Financial Management – I

Project Report on:

Estimating Cost of Capital

Company Chosen:
Gandhi Special Tube Limited

Submitted to: Prof. Sharon k Jose

Muhammad Shamsad
23BSOCBL0511
 Introduction
Gandhi Special Tubes Limited (GSTL) is a leading manufacturer of high-quality tubes and
fittings in India. The company was founded in 1950 and is headquartered in Mumbai. GSTL has
a strong track record of profitability and growth, and is well-positioned to continue to grow in
the future.

The purpose of this project report is to estimate the cost of capital for GSTL. The cost of capital
is an important factor in determining the value of a company and the feasibility of its investment
projects. The cost of capital is calculated as the weighted average of the cost of equity and the
cost of debt.

The cost of equity is the return that investors require on their investment in GSTL's equity. The
cost of equity can be estimated using the capital asset pricing model (CAPM) or the dividend
capitalization model (DDM).

The cost of debt is the interest rate that GSTL pays on its debt. The cost of debt can be estimated
by looking at the interest rates on the company's outstanding debt.

The weighted average cost of capital is calculated by weighting the cost of equity and the cost of
debt according to their respective proportions in the company's capital structure.

The results of this project report will be used to help GSTL make informed decisions about its
financing and investment strategies.
1. I gathered the financial expenses and interest bearing debt from the last 5 years financial
statements and take a 5 year simple average of this ratio for to find cost of debt of the
company

COST OF DEBT(in CRORE)

INTEREST BEARING DEBT
Year Finance Cost Short Term Long Term Cost Of Debt
2023 0.12 0.00 0.00 #DIV/0!
2022 0.05 0.00 0.00 #DIV/0!
2021 0.05 0.00 0.00 #DIV/0!
2020 0.04 0.00 0.00 #DIV/0!
2019 0.00 0.00 0.00 #DIV/0!

As the company does not have the Interest Bearing Debt so we cannot calculate the cost of debt.

2.
3. The cost of equity of Gandhi Special Tubes Limited has to be estimated in two ways CAPM
and Dividend Discounting Method

CAPM Method
The CAPM is a widely used method for calculating the cost of equity. It takes into account the
risk free rate of return, the company’s beta and the expected market premium.
 Risk free rate of return: This is the theoretical return on investment with zero risk. The
current yield on a 10 year bond is 7.20%
 Beta: Beta measures the company’s sensitivity to market movement. For calculating beta
I have collected last 5 years’ monthly data of company’s equity share price and NSE 500
as the proxy for market portfolio
From the data I calculated Return (Return = (Todays price – Yesterdays price)/Yesterdays price)
for the Market and the Company.
Beta = Covariance (Company, Market)/ Variance (market)
Beta = 0.8637
 Market Risk Premium: This represents the additional return investors expect to earn for
taking on the risk of investing in the stock market. It’s typically estimated based on
historical data and market conditions.
Market risk premium = 8.33% (Prof Damodaran’s website)
 CAPM APPROACH
BETA 0.8637

Rf (Risk free rate of return) 7.20%

(Rm-Rf)Equity/Market risk Premium) 8.33%

COST OF EQUITY 14.39%

Cost of equity = Rf + Beta(Rm-Rf)

Dividend Discount Method (DDM)

The DDM estimates the cost of equity based on the expected dividends and the growth rate of
those dividend
Ke = Dividend per share (D1)/ (Current stock price + Dividend growth rate)
 Dividend growth rate

Year Dividend Paid Growth Rate

2022 10 0.111111111
2021 9 0
2020 9 0
2019 9 0.125
2018 8 -
Dividend Growth Rate 0.04

 Dividend per share

D1 = D0 (1+g)
Dividend per share = 10.37037037

 Current stock price

As on 3rd July Current stock price = 577.94

DIVIDEND DISCOUNT MODEL

Dividend Growth Rate 0.04
D1 10.37037037
CURRENT STOCK PRICE 577.94

Ke 5.50%
4. Average Tax Bracket: The Average tax bracket of the company is extracted from the Profit
Before Tax and Profit After Tax figures of company based on the last 5 years

TAX
Year PBT PAT BRACKET
2023 62.87 47.34 0.247017655
2022 50.49 38.57 0.236086354
2021 47.57 36.15 0.240067269
2020 26.03 21.37 0.179024203
2019 49.75 38.63 0.223517588
AVERAGE 0.225142614

5. Using the tax rate, cost of equity, cost of preference shares and 5 year average cost of debt, the
weighted average cost of capital(for the year 2023) calculated based both on book value and
market value weights.

