its the ppt of Cost of capital of top FMCG Company

1. Topic:
Cost of Capital of FMCG Companies
Submitted To:
Dr. Ajay Kumar Patel
Associate Professor
(Finance)
Presented By:
Team Members
1. Aman Kumar Verma
2. Anshu Kumari
3. Amit Kumar
4. Divita Agarwal
5. Yuvraj Singh
6. Anuja Mishra
7. Anubhav Jain
Corporate Finance Presentation
PGDM Batch 2017-2019 Term III
Section __A___ Team No. __3___

2. WHAT IS COST OF CAPITAL?
• It is the cost of a company's funds
(both debt and equity).
• It is used to evaluate new projects of a company.
• It is the minimum return that investors expect
for providing capital to the company, thus
setting a benchmark that a new project has to
meet.

3. IMPORTANCE OF COST OF
CAPITAL
• Designing the capital structure
• Capital budgeting decisions
• Comparative study of sources of financing
• Evaluation of financial performance
• Knowledge of firms expected income and inherent
risks
• Financing and dividend decisions

4. COST OF EQUITY
• What is Cost of Equity?
Cost of equity is the dividend amount that a company
pays to its shareholders .
• Ways to Calculate Cost of Equity
1) Dividend Growth Model
2) Capital Asset Pricing Model

5. DIVIDEND GROWTH MODEL
• DEFINITION:
Dividend growth model is a valuation model, that
calculates the fair value of stock, assuming that
the dividends grow either at a stable rate in perpetuity
or at a different rate during the period at hand.
• FORMULA:
EXPECTED DIVIDEND
CURRENT PRICE
+ GROWTH

6. CAPITALASSET PRICING
MODEL
• DEFINITION:
The capital asset pricing model (CAPM) is a model
that describes the relationship between systematic
risk and expected return for assets.
• FORMULA:
RE = RF + β ( RM – RF )
Where,
RE= Expected return on asset
RF = Risk free Rate
β = Beta of security
RM= Market Rate of Return

7. Cost of equity of P&G and Dabur
• By SML Method or CAPM
• By Dividend Growth Model

8. P & G
Cost of equity

9. The SML Method
RE = RF + βE(E(RM) – RF)
• Expected return on equity (RE)
• Risk-free rate, (RF)
• Systematic risk premium, (βE)
• Market risk premium, E(RM) – RF
The SML Method

10. Cost of equity by SML Method of
P&G
• Company’s equity beta = .42
• Current Risk Free Rate (RF) = 4.5%
• Expected Market risk premium E(RM) – RF = 5%
• What is the cost of equity capital ?
RE = RF + βE(E(RM) – RF)
= 4.5 + .42(5) = 6.6%

11. The DGM Method
RE =
𝐷1(1+𝑔)
𝑃0
+ 𝑔
• Dividend (D1)
• Expected Growth Rate (g)
• Current Stock Price (P0)

12. Estimating the dividend growth rate
of P&G
• Use of historical average:
Year Dividend % change
2012 139
2013 149 (149 – 139) / 139 = 7%
2014 159 (159 – 149) / 149 = 6.98%
2015 168 (168 – 159) / 159 = 5.71%
2016 173 (173 – 168) / 168 = 2.70%
2017 175 (175 – 173) / 173 = 1.50%
Average = (7 + 6.98 + 5.71 + 2.70 + 1.50) / 5 = 4.778%

13. Cost of equity by DGM Method of
P&G
• Dividend = Rs.175
• Current Stock Price = Rs.9592
• Estimates of growth = 4.77%
• What is the cost of equity?
RE =
𝐷1
(1+𝑔)
𝑃0
+ 𝑔
=
175(1+0.0477)
9592
+ 0.0477
=0.06681 or 6.681%

14. Cost of equity of Dabur

15. Cost of equity by SML Method of
Dabur
• Company’s equity beta = .882
• Current Risk Free Rate (RF) = 6%
• Expected Market risk premium E(RM) – RF = 8%
• What is the cost of equity capital ?
RE = RF + βE(E(RM) – RF)
= 6 + .882(8) = 13.056%

