as overall costs of capital. While evaluating a capital expenditure proposal, the
composite cost of capital should be as an acceptance/ rejection criterion. When capital from more
than one source is employed in the business, it is the composite cost which should be considered
for decision-making and not the specific cost. But where capital from only one source is
employed in the business, the specific cost of those sources of capital alone must be considered.
3. Average Cost and Marginal Cost
Average cost of capital refers to the weighted average cost of capital calculated on the basis of
cost of each source of capital and weights are assigned to the ratio of their share to total capital
funds. Marginal cost of capital may be defined as the Cost of obtaining another rupee of new
capital. When a firm raises additional capital from only one sources (not different sources), than
marginal cost is the specific or explicit cost. Marginal cost is considered more important in
capital budgeting and financing decisions. Marginal cost tends to increase proportionately as the
amount of debt increase.
4. Explicit Cost and Implicit Cost
Explicit cost refers to the discount rate which equates the present value of cash outflows or value
of investment. Thus, the explicit cost of capital is the internal rate of return which a firm pays for
procuring the finances. If a firm takes interest free loan, its explicit cost will be zero percent as
no cash outflow in the form of interest are involved. On the other hand, the implicit cost
represents the rate of return which can be earned by investing the funds in the alternative
investments. In other words, the opportunity cost of the funds is the implicit cost. Port field has
defined the implicit cost as the rate of return with the best investment opportunity for the firm
and its shareholders that will be forgone if the project presently under consideration by the firm
were accepted. Thus implicit cost arises only when funds are invested somewhere, otherwise
not. For example, the implicit cost of retained earnings is the rate of return which the shareholder
could have earn by investing these funds, if the company would have distributed these earning to

them as dividends. Therefore, explicit cost will arise only when funds are raised whereas implicit
cost arises when they are used.

Assumption of Cost of Capital

While computing the cost of capital, the following assumptions are made:

The cost can be either explicit or implicit.

The financial and business risks are not affected by investing in new
investment proposals.

The firms capital structure remains unchanged.

Cost of each source of capital is determined on an after tax basis.

Costs of previously obtained capital are not relevant for computing the
cost of capital to be raised from specific source.

Computation of specific costs

A firm can raise funds from different sources such as loan, equity shares, preference shares,
retained earnings etc. All these sources are called components of capital. The cost of capital of
these different sources is called specific cost of capital. Computation of specific cost of capital
helps in determining the overall cost of capital for the firm and in evaluating the decision to raise
funds from a particular source. The computation procedure of specific costs is explained in the
pages that follow

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 aftertax 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. Traditionally, tax
savings that occur because interest is deductible while equity payout is not have been modeled as
a primary benefit of debt. Large firms with tangible assets and few growth options tend to use a
relatively large amount of debt. Firms with high corporate tax rates also tend to have higher debt
ratios and use more debt incrementally. A company will use various bonds, loans and other forms
of debt, so this measure is useful for giving an idea as to the overall rate being paid by the
company to use debt financing. The measure can also give investors an idea as to the riskiness of
the company compared to others, because riskier companies generally have a higher 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 earnws less than this interest
rate (12%) than the income available to the shareholders will be redused 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. But, to know the real cost of debt, the relation of the
interest rate is to be established with the actual amount realised or net proceeds from the issue of
debentures.

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))
The before tax rate of interest can be calculated as below:

Interest Expense of the company

100

----------------------------------------

Total Debt

Net Proceeds:

1. At par

= Par value Floatation cost

2. At premium

= Par value + Premium Floatation cost

3. At Discount

= Par value Discount Floatation cost

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--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).

COST OF EQUITY SHARE CAPITAL

The computation of cost of euity share capital is relatively diffiult because nether the rate of
dividend is predetermind nor the payment of dividend is legally binding, therefore, some
financial experts hold the opinion the p.s capital does not carry any cost but this is not true.
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
excisting 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 atleast
so much income that the market price of its ecisting share remains unchanged. This expected

minimum rate of return is the cast o equity share capital. Thus, cost of equity sahre capital may
be define as the minimum rate of return that a firm must earn on the equity financed portion of a
investment- project in order to leave unchanged the market price of its shares. The cost of equity
can be computed by any of the following method:

1. Dividend yield method:

Ke = DPS\mP*100
Ke= cost of equity capital
Dps= current cash dividend per share
Mp=current market price per share

2. Earning yield method:

Ke= EPS\mp*100
Eps= earning per share

3.

