A.

6
Company 1- RELIANCE INDUSTRIES LTD.
Following are the sources of long term finance for the company:

SOURCES 2016-17 2017-18 2018-19

Equity Share Capital 2,959 5,922 5,926

Borrowings
Secured:
Non-Convertible Debentures 13,503 8,500 15,000
Term Loans - from Banks 5,394 6,065 4,699
Term Loans - from Others - - 383

Unsecured:
Non-Convertible Debentures 7,002 27,000 42,500
Bonds 44,232 41,242 43,786
Term Loans - from Banks 80,489 59,487 99,072
Term Loans – from Others 1.528 1,881 2,066
Total 1,52,148 1,44,175 2,07,506

Company 2- TATA POWER

Following are the sources of long term finance for the company:

Capital Structure 2018-19

Equity Share Capital
Issued, subscribed and fully paid up capital 270.50
Other Equity 3181.67
Non-Current Borrowings
Term loans 24303.76
Non-convertible Debentures 9925.48

A.7 RELIANCE INDUSTRIES LTD.

Cost of Debentures after tax
 FY 2018-19

Particulars Secured Unsecured

Debenture Amount 15000 42500

Tax Rate 30% 30%

Interest rate (averaging highest 8.36% [(7.97+8.75)/2) 8.015%

and lowest interest rates)

Cost of Debentures [interest =8.36(1-0.3) =8.015(1-0.3)

rate(1-tax rate)]
=5.852% = 8.015%

Cost of Equity Calculation using CAPM Model

 RF: (Calculated using 10-year Bond Yield Data)
Year Rf

2016-17 6.93%
 RM: 10.09%
BETA 2017-18 6.965%

2018-19 7.708%

FY 2016-17 FY 2017-18 FY 2018-19

0.73 1.17 1.51

 Return on Stock

Ri = Rf + B (Rm – Rf)

FY 2016-17 FY 2017-18 FY 2018-19

Ri = 6.93 + 0.73 (10.09 – 6.93 ) Ri = 6.965 + 1.17 (10.09 – Ri = 7.708 + 1.51 (10.09 –
6.965) 7.708 )

Ri = 9.2368 Ri = 10.62125 Ri = 11.305

Cost of preference shares

The cost of preference shares is NIL as the company has never issued preference shares although the
company is authorized to sell such shares.

Term Loan after Tax

FY 2018-19

Particulars Secured Unsecured

Term Loan Amount 5,082 1,01,138
Tax Rate 30% 30%
Interest Rate (Averaging 7.72% 8.39%
the highest and the
lowest rate)
Cost of term loan =7.72(1-0.3) =8.39(1-0.3)
[interest rate(1-tax rate)] =5.404% =5.873%

Calculation of Weighted Average Cost of Capital

FY 2018-19

Security (Equity / Amount Weight Rate (Percentage) Return

Debt) (Decimal) (Percentage)
 EQUITY 5,926 0.027765284 11.30482 0.313882

DEBT 207,506 0.972234716 8.69220649 8.450865

TOTAL 213,432 1 8.764746

 Cost of Bonds =
Interest rate (1-Tax rate)
Interest rate= (1.87+10.05)/2
=6.185%
Tax Rate= 30%
Cost of bonds= 6.185 (1-0.3)
=4.3295%

 Cost of Retained Earnings (Other Equity)

Here cost of retain earnings is equal to cost of equity
Sources Book Value Cost% Book
Value*Cost%
Equity 5926 11.305% 669.93
Debentures
-Secured 15000 5.852% 877.8
-Unsecured 42500 5.6105% 2384.47
Term Loan
-Secured 5082 5.404% 274.63
 -Unsecured 1,01,138 5.873% 5939.83
Bonds 43786 4.3295% 1895.71
Total 2,25,132 13436.28

Now using Weighted Average Cost of Capital

= (13436.28/225132)*100
=5.968%

TATA POWER

A. Cost of Debt

i. Cost of Debentures
As per the annual reports of the company the interest rates range between 8% to 10.75% pa.

Hence, we take an average interest rate as (8+10.75)/2 = 9.375%

Tax Rate is taken as 30%.

Cost of debentures

= [Interest Rate (1-Tax Rate) + {(Redemption Proceeds – Issue Proceeds)/No. of Years}] / [(Redemption
Proceeds + Issue Proceeds)/2]
= [9.375(1-0.3) + (100-100)] / [(100+100)/2]

= 6.56%

ii. Cost of Term Loan

As per the annual reports of the company the interest rates range between 8.5% to 9.45% pa.

Hence, we take an average interest rate as (8.5+9.45)/2 = 8.975%

Tax Rate is taken as 30%.

Cost of term loans = Interest Rate (1-Tax Rate)

= 8.975*(1-0.3)

= 6.28%

I. Cost of Preference Shares

The capital structure of the company does not contain preference shares.

Hence, cost of preference shares is Nil.

J. Cost of Equity
Return on Market = 15.58%

Risk Free Rate of Return = 7.708%

Beta = 0.973

Cost of Equity = Risk Free Rate of Return + Beta * (Return on Market – Risk Free Rate of Return)

= 7.708 + 0.973 * (15.58-7.708)

= 15.367%

K. Cost of Retained Earnings (Other Equity)

The cost of retained earnings is equal to the cost of equity i.e. 15.367%
Weighted Average Cost of Capital

Sources of Fund Book Value (Rs in Cost

crores) (%)
Equity Share Capital 270.50 15.367 (270.50*15.367%) =
41.567
Retained Earnings 3181.67 15.367 (3181.67*15.367%) =
488.927
Non-convertible 9925.48 6.56 (9925.48*6.56%) =
debentures 651.111
Term Loans 24303.76 6.28 (24303.76*6.28%) =
1526.276
37681.41 2707.881

Weighted average cost of capital = (2707.881/37681.41) * 100

= 7.186%

A.8
(a) Value of Debentures
Tata Power

Cost of Debenture (as per Q7) = 6.56%

C = 9.375% x 9925.48 = 930.51 Crs. per year

t = 60 years

Present value of annual payments = 930.51/(1.0656)1 + 930.51/(1.0656)2 + 930.51/(1.0656)3 + …………

930.51/(1.0656)60 = Crs.

Present value of face value = 9925.48/(1.0656)10 = 219.33 Crs.

Value of bond = Present Value of annual payments + Present value of face value.
Value of Bond = 219.33 + = Crs.

(b)Value of Stock

Formula (Gordon Growth Model)

P = D1/(Ke – g)

Where,

P = Value of the Stock

D1 = Dividend of the current year

Ke = Cost of Equity

g = Growth rate of dividend.

Tata Power

D1 = 1.55 / share

Ke = 16.84%

g = 8.98% (CAGR)

P = 1.55 / (0.1684 – 0.0898) = 19.72 Rs.