16. Estimating the dividend growth rate
of Dabur
• Use of historical average:
Year Dividend % change
2012 1.3
2013 1.5 (1.5 – 1.3) / 1.3 = 15.38%
2014 1.8 (1.8 – 1.5) / 1.5 = 20%
2015 2.0 (2.0 – 1.8) / 1.8 = 11.11%
2016 2.3 (2.3 – 2.0) / 2.0 = 15%
2017 2.3 (2.3 – 2.3) / 2.3 = 0%
Average = (15.38 + 20 + 11.11 + 15 + 0) / 5 = 12.29%

17. Cost of equity by DGM Method of
Dabur
• Dividend = Rs.2.3
• Current Stock Price = Rs.342
• Estimates of growth = 12.29%
• What is the cost of equity?
RE =
𝐷1
(1+𝑔)
𝑃0
+ 𝑔
=
2.3(1+0.1229)
342
+ .1229
=0.13045 or 13.045%

18. Dividend Discount Model:
Advantages
• Justification
• Consistency
• No Subjectivity
• No Requirement of Control
• Mature Businesses

19. Dividend Discount Model:
Disadvantages
• Limited Use
• May Not Be Related To Earnings
• Too Many Assumptions
• Tax Efficiency
• Control

20. The Advantages And Disadvantages
Of The SML
• Ease-of-use
• Diversified Portfolio
• Systematic Risk (beta)
• Business and Financial Risk Variability

21. Disadvantages
• Return on the Market (Rm)
• Risk-free Rate (Rf)
• Ability to Borrow at a Risk-free Rate
• Determination of Project Proxy Beta

22. CAPM Vs. DDM
You can use CAPM and DDM together: most DDM
formulas employ CAPM to help figure out how to
discount future dividends and derive the current value.
CAPM, however, is much more widely useful. DDM
can't do anything for you if your investments aren't
dividend-issuing stocks but you can apply CAPM to any
sort of investment. Even on specific stocks, CAPM has
an advantage because it looks at more factors than
dividends alone.

23. Cost of Capital
Business
Funds
Raised
Various
Sources
Share
Holders
Funds
Equity Share
Capital
Preference
Share Capital
Reserves &
Surplus
Borrowings Bonds
Bank Loans
Debenture

24. Funds
Cost
Owners
Cost of
Equity
ReturnInvestment
Out Sider
Borrowing
Cost
Interest Cost

25. Owners Out Siders
Funds
Cost
Cost of Capital

26. Investment Capital Budgeting
Funds
Capital
Structure
Decision
Decision

27. To Determine The Cost of Equity
For Prabhat Dairy Ltd.
• DGM (Dividend Growth Model): -
RE = D1/P0 + g
• SML (Security Market Line): -
RE = RF + ᵝ {E(RM)- RF }

28. Comparing The Three Methods
• Many firms use the DGM Method. Use the historical
Growth rate if you believe the future will be take the past.
• In Practice, most firms use the SML to estimate the cost of
equity capital. Most analysts use a rate of 3.5% to 6% for
the Market risk Premium.
• Some firms estimate the cost of equity capital by adding a
risk premium to their bond interest rate.

29. DGM Cost of Equity By The
Prabhat Dairy Ltd.
• Given here: -
Dividend Price, (D0) = ₹5.65
Current Share Price, (P0) = ₹173
Growth Rate, (g) = 3.44%
Required RoR, (RE) = ?
Dividend end of Year (D1) = ?

30. Conti……
RE = D1/P0 + g
• Here:- D1 = D0 (1+g)
= ₹ 5.844
• Now, RE = D1/P0 + g
RE = 5.844/173 + .0344
= .033 + .0344 = 0.067 or 6.7%

31. SML Cost of Equity Method of
Prabhat Dairy Ltd.
• Given here: -
Risk free Rate, (RF) = 5.6%
Market Risk Premium, {E(RM)- RF } = 5%
Systematic Risk of Asset, (ᵝ ) = .2
Required RoR, (RE) = ?
• Now, RE = RF + ᵝ {E(RM)- RF }
= 5.6 + .2*5
= 5.6 + 1
RE = 6.6%

41. REFRENCES :
• https://www.gurufocus.com/term/wacc/NSE:I
TC/WACC-Percentage/ITC%20Ltd
• http://www.wikiwealth.com/wacc-
analysis:itc.subscribers/formataable.co