TOTAL DEBT 1114.13

TOTAL EQUITY 18,210.06
TAX BRACKET 23%
CAPM DDM
COST OF EQUITY 14.39% 5.50%
MARKET CAPITALISATION/MARKET
VALUE OF EQUITY , E 90611
V(E+D) 91725.13

Non-current liabilities
A)financial liabilities
1) Lease Liabilities 26.91
Current liabilities
A)financial liabilities
1) Lease Liabilities 4.52
2) Trade payables 156.17
3) other financial
liabilities 530.42
B)Other current liabilities 396.11
TOTAL DEBT 1114.13
 CAPM Cost of Equity DDM Cost of equity Function
WACC = (E_book / (E_book
+ D_book)) * Re + (D_book
BOOK VALUE WEIGHTED / (E_book + D_book)) * Rd
COST OF CAPITAL 0.193292053 0.109465502 * (1 - Tax Rate)
MARKET VALUE WEIGHTED WACC = (E / V) * Re + (D /
COST OF CAPITAL 0.154334049 0.066459298 V) * Rd * (1 - Tax Rate)
 Conclusion
The report is on the weighted average cost of capital (WACC) for the year 2023. It calculates the
WACC using both book value and market value weights. The report uses the capital asset pricing
model (CAPM) and dividend discount model (DDM) to calculate the cost of equity. The report
concludes that the company’s book value weighted cost of capital using CAPM is 19.32% and
using DDM is 10.96% and company’s market value weighted method of cost of capital using
CAPM is 15.43% and using DDM is 6.64%.
The company’s book value is greater than its market value under CAPM, it means the company
is undervalued. This means that the market is not assigning the company’s assets their full value.
If the company is undervalued, you may want to consider investing in it. However, it is
important to do research and make sure understand the risks involved. The book value under
CAPM is greater than the DDM method, it means that the company’s expected return under
CAPM is lower than the expected return under the DDM method. The WACC market value is
more greater than DDM, it means that the cost of capital for the company is higher when
calculated using the CAPM method than when calculating using the DDM method. The CAPM
method considers the riskiness of the investment, while the DDM method does not. The CAPM
method uses the beta of the stock to measure its risk. Companies with higher bets are considered
to be riskier, and they therefor have higher cost of capital. The DDM method does not explicitly
consider risk, so it may produce a lower cost of capital for riskier companies.
 GANDHI TUBE SPECIAL MARKET(NIFTY 500)
Date Adj Close RETURN Date Adj Close RETURN
4/1/2018 329.29538 4/1/2018 9496.487305
-
5/1/2018 332.81543 0.010689643 5/1/2018 9315.336914 0.019075516
- -
6/1/2018 316.975281 0.047594395 6/1/2018 9162.438477 0.016413624
7/1/2018 329.252472 0.038732329 7/1/2018 9650.586914 0.053277131
8/1/2018 342.130676 0.039113462 8/1/2018 9991.987305 0.035376127
-
9/1/2018 313.107056 0.084831972 9/1/2018 9115.988281 -0.08767015
-
10/1/2018 331.170929 0.057692322 10/1/2018 8753.438477 0.039770762
-
11/1/2018 315.656219 0.046848043 11/1/2018 9109.138672 0.040635482
12/1/2018 329.281036 0.043163468 12/1/2018 9169.988281 0.006680062
- -
1/1/2019 322.292786 0.021222753 1/1/2019 9003.837891 0.018118932
-
2/1/2019 305.986969 -0.05059318 2/1/2019 8955.938477 0.005319889
-
3/1/2019 305.415619 0.001867236 3/1/2019 9663.6875 0.079025668
