Cost Of Capital In Financial Management 4 Nov


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Cost Of Capital In Financial Management 4 Nov

  2. 2. COST OF CAPITAL IN FINANCIAL MANAGEMENT Dr. T.K. Jain. AFTERSCHO☺OL Centre for social entrepreneurship Bikaner M: 9414430763 [email_address] ,
  3. 3. Jitu Global Inc. issues 10% preference shares at a discount of 10%. What is the cost of capital? <ul><li>Let us assume that the face value is Rs. 100. Dividend will be 10. </li></ul><ul><li>Cash realised is 100 – 10 = 90 </li></ul><ul><li>Ke (cost of capital) 10 / 90 =11% </li></ul>
  4. 4. Goti Global Inc. issues 20% preference shares at a premium of 5%. What is the cost of capital? <ul><li>Let us assume that the face value is Rs. 100. Dividend will be 20 </li></ul><ul><li>Cash realised is 100 +5 = 105 </li></ul><ul><li>Ke (cost of capital) 20/105 =19% </li></ul>
  5. 5. Goti Global Inc. issues 20% preference shares at a premium of 5% for 10 years. He will redeem these at 10% premium. What is the cost of capital? <ul><li>Let us assume that face value is 100. </li></ul><ul><li>Dividend = 20 </li></ul><ul><li>Redemption value 110, realised value 105 </li></ul><ul><li>Ke = (20 + ((110 – 105) / 10)) / (average of 110 and 105) </li></ul>
  6. 6. solution <ul><li>Ke = (20 + ((110 – 105) / 10)) / (average of 110 and 105) </li></ul><ul><li>(20 + .5)/107.5 </li></ul><ul><li>=19% answer. </li></ul>
  7. 7. Risk free rate of return = 10%, Market Portfolio rate of return for software companies = 15%. Kap Softwares has beta of 1.75. What is the cost of capital of Kap Softwares? <ul><li>Formula = Rf (risk free rate) + beta (Market rate – Risk free rate) </li></ul><ul><li>= .10 + 1.75 (.15-.10) </li></ul><ul><li>=18.75% answer. </li></ul>
  8. 8. Dhawal World Inc. has growth rate of 15%. Current market price of his shares are 5000. Last year he gave Rs. 10 as dividend. What is the cost of retained earnings of this company as per DCF approach? <ul><li>Formulae (Projected dividend of next year)/ (current market price) + growth rate </li></ul><ul><li>=(10*1.15) / 5000 + .15 = 15.23% answer. </li></ul>
  9. 9. Vinod & Pankaj Inc. have beta of 1.1. Market rate is 14%. Risk free rate is 8%. What is the cost of capital of this company as per CAPM? <ul><li>Formula = Rf (risk free rate) + beta (Market rate – Risk free rate) </li></ul><ul><li>.08 + 1.1 (.14 - .08) </li></ul><ul><li>=14.6 % answer. </li></ul>
  10. 10. Sarika Global Inc. has 15% debt of $20 tr.18% Preference shares of $10 Tr. And Equity of $ 90 Tr. Cost of equity is 20%. Tax rate is 40%. What is the overall cost of capital? <ul><li>=(.15*(1-.4)*(20/120) )+(.18*(10/120)+(.2*(90/120)) </li></ul><ul><li>=18% answer. </li></ul>
  11. 11. Ajay Ltd. Has a plan to raise debt. He will get Rs. 100 Crore loan @ 12%. He will pay 40% tax to the government of India? What will be his cost of debt? <ul><li>= .12 (1-.4) </li></ul><ul><li>=7.20% only </li></ul>
  12. 12. Goutam Buchha has following options: (suggest which is the best) Tax rate is 50% <ul><li>Equity = $ 250 tr.@ 20% </li></ul><ul><li>Debt = $ 50 Tr. @ 12% </li></ul><ul><li>Preference = $ 30 Tr. @ 15% </li></ul><ul><li>Equity = $ 50 tr.@ 25% </li></ul><ul><li>Debt = $ 200 Tr. @ 15% </li></ul><ul><li>Preference = $ 80 Tr. @ 18% </li></ul>
  13. 13. Solution <ul><li>1 st option: </li></ul><ul><li>(.20*250/330) + .12 * (1-.5)*(50/330)+.15*(30/330) = 17.42% </li></ul><ul><li>2 nd option: </li></ul><ul><li>(.25*50/330) + .15 * (1-.5)*(200/330)+.18*(80/330) = 12.69% </li></ul><ul><li>2 nd option is much better (but risky also). </li></ul>
  14. 14. ABOUT AFTERSCHO☺OL <ul><li>Afterschoool conducts three year integrated PGPSE (after class 12 th along with IAS / CA / CS ) and 18 month PGPSE (Post Graduate Programme in Social Entrepreneurship) along with preparation for CS / CFP / CFA /CMA / FRM . This course is also available online also. It also conducts workshops on social entrepreneurship in schools and colleges all over India – start social entrepreneurship club in your institution today with the help from afterschoool and help us in developing society. </li></ul>
  15. 15. Why such a programme? <ul><li>To promote people to take up entrepreneurship and help develop the society </li></ul><ul><li>To enable people to take up franchising and other such options to start a business / social development project </li></ul><ul><li>To enable people to take up social development as their mission </li></ul><ul><li>To enable people to promote spirituality and positive thinking in the world </li></ul>
  16. 16. Who are our supporters? <ul><li>Afterschoolians, our past beneficiaries, entrepreneurs and social entrepreneurs are supporting us. </li></ul><ul><li>You can also support us – not necessarily by money – but by being promotor of our concept and our ideas. </li></ul>
  17. 17. About AFTERSCHO☺OL PGPSE – the best programme for developing great entrepreneurs <ul><li>Most flexible, adaptive but rigorous programme </li></ul><ul><li>Available in distance learning mode </li></ul><ul><li>Case study focused- latest cases </li></ul><ul><li>Industry oriented practical curriculum </li></ul><ul><li>Designed to make you entrepreneurs – not just an employee </li></ul><ul><li>Option to take up part time job – so earn while you learn </li></ul><ul><li>The only absolutely free course on internet </li></ul>
  18. 18. Workshops from AFTERSCHO☺OL <ul><li>IIF, Delhi </li></ul><ul><li>CIPS, Jaipur </li></ul><ul><li>ICSI Hyderabad Branch </li></ul><ul><li>Gyan Vihar, Jaipur </li></ul><ul><li>Apex Institute of Management, Jaipur </li></ul><ul><li>Aravali Institute of Management, Jodhpur </li></ul><ul><li>Xavier Institute of Management, Bhubaneshwar </li></ul><ul><li>Pacific Institute, Udaipur </li></ul><ul><li>Engineering College, Hyderabad </li></ul>
  19. 19. Flexible Specialisations: <ul><li>Spiritualising business and society </li></ul><ul><li>Rural development and transformation </li></ul><ul><li>HRD and Education, Social Development </li></ul><ul><li>NGO and voluntary work </li></ul><ul><li>Investment analysis,microfinance and inclusion </li></ul><ul><li>Retail sector, BPO, KPO </li></ul><ul><li>Accounting & Information system (with CA / CS /CMA) </li></ul><ul><li>Hospital management and Health care </li></ul><ul><li>Hospitality sector and culture and heritage </li></ul><ul><li>Other sectors of high growth, high technology and social relevance </li></ul>
  20. 20. Salient features: <ul><li>The only programme of its kind (in the whole world) </li></ul><ul><li>No publicity and low profile course </li></ul><ul><li>For those who want to achieve success in life – not just a degree </li></ul><ul><li>Flexible – you may stay for a month and continue the rest of the education by distance mode. / you may attend weekend classes </li></ul><ul><li>Scholarships for those from poor economic background </li></ul><ul><li>Latest and constantly changing curriculum – keeping pace with the time </li></ul><ul><li>Placement for those who are interested </li></ul><ul><li>Admissions open throughout the year </li></ul><ul><li>Latest and most advanced technologies, books and study material </li></ul>
  21. 21. Components <ul><li>Pedagogy curriculum and approach based on IIM Ahmedabad and ISB Hyderabad (the founder is alumnus from IIMA & ISB Hyderabad) </li></ul><ul><li>Meditation, spiritualisation, and self development </li></ul><ul><li>EsGotitial softwares for business </li></ul><ul><li>Business plan, Research projects </li></ul><ul><li>Participation in conferences / seminars </li></ul><ul><li>Workshops on leadership, team building etc. </li></ul><ul><li>Written submissions of research projects/articles / papers </li></ul><ul><li>Interview of entrepreneurs, writing biographies of entrepreneurs </li></ul><ul><li>Editing of journals / newsletters </li></ul><ul><li>Consultancy / research projects </li></ul><ul><li>Assignments, communication skill workshops </li></ul><ul><li>Participation in conferences and seminars </li></ul><ul><li>Group discussions, mock interviews, self development diaryng </li></ul><ul><li>Mind Power Training & writing workshop (by Dr. T.K.Jain) </li></ul>
  22. 22. Pedagogy <ul><li>Case analysis, </li></ul><ul><li>Articles from Harvard Business Review </li></ul><ul><li>Quiz, seminars, workshops, games, </li></ul><ul><li>Visits to entrepreneurs and industrial visits </li></ul><ul><li>PreGotitations, Latest audio-visuals </li></ul><ul><li>Group discussions and group projects </li></ul><ul><li>Periodic self assessment </li></ul><ul><li>Mentoring and counselling </li></ul><ul><li>Study exchange programme (with institutions out of India) </li></ul><ul><li>Rural development / Social welfare projects </li></ul>
  23. 23. Branches <ul><li>AFTERSCHO☺OL will shortly open its branches in important cities in India including Delhi, Kota, Mumbai, Gurgaon and other important cities. Afterschooolians will be responsible for managing and developing these branches – and for promoting social entrepreneurs. </li></ul>
  24. 24. Case Studies <ul><li>We want to write case studies on social entrepreneurs, first generation entrepreneurs, ethical entrepreneurs. Please help us in this process. Help us to be in touch with entrepreneurs, so that we may develop entrepreneurs. </li></ul>
  25. 25. Basic values at AFTERSCHO☺OL <ul><li>Share to learn more </li></ul><ul><li>Interact to develop yourself </li></ul><ul><li>Fear is your worst enemy </li></ul><ul><li>Make mistakes to learn </li></ul><ul><li>Study & discuss in a group </li></ul><ul><li>Criticism is the healthy route to mutual support and help </li></ul><ul><li>Ask fundamental questions : why, when, how & where? </li></ul><ul><li>Embrace change – and compete with yourself only </li></ul>
  26. 26. social entrepreneurship for better society