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ITC,[object Object],Brands,[object Object]
ITC,[object Object]
FOCUS,[object Object],Computation of,[object Object],Cost of Capital,[object Object],of ITC Ltd.,[object Object]
Data Analysts,[object Object],Divanshu Kapoor (91017)	                                                      Radhika Gupta (91041),[object Object],MadhusudhanPartani (91029),[object Object],Anika Gupta (91005) 	                                                  Manish TN Singh (91053),[object Object]
GLIMPSE,[object Object],market capitalization of nearly US $ 19 billion,[object Object],Employs over 26,000 people ,[object Object],corporate positioning statement,[object Object],"Enduring Value. For the nation. For the Shareholder.",[object Object],Ranks among India's `10 Most Valuable (Company) Brands',[object Object],turnover of over US $ 5 billion,[object Object],more than 3, 41,000 shareholders,[object Object],Asia's 50 best performing companies -Business Week.,[object Object],Asia's 'Fab 50',[object Object],60 locations across India,[object Object]
Financial Position,[object Object],Debt/Equity,[object Object], ,[object Object],The debt-to-equity ratio has been hovering around 0.02:1 since the past 7 years. This shows that investment is not risky in this firm as the company is not depends on debt financing. But is also implies that the firm has not leveraged at all.,[object Object], ,[object Object],Equity in the form of,[object Object], ,[object Object],The firm has Equity in form of Retained Earnings. The Shares comprise of Equity shares of Re 1 each. Total No. of shares as on 31st of March 2009 were Approx 377.44 Crores. And the Retained earnings comprises of Rs. 13650.72 Crs. Also the Company issues ESOPs (Employee Stock Option Plans) Regularly.,[object Object], ,[object Object]
Financial Position,[object Object],Cash flows,[object Object], ,[object Object],The net turn-over grew by 10.3 %, driven by a robust 20% growth in the non-cigarette FMCG business. The Company’s relentless efforts to create value through international quality products, significant investments in technology and product development and a strong portfolio of brands have enabled it to maintain its leadership position in terms of market standing and share.,[object Object],Segment revenues in FMCG (Others) grew by 20% over last year and Education & Stationery Products business registered an impressive sales growth of 60% over the previous year.,[object Object]
Financial Position,[object Object],summarized financials,[object Object]
Financial Position,[object Object],key ratios,[object Object]
Cost of Debt,[object Object],Long Term Debt = 46.365,[object Object]
Cost of Debt,[object Object],Ignored,[object Object]
Cost of Debt,[object Object],INTEREST : the interest paid on Term Loans is as on 31st March, 2009 is 9.47 	       Crores.,[object Object],TAX RATE: Tax rates taken for computation of cost of debt are 32.60% for 	       the year 2009. In the previous year, tax rate was 32.02% 1,[object Object],ASSUMPTION : the assumption has been made that the loan has been  	             	raised at middle of the year. Thus Interest is calculated on 		the average of Opening and closing balance of loans.,[object Object]
Cost of Debt,[object Object],Computation of Cost of Debt,[object Object], Kd = Long Term Interest / Long Term Debt,[object Object],Kd = 9.47/46.365 = 20.42%,[object Object],            20.42 X (1 – t) ,[object Object],             =  20.42 X (1 – 0.32),[object Object],=      13.89 %,[object Object], ,[object Object]
Cost of Equity,[object Object],Regression Equation ,[object Object],Y= 0.000349752 + 0.652006636X,[object Object]
Cost of Equity,[object Object],The value of the intercept (α=0.000349752) shows that the security provides a return of 0.000349752% when there is no movement in the market i.e. x=0. Also, The value of the slope (β=0.652006636) reflects the sensitivity of stock returns as 0.652006636 times the market returns.,[object Object]
Pure Play Approach,[object Object],Why Use It ???,[object Object],ITCis engaged in multiple businesses  (ITC has 4+SBU),[object Object],Each business has different risks and operates in different environments ,[object Object],A Firm has: ,[object Object],[object Object]
Financial Risks   (  Due to its capital structure  )So we neutralize the financial risk and only take the business risk of the Proxy firm into consideration,[object Object]
β Calculations  ,[object Object]
Capital Employed in business segments of ITC Ltd,[object Object],Beta of ITC ,[object Object],(  βITC) = (0.51*0.26) + (0.574*0.176) + (0.544*0.18) + (0.522*0.084) +(0.358*0.3),[object Object],= 0.49,[object Object]
				Cost of Equity,[object Object],	Cost of equity = Rf+ (Rm - Rf)*βL ,[object Object]
   Dividend Capitalization Model,[object Object],Cost of Equity  (Re)  =   D1  +  g,[object Object],                                       P0,[object Object],P0 =  Market Price per share as on 31 March 2009,[object Object],Re = 5.69( 1 + 0.1255 ) + 0.1255,[object Object],              208.65,[object Object],     = 15.6%,[object Object]
Computation of WAAC,[object Object]
Analysis and Conclusions,[object Object],[object Object]
The cost of equity is almost similar to overall Cost of Capital.

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Cost of Capital ITC

  • 1.
  • 2.
  • 3.
  • 4.
  • 5.
  • 6.
  • 7.
  • 8.
  • 9.
  • 10.
  • 11.
  • 12.
  • 13.
  • 14.
  • 15.
  • 16.
  • 17.
  • 18.
  • 19.
  • 20.
  • 21.
  • 22.
  • 23.
  • 24. The cost of equity is almost similar to overall Cost of Capital.
  • 25. The Beta Using CAPM and Beta Using Pure Play are almost similar; there
  • 26. is a bit difference between both implying that the risks of individual SBUs are not similar to the overall risk assumed by the ITC.
  • 27.
  • 28. The Cost of Capital tends to be lower i.e... In the range of 14% - 16%, this implies that the companies have a very low cut off point for any new and existing project.
  • 29.

Editor's Notes

  1. NOTE: Mention about the comparision of Proxy companies & the market indexes usedTax rate for pure play firms  33.99% (as per the Income Tax Act, 1961)Tax rate for ITC  32%Assumptions madeCapital employed in each business segment of ITC Ltd. = Segment Assets – Segment Liabilities. At the time of relevering beta (β) of each pure play firm to reflect the financial risk of ITC Ltd., the Debt-Equity ratio of entire ITC Ltd is used.
  2. NOTE: The Market value is considered based on Share price as on 31st March 2009 i.e. Market Capitalization.