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INTRODUCTION
Jamsetji N. Tata founded Tata Steel in Jamshedpur in the year 1907. It operates in 26 countries
spread over five continents and is the world’s second most geographically diversified steel
producer having products and services in 150 countries. The vision is to be the global steel
industry benchmark for value creation and corporate citizenship. The focus of the company is on
high technology and productivity and considers ‘profitability as the main spark for economic
activity.
DECISION TO BE MADE
Ramesh is an intern in an investing company. He has the task of estimating Tata Steel’s cost of
capital. He considered RESERVES AND SURPLUS as cost free as they are generated from
profits and are not directly contributed by the shareholders. Regarding the cost of raising debt, he
considered that Tata Steel may be able to borrow at the prime lending rate or less as its term loan
rating is AA.
PROBLEMS/ISSUES ENCOUNTERED
FACTS
For funding capital structure, the Company strives to monetize its non-core assets regularly
and maximize the use of internal accruals.
Tata Steel’s gross profit has been growing continuously.
To calculate the Company’s cost of capital Ramesh thought, he should calculate cost of
shareholders’ funds (equity) and cost of debt.
FINANCIAL ANALYSIS
RATIO ANALYSIS
GROSS PROFIT RATIO- Gross profit ratio (GP ratio) is a profitability ratio that shows the
relationship between gross profit and total net sales revenue. The company, GP ratio has declined
in the year 2016 substantially to 12%. Though from 2013-2015 it resulted in an increase from 25%
to 27.91% and back to 25%. This depicts that earlier it had a good financial performance but now
have substantially declined.
RETURN ON EQUITY- The return on equity ratio or ROE is a profitability ratio that measures
the ability of a firm to generate profits from its shareholders investments in the company. From
2013 the ROE increased but in the year 2016 there was a sharp decline in the ROE. But in the year
2017 it recovered to some extent by jumping from 2.05% to 6.94%.
REGRESSION ANALYSIS
Regression Statistics
Multiple R 0.707297109
R Square 0.500269201
Adjusted R Square 0.498672617
Standard Error 95.01271338
Observations 315
Variance 3332402.85
Co - Variance 172986.09
Beta 0.05
COMMENTS:
R Square: R-squared is the “percent of variance explained” by the model. That is, R-squared is
the fraction by which the variance of the errors is less than the variance of the dependent
variable. (The latter number would be the error variance for a constant-only model, which
merely predicts that every observation will equal the sample mean.) It is called R-squared
because in a simple regression model it is just the square of the correlation between the
dependent and independent variables, which is commonly denoted by “r”. The company Square
is 0.50 and A fund with a low R-squared, at 70% or less, indicates the security does not generally
follow the movements of the index.
Beta: A beta coefficient is a measure of the volatility, or systematic risk, of an individual stock
in comparison to the unsystematic risk of the entire market. In statistical terms, beta represents
the slope of the line through a regression of data points from an individual stock's returns against
those of the market. The beta of the company is 0.05 and A company’s beta is a measure of the
volatility, or systematic risk, of a security compared to the broader market.
WACC ANALYSIS:
The weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which
each category of capital is proportionately weighted. All sources of capital, including common
stock, preferred stock, bonds, and any other long-term debt, are included in a WACC calculation.
The WACC is commonly referred to as the firm's cost of capital.
DATATABLE
13.40% 13.82%
1.25 12.68% 1.25 12.92% 0.24%
1.35 13.06% 1.35 13.40% 0.34%
1.45 13.43% 1.45 13.87% 0.44%
1.55 13.81% 1.55 14.34% 0.53%
1.65 14.19% 1.65 14.82% 0.63%
1.75 14.57% 1.75 15.29% 0.73%