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On
Cost Of Capital
Of Shree Cememt Limited
From:- CHETAN PRAKASH SANKHLA
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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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.
1. Designing the capital structure. 2. Capital budgeting decisions. 3. Comparative study of sources of financing. 4. Evaluations of financial performance of top management.
Costs of previously obtained capital are not relevant for computing the cost of capital to be raised from specific source.
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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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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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8.43
10.56
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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 firms capital structure.
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10.56 05.65
WACC = (We * Ke) + (Wd * Kd) WhereWe = Weight of equity Wd = Weight of Debt. Ke = Cost of Equity Share capital Kd = Cost of Debt. capital WACC = ( 0.8322 * 10.56) +( 0.1678 *05.65 ) = 9.74%
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Conclusion
Cost of Debt is decreased in 2009-10 as compared to 200809.
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Thank You
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