-
4/1/2019 291.790833 0.044610639 4/1/2019 9664.287109 6.20476E-05
5/1/2019 357.849152 0.226389288 5/1/2019 9805.037109 0.01456393
- -
6/1/2019 353.058533 0.013387258 6/1/2019 9657.9375 0.015002453
 - -
7/1/2019 305.283752 0.135316885 7/1/2019 9044.938477 0.063471007
- -
8/1/2019 266.884186 0.125783196 8/1/2019 8977.538086 0.007451725
9/1/2019 286.74176 0.07440521 9/1/2019 9340.887695 0.04047319
-
10/1/2019 269.991119 0.058417166 10/1/2019 9689.637695 0.037335852
-
11/1/2019 254.816528 0.056204038 11/1/2019 9813.637695 0.012797176
12/1/2019 252.159821 -0.01042596 12/1/2019 9872.537109 0.006001792
- -
1/1/2020 243.379288 0.034821301 1/1/2020 9861.4375 0.001124291
- -
2/1/2020 206.726028 0.150601394 2/1/2020 9236.038086 0.063418687
- -
3/1/2020 170.342972 0.175996493 3/1/2020 6996.740723 0.242452158
4/1/2020 162.868256 -0.04388039 4/1/2020 8012.88916 0.145231684
- -
5/1/2020 147.64859 0.093447713 5/1/2020 7822.389648 0.023774135
6/1/2020 174.710739 0.183287555 6/1/2020 8474.789063 0.083401549
-
7/1/2020 169.847672 0.027834963 7/1/2020 9035.738281 0.066190346
8/1/2020 199.071182 0.172057171 8/1/2020 9372.037109 0.037218744
- -
9/1/2020 189.164902 0.049762502 9/1/2020 9341.737305 0.003233001
10/1/2020 189.328812 0.000866493 10/1/2020 9581.637695 0.02568049
11/1/2020 218.049072 0.151695137 11/1/2020 10719.03613 0.118706058
12/1/2020 240.444321 0.10270738 12/1/2020 11518.28516 0.074563516
- -
1/1/2021 227.560013 0.053585412 1/1/2021 11302.38574 0.018744059
2/1/2021 248.268585 0.091002684 2/1/2021 12181.38477 0.077771105
3/1/2021 253.281738 0.020192458 3/1/2021 12313.68359 0.010860738
4/1/2021 284.672577 0.123936448 4/1/2021 12364.33301 0.004113263
5/1/2021 290.857025 0.021724776 5/1/2021 13226.33203 0.069716581
6/1/2021 396.789337 0.364207507 6/1/2021 13473.53223 0.018690004
7/1/2021 455.635437 0.148305649 7/1/2021 13664.23242 0.01415369
-
8/1/2021 441.976074 0.029978711 8/1/2021 14555.88086 0.065254191
-
9/1/2021 432.662781 0.021071939 9/1/2021 15052.63086 0.0341271
-
10/1/2021 406.2034 0.061154743 10/1/2021 15086.88086 0.00227535
- -
11/1/2021 350.801178 0.136390345 11/1/2021 14648.33008 0.029068353
12/1/2021 353.189209 0.006807363 12/1/2021 14996.18066 0.023746774
 -
1/1/2022 364.221863 0.031237234 1/1/2022 14921.43066 0.004984603
-
2/1/2022 308.007751 0.154340301 2/1/2022 14307.93164 0.041115295
3/1/2022 334.180511 0.084974355 3/1/2022 14894.48047 0.040994662
-
4/1/2022 368.902435 0.103901702 4/1/2022 14783.33008 0.007462522
-
5/1/2022 347.601196 0.057742202 5/1/2022 14119.58106 0.044898478
-
6/1/2022 359.493591 0.034212756 6/1/2022 13387.53223 0.051846356
7/1/2022 357.006866 -0.0069173 7/1/2022 14665.63086 0.095469323
8/1/2022 409.556946 0.147196273 8/1/2022 15325.0293 0.04496216
-
9/1/2022 426.239502 0.040733178 9/1/2022 14829.33008 0.032345727
-
10/1/2022 411.666809 0.034188978 10/1/2022 15423.97949 0.040099547
11/1/2022 612.838867 0.488676895 11/1/2022 15946.12988 0.033853156
- -
12/1/2022 502.194244 0.180544396 12/1/2022 15448.8291 0.031186299
-
1/1/2023 593.114258 0.181045512 1/1/2023 14935.48047 0.033228967
- -
2/1/2023 497.827332 0.160655261 2/1/2023 14518.75 0.027902046
-
3/1/2023 480.212524 0.035383369 3/1/2023 14557.84961 0.002693042