Divideng yield plus growth in dividend method:

While computing cost of capital under dividend yield(d\p ratio)method, it had been asumend that
present rate of dividend will remail the same in future also. But, if the management astimates that
companies prestnet dividend will increased continuisly for the year to come, then adjustment for
this increase is essential to compute the cost of capital.
The growth rate in dividend is assumed to be equal to the growth rate in earning per share. For
example if the EPS increase at the rate of 10% per year, the DPS and market price per share
would show an increase at the rate of 10%. Therefore, under this method, cost of equity capital is

computed by adjusting the present rate of dividend on the basis of expected future increase in
companys earning.

Ke= DPS\MP*100+G
G= Growth rate in dividend.
4. Realised yield methd:
In case where future dividend and market price are uncertain, it is very difficult to estimate the
rate of return on investment. In order to overcome this difficulty, the average rate of return
actually relise in the past few year by the investors is used to determine the cost of capital. Unddr
this method, the realised yield is discounted at the present value factor, and then compare with
value of investment this method is based on these assumptions. The companys risk doe not
change i.e. dividend and growth rate are stable.
The alternative investment opportuinities, elsewhere for the investor, yield the return wshich is
equal to realised yiels in the company, and
The market of equity share of the company does not fluctuate widly.

Cost of newly issued equity shares

when new equity share are issued by a company, it is not possible to realise the marlet price per
share, because the company has to incur some expenses on new issue, including underwriting
commission, brokerage etc. so, the amount of net proceeds is calculated by deducting the issue
expenses form the expected marlet value or issue price. To acertain the cost of capital, dividend
per share or EPS is divided by the amount of net proceeds. Any of the following formulae may
be used for this purpose:

Ke= DPS\NP*100
Or
Ke= EPS\NP*100
Or
Ke=DPS\NP*100+G

COST OF RETAIN EARNINGS OR INTERNAL EQUITY

Generally, compnays do not distribute the entire profits by way of dividend among their share
holders. A part of such profit is reatianed for future expantion and development. Thus year by
year, companies create sufficiat fund fior the fianancing thrugh internal sources. But , nether the
company pays any cost nor incur any expenditure for such funds. Therefore, it is assumed to cost
free capital that is not true. Though ratain earnings like retained earnings like equity funds have
no explicit cost but do have opportunity cost. The opportunity cost iof retained earnings is the
income forgone by the share holders. It is equal to the income what a share holders culd have
earn otherwise by investing the same in an alternative investment, If the company would have
distributed the earnings by way of dividend instead of retaining in the busieness. Therefore ,
every share holders expects from the company that much of income on ratined earnings for
which he is deprived of the income arising o its alternative investment. Thus, income forgone or
sacrifised is the cost of retain earnings which the share holders expects from the company.

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 projets is evaluated by comparing the
exprcted rate of return with overall cost of apital 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 sources 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 firms capital structure. It is also termed as
Composite Cost of Capital or Overall Cost of Capital or Average Cost of Capital.

WEIGHTED AVERAGE, How to calculate?

Though, the concept of weighted average cost of capital is very simple. Yet there are many
problems in its calculation. Its computation requires :

1.Assignment of Weights : First of all, weights have to be assigned to each source of capital for
calculating the weighted average cost of capital. Weight can be either book value weight or
market value weight. Book value weights are the relative proportion of various sources of
capital to the total capital structure of a firm. The book value weight can be easily calculated by
taking the relevant information from the capital structure as given in the balance sheet of the
firm. Market value weights may be calculated on the basic on the market value of different
sources of capital i.e. the proportion of each source at its market value. In order to calculate the
market value weights, the firm has to find out the current market price of each security in each
category. Theoretically, the use of market value weights for calculating the weighted average cost
of capital is more appealing due to the following reasons:

The market value of securities is closely approximate to the actual amount to be

received from the proceeds of such securities.

The cost of each specific source of finance is calculated according to the

prevailing market price.

But, the assignment of the weight on the basic of market value is operationally inconvenient as
the market value of securities may frequently fluctuate. Moreover, sometimes, no market value is
available for the particular type of security, especially in case of retained earnings can indirectly
be estimated by Gitmans method. According to him, retained earnings are treated as equity
capital for calculating cost of specific sources of funds. The market value of equity share may be
considered as the combined market value of both equity shares and retained earnings or
individual market value (equity shares and retained earnings) may also be determined by
allocating each of percentage share of the total market value to their respective percentage share
of the total values.

