Corporate Finance

Estimation of Cost of Capital 
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Harris, Robert S, Thomas J O’Brien, and Doug Wakeman (1989). ‘Divisional Cost-of-