1. NIRMA LIMITED-Cost of Capital
Nirma’s Cost of Equity
(Fig. in Rs. Cr. ) Mar '07 Mar '08
Equity Share Capital 79.57 79.57
Preference Share Capital 2.79 2.79
Reserves 2,347.42 2,502.62
Revaluation Reserves 0 0
Net worth 2,429.78 2,584.98
Calculation of Ke:
Ke= Rf + β (Rm-Rf)
Rf= 4.5056% (364 day T-bills, cut-off at the last auction , Source: http://www.rbi.org.in/home.aspx)
Rm= 15 % (Considering India’s growing Soda Ash and Detergent Industry)
β= 0.66 (Taking from last assignment based on last one year price data)
 Ke= 4.5 % + 0.66 x (15 %- 4.5%)= 11.43%
Nirma’s Cost of Debt
Nirma Ltd. (Rs. Crore) Mar-07 Mar-08
Bank borrowings 239.15 182.54
Short term bank borrowings 239.15 182.54
Long term bank borrowings 0 0
Total Secured borrowings (in Rs. Crores) 239.15 182.54
Short-term loans from banks in foreign currency 43.57 87.94
Non-Convertible debentures 0 140
Borrowings from corporate bodies 41.12 33.37
Deferred credit 0.96 0.04
Total Unsecured borrowings (in Rs. Crores) 85.65 261.35
Total borrowings 324.8 443.89

2. Calculation of Kd:
1st Method: By Interest Expense
Interest= Rs. 23.31 Crore
Average Debt for the year 2006-07 and 2007-08 = Rs .384.345 Crore
Interest rate = Interest / Average Debt= 6.06 %
Tax Rate = 34 % ( Indian Corporate Tax rate)
Kd= 6.06 % x (1- 0.34) = 4 %
2nd Method: By contribution of each debt
Nirma Ltd. (Rs. Crore) Weighted
Mar-08 Weightage Interest Rates Interest
Rates
Bank borrowings 182.54
Short term bank borrowings 182.54 0.41 13%* 0.05
Long term bank borrowings 0
Secured borrowings (in Rs. Crores) 182.54
Short-term loans from banks in foreign currency 87.94 0.20 1.89%** 0.37
Non-Convertible debentures # 140 0.32 7.84%*** 2.47
Borrowings from corporate bodies 33.37 0.08 10% 0.01
Deferred credit 0.04 0.00 4% 0.00
261.35
Total borrowings 443.89 2.91
* PLR (Source: http://www.rbi.org.in/home.aspx)
** LIBOR rates- 1 year (The interest is fixed with a reasonable spread over LIBOR, Source http:// www.
ucobank.com /internationalbanking.htm)
***MIBOR rate for 3 Month (Source: http://www.nse-india.com/marketinfo/eod_information /bidbor
.jsp)
# The Floating Rate Non-Convertible Debentures were redeemable with interest on the expiry of 364 days from the deemed date
of allotment. However the investor/ company were given the option to put/call the FRNCD any day from the date of allotment.
These FRNCD were all privately placed debentures.
Kd= 2.91 x (1-0.34) = 2%

3. Considering the above two cost of debt ( by interest expense and by contribution by each debt), I consider
the cost of debt by interest expense more accurate for the following reasons:
This figure (interest rate paid) was indicated by the annual report of the company.
The interest rates of individual debts vary over time and can increase or decrease in future. The
above figures are taken on a conservative basis with the current LIBOR and MIBOR rates. So, the
figure of 2% is more on the conservative side.
 Kd= 4%
Market value of Equity:
No. of shares = 15.91 Crores
Price/ Share ( as on 20.2.2009) = Rs. 96.05
Market Capitalization = Rs. 1528.155 Crores
Reserves = Rs. 2,502.62 Crores
Total Market Value of Equity = Rs. 4030.77 Crores
Market Value of Debt:
The FRNCD were all privately placed debentures and hence no current data is available on the net. Due to
this limitation, we assume the Market Value of Debt to be same as the Book Value.
Total Market Value of Debt = Rs. 443.89 Crores
Market Value of Preference Shares:
Preference Shares Issued = 2,79,285 Shares
Market Value of each share ( as on 20.2.2009) = Rs. 96.05
 Total Market Value of Preference Shares = Rs. 2. 68 Crores

4. WACC According to Market Value
Kc = Ke*Pe + Kd*Pd + Kps*Pps
Ke= 11.43%
Kd= 4%
Kps= 6%
Pe= 0.90
Pd= 0.099
Pps= 0.0066
 Kc = 10.72 %
Book Value of Equity
Market Capitalization = Rs. 79.57 Crores
Reserves = Rs. 2,502.62 Crores
Total Book Value of Equity = Rs. 2582.19 Crores
Book Value of Debt:
Total Book Value of Debt = Rs. 443.89 Crores
Book Value of Preference Shares:
Preference Shares Issued = 2,79,285 Shares
Face Value of each share =Rs. 100

5.  Total Book Value of Preference Shares = Rs. 2. 79 Crores
WACC According to Book Value
Kc = Ke*Pe + Kd*Pd + Kps*Pps
Ke= 11.43%
Kd= 4%
Kps= 6%
Pe= 0.85
Pd= 0.146
Pps= 0.0009
 Kc = 10.30 %