For example:- the capital structure of a company consists of 40,000 equity shares of Rs. 10 each
ad retained earning of Rs. 1,00,000. if the market price of companys equity share is Rs. 18, than
total market value of equity shares and retained earnings would be Rs. 7,20,000 (40,000* 18)
which can be allocated between equity capital and retained earnings as follows-

Market Value of Equity Capital = 7,20,000*4,00,000/5,00,000

=Rs. 5,76,000.
Market Value of Retained Earnings= 7,20,000*1,00,000/5,00,000
=Rs. 1,44,000.

2.Computation of Specific Cost of Each Source :

After assigning the weight; specific costs of each source of capital, as explained earlier, are to be
calculated. In financial decisions, all costs are after tax costs. Therefore, if any source has
before tax cost, it has to be converted in to after tax cost.

3.Computation of Weighted Cost of Capital :

After ascertaining the weights and cost of each source of capital, the weighted average cost is
calculated by multiplying the cost of each source by its appropriate weights and weighted cost of
all the sources is added. This total of weighted costs is the weighted average cost of capital. The
following formula may be used for this purpose :
Kw = XW/W
Here; Kw = Weighted average cost of capital
X = After tax cost of different sources of capital
W = Weights assigned to a particular source of capital

Example: Following information is available with regard to the capital structure of ABC Limited
:
Sources of Funds

Amount(Rs.)

After tax cost of Capital

E.S. Capital

3,50,000

.12

Retained Earning

2,00,000

.10

P.S. Capital

1,50,000

.13

Debentures

3,00,000

.09

You are required to calculate the weighted average cost of capital.

Computation of Weighted Average Cost of Capital
Source

Amount
Rs.

Weights

After

tax Weighted

Cost

Cost

(2)
(1)

(4)

(5)= (3) * (4)

(3)

E.S. Capital

3,50,000

.35

.12

.0420

Retained Earning

2,00,000

.20

.10

.0200

P.S. Capital

1,50,000

.10

.13

.0195

Debentures

3,00,000

.09

.09

.0270

Total

10,00,000

1.00

.1085

Weighted Average Cost of Capital (WACC)

.10850 or 10.85%

CALCULATION OF COST OF CAPITAL OF SHREE CEMENT LTD.

Cost of Debt Capital:
For the year 2008-09:
Total Debt Capital = Term loan from Banks + Debts
= 112573.18 + 800 = 113373.18 lacs
Total Interest Paid = 9636.72 lacs
Tax Rate = 30%

Interest Expense of the company

Kd (before tax)

--------------------------------------------

100

Total Debt
9636.72
Kd (before tax)

---------------------113373.18

100

8.50%

Kd (after tax)

Kd (after tax)

Interest Rate Before Tax Tax Rate ( 30%.)

8.50% - 30%

= 5.95%

For the year 2007-08

Total Debt Capital = Term loan from Banks + Debts

= 83427.02+1400 = 84827.02lacs
Total Interest Paid = 6573.02 lacs
Tax Rate

= 30%
6573.02

Kd (before tax)

----------------------

84827.02

Kd (after tax)

7.75% - 30%

= 5.42%

For the year 2006-07

Total Debt Capital = Term loan from Banks + Debts

= 28617.33+2000= 30617.33lacs

100

= 7.75%

Total Interest Paid = 2143.21lacs

Tax Rate

= 30%

2143.21
Kd (before tax)

----------------------

100

7%

30617.33

Kd (after tax)

7% - 30%

= 4.90%

COMPARATIVE CALCULATION OF Kd FOR THREE YEAR

Particular

2007-08

2006-07

Total Debts (Term loan from 112573.18+

83427.02+1

28617.33+

Bank+Debts)

800

400

2000

=113373.18

=84824.02

=30617.33

Total Interest paid

9636.72

6573.86

2143.21

Interest Rate (Before Tax)

8.50%

7.75%

7%

Interest Rate (After Tax)= Interest 5.95%

5.42%

4.90%

Rate Before Tax Tax Rate 30%.

2008-09

CEMENT

Cements are of two basic types- gray cement and white cement. Grey cement is used only for
construction purposes while white cement can be put to a variety of uses. It is used for mosaic
and terrazzo flooring and certain cements paints. It is used as a primer for paints besides has a
variety of architectural uses. The cost of white cement is approximately three times that of gray
cement. White cement is more expensive because its production cost is more and excise duty on
white cement is also higher. Shree cement does not manufacture white cement at present.