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[Year]
Corporate Finance End Term
Assignment Companies Chosen: HUL, ITC Ltd., Nestle India
Sahil Nanda - 211128
Utsav Sharma - 211153
Vysakh Nair - 211167
Vysakh Nair
Siddharth Sharma - 211140
Aanchal Mahajan - 211160
Abhas Agarwal - 211181
Vysakh Nair
Submitted to: Prof. Shalini Kalra Sahi
Contents Risk and Return Analysis ............................................................................................................................................................................................... 4
Find Beta estimates using the latest 1-year daily returns. Compare the estimated Beta of all the three companies in your sample. Which company
is more risky and why? .............................................................................................................................................................................................. 4
Using the historical risk free rate and the market risk premium, calculate the expected return for your set of companies ....................................... 5
Estimate the cost of capital, cost of debt and the weighted average cost of capital of the companies. State relevant assumptions. ......................... 6
Provide a few examples of systematic and unsystematic risk for each company. ..................................................................................................... 7
What is the return on equity and return on capital for the companies? How have these changed historically? Based upon these returns can you
comment upon the type of investments that the company is doing? State relevant assumptions. ............................................................................. 9
What is Return on Equity and Return on Capital Employed? ....................................................................................................................................... 9
OUTLOOK .................................................................................................................................................................................................................. 10
HUL ............................................................................................................................................................................................................................. 13
Capital Structure Choices ............................................................................................................................................................................................ 18
Analyze the existing capital structure of the companies and based on the same, comment on the benefits and the costs of debt to that company,
and whether the firm has too much or too little debt, as compared to its peers. State relevant assumptions. Is the capital structure influence by
the industry or not? Analyse and comment on the results that you have generated. ............................................................................................... 18
What is the dividend policy of the companies? Are they paying too much dividend or too little dividend, relative to their peers? ....................... 32
HUL ......................................................................................................................................................................................................................... 35
What is the value of these companies, based upon a discounted cash flow model? State relevant assumptions. Can you also work out the stock
valuation using the dividend growth model? (Assume an expected rate of return of 15%). Compare the arrived share price with the current
market price of the company. Give your comments on the comparison. ................................................................................................................. 41
Risk and Return Analysis
Find Beta estimates using the latest 1-year daily returns. Compare the estimated Beta of all the three companies in your
sample. Which company is more risky and why?
Beta
HUL Nestle ITC
0.36458041 0.2564783 0.465814
Beta for Nestle is minimum and it is maximum for ITC.
Following are the reasons for this variation:-
Nestle is a “Food-processing company” and they have their main products like Maggi & Cerelac, where Nestle is Market-
leader.
They have very high sales & very good terms with their suppliers and an organized processing with their distributors.
Also the prices of agro-commodities are less volatile in the exchange market and thus the risk involve is lower.
ITC is mainly a tobacco company, as their 73% of revenue is dependent on tobacco business. This industry is always in target
by government, as imposing excise duties is easier here. Also since tobacco plantation is discouraged in India gradually, thus
the price of raw material is increasing and so is their risk of doing business.
HUL is more of a “Household Segment” and the nature of business is a blend of two and so is the risk involved in between the
two.
Using the historical risk free rate and the market risk premium, calculate the expected return for your set of companies
Beta
HUL Nestle ITC
0.364580415 0.256478253 0.465813683
Risk Free
Rate(Rf)
Market
Return
Market
Premium(Rm)
7.92% 12.79% 20.71%
Expected Return, Re = Rf + β*(Rm-Rf)
Re
HUL Nestle ITC
12.58% 11.20% 13.88%
As already calculated, beta for the three company, The risk free return is inquired from the government website.
Market premium is calculated with respect to NIFTY-50, and accordingly expected return is calculated.
Estimate the cost of capital, cost of debt and the weighted average cost of capital of the companies. State relevant assumptions.
Cost Of Debt, Kd = Total Interest(1-Corporate Tax)/Total Debt
Corporate Tax rate = 35%
Companies Total
Debt (in
Rs. Cr.)