6. Henkel India-Peer
Henkel’s Cost of Equity
(Fig. in Rs. Cr. ) Mar '07 Mar '08
Equity Share Capital 116.46 116.46
Preference Share Capital 68 68
Reserves 27.39 37.86
Revaluation Reserves 0 0
Net worth 211.85 222.32
Calculation of Ke:
Ke= Rf + β (Rm-Rf)
Rf= 4.5056% (364 day T-bills, cut-off at the last auction , Source: http://www.rbi.org.in/home.aspx)
Rm= 15 % (Considering India’s growing Soda Ash and Detergent Industry)
β= 1.05 (Taking from CMIE-PROWESS. This company is making losses presently and hence the higher
value is considered.)
 Ke= 4.5 % + 1.05 x (15 %- 4.5%)= 15.525%
Henkel’s Cost of Debt
Henkel India Ltd. ( All Fig. in Rs. Crore) Dec 2006 Dec 2007
Secured borrowings 15.55 10.18
Unsecured borrowings 171.13 282.1
Bank borrowings 186.68 292.28
Short term bank borrowings 186.68 292.28
Calculation of Kd:
1st Method: By Interest Expense
Interest= Rs. 22.27 Crore
Average Debt for the year 2006-07 and 2007-08 = Rs .239.48 Crore
Interest rate = Interest / Average Debt= 9.30 %
Tax Rate = 34 % (Indian Corporate Tax rate)

7. Kd= 9.30 % x (1- 0.34) = 6.14 %
2nd Method: By contribution of each debt
Henkel India Ltd. ( All Fig. in Rs. Dec Weightage Interest Weighted Interest
Crore) 2007 Rates Rates
Secured borrowings 10.18
Unsecured borrowings 282.1
Bank borrowings 292.28 1 13%* 13%
Short term bank borrowings 292.28
* PLR (Source: http://www.rbi.org.in/home.aspx)
Kd= 13% x (1-0.34) = 8.58%
Considering the above two cost of debt ( by interest expense and by contribution by each debt), I consider
the cost of debt by interest expense more accurate for the following reasons:
This figure (interest rate paid) was indicated by the annual report of the company.
The interest rates of individual debts vary over time and can increase or decrease in future. The
current bank lending rates are 13%. However, the company might have negotiated well for the
loan with the corresponding reduction to around 9% (average cost of debt).
 Kd= 6.14%
Market value of Equity:
No. of shares = 11.64 Crores
Price/ Share ( as on 20.2.2009) = Rs. 11.54
Market Capitalization = Rs. 134.32 Crores
Reserves = Rs. 37.86 Crores

8. Total Market Value of Equity = Rs. 172.18 Crores
Market Value of Debt:
Debt is short term borrowings from banks. Hence market value is same as book value
Total Market Value of Debt = Rs. 292.28 Crores
Market Value of Preference Shares:
Preference Shares Issued = 6.80 Crores
Market Value of each share ( as on 20.2.2009) = Rs. 78.472 Crores
 Total Market Value of Preference Shares = Rs. 78.472 Crores
WACC According to Market Value
Kc = Ke*Pe + Kd*Pd + Kps*Pps
Ke= 15.525%
Kd= 6.14%
Kps= 6% (2.8 Crore Shares with 9% and 4 Crores Shares with 4%)
Pe= 0.317
Pd= 0.538
Pps= 0.144
 Kc = 9.08 %

9. Book Value of Equity
Market Capitalization = Rs. 116.46 Crores
Reserves = Rs. 37.86 Crores
Total Book Value of Equity = Rs. 154.32 Crores
Book Value of Debt:
Total Book Value of Debt = Rs. 292.28 Crores
Book Value of Preference Shares:
Preference Shares Issued = 6.8 Crore Shares
Face Value of each share =Rs. 10
 Total Book Value of Preference Shares = Rs. 68 Crores
WACC According to Book Value
Kc = Ke*Pe + Kd*Pd + Kps*Pps
Ke= 15.525%
Kd= 6.14%
Kps= 6% (2.8 Crore Shares with 9% and 4 Crores Shares with 4%)
Pe= 0.3
Pd= 0.56
Pps= 0.14
 Kc = 8.94 %

10. Conclusions:
Wacc Nirma Henkel
Market value 10.72% 9.08%
Book Value 10.30% 8.94%
 The cost of capital for both the companies is higher when calculated as per the Market Value
method as the market value of equity is higher than the book value in the case of both the
companies.
 In case of Nirma ltd. the proportion of debt (Pd) is very less as compared to Henkel where it
is very high (more than 50%).
 The cost of equity of Henkel is higher than Nirma because of higher β.
 However, the Wacc of Henkel is coming out to be lesser than Nirma. This is because the
proportions of equity, debt and preference shares are more distributed than in Nirma which is
predominantly equity based (which is an expensive source of finance).
 Thus, inspite of being well established in the market, Nirma has higher Wacc as compared to
Henkel. Nirma can reduce the Wacc by increasing the debt (current Debt-to-Equity Ratio for
Nirma is 0.15)
Dec '07 Nirma Ltd. Henkel Ltd.
Debt to equity ratio 0.15 1.33
How HR managers of your company might influence the cost of capital?
HR managers can reduce the cost of capital (by reducing β and hence the cost of equity) by making the
company less risky by keeping the company’s operations proper by ensuring the right organizational
structure (according to the environmental conditions and strategy of the organization) and keeping the
employees motivated to ensure high operational efficiency and reducing the business risk!!
References:
 http://www.nse- data_44_11.xls
india.com/marketinfo/eod_information/bidbor.jsp
 Cmie-Prowess
 www.indiainfoline.com
 www.sebi.gov.in