Total
Interest (in
Rs. Cr.)
Interest Rate
(Total Interest/
Total Debt)
Cost of
Debt
(%)
HUL 0 0 0 0%
Nestle 476.44 9.06 0.019016036 1.24%
ITC 79.09 87.02 1.10026552 71.52%
WACC= Wd*(1-T)*rd + We*re+ WP*rP
HUL Nestle ITC
Share Holder's Equity 216.15 96.42 781.84
Long Term Debt 0 476.44 79.09
Preference Share Capital 0 0 0
wd = Debt portion of value of corporation 0 0.83168663 0.091865773
T = Tax rate 35% 35% 35%
rd = Cost of debt (rate) 0% 1.24% 71.52%
we = Equity portion of value of corporation 1 0.16831337 0.908134227
re = Cost of internal equity (rate) 12.58% 11.20% 13.88%
wP = Preference share portion of value of
corporation 0 0 0
rp = Cost of preference capital (rate) 0 0 0
Companies HUL Nestle ITC
WACC 12.58% 2.55% 16.87%
All the relevant data is picked from the balance sheet of the company, as by simply applying formula, incides have been found.
Provide a few examples of systematic and unsystematic risk for each company.
ITC
Systematic Risk Unsystematic Risk
Tobacco Regulations Inflation
Regulations on plastic
bags
Monsoon,which leads
to lower production of
agro-commodities.
Increasing Taxes HUL
Systematic Risk Unsystematic Risk
Environmental Issues
related to their raw
materials used
Monsoon,which leads to
lower production of
agro-commodities.
Inflation
FDI in retail
NESTLE
Systematic Risk Unsystematic Risk
Environmental Issues
related to their raw
materials used
Monsoon,which leads to
lower production of
agro-commodities.
Ban on advertisement of
baby products Inflation
Economic Fluctutation
Measuring Investment Returns
What is the return on equity and return on capital for the companies? How have these changed historically? Based upon these returns
can you comment upon the type of investments that the company is doing? State relevant assumptions.
Investment Decisions
Investment Decisions, take time to mature, have to be based on the returns which that investment will make. Investment is the
purchase or creation of assets with the objective of making gains in the future. Typically investment involves using financial resources
to purchase a machine/ building or other asset, which will then yield returns to an organization over a period of time. Unless the
project is for social reasons only, if the investment is unprofitable in the long run, it is unwise to invest in it now.
Often, it would be good to know what the present value of the future investment is, or how long it will take to mature (give returns). It
could be much more profitable putting the planned investment money in the bank and earning interest, or investing in an alternative
project.
Typical investment decisions include the decision to build another grain silo, cotton gin or cold store or invest in a new distribution
depot. At a lower level, marketers may wish to evaluate whether to spend more on advertising or increase the sales force, although it is
difficult to measure the sales to advertising ratio.
What is Return on Equity and Return on Capital Employed?
Return on Equity (ROE)
The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by
revealing how much profit a company generates with the money shareholders have invested.
ROE is expressed as a percentage and calculated as:
Return on Equity = Net Income/Shareholder's Equity
Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.)
Shareholder's equity does not include preferred shares.
Return on Capital Employed (ROCE) A ratio that indicates the efficiency and profitability of a company's capital investments.
ROCE should always be higher than the rate at which the company borrows; otherwise any increase in borrowing will reduce
shareholders' earnings.
It is calculated as:
Where, NOPAT is Net Operating Profit after Tax. Capital Employed is in general it is the capital investment necessary for a business
to function.
Net Operating Profit After Tax (NOPAT) is equal to EBIT * (1 - tax).
Capital employed is commonly represented as total assets less current liabilities.
OUTLOOK
The fiscal year 2011-12 witnessed slowdown of economic activities particularly industrial output. Inflation also remained at elevated
level throughout the fiscal year. Private investment has declined in its pace of growth considerably affecting the growth rate of the
economy. Higher spending on subsidies on account of oil and fertilisers widened the fiscal deficit of the centre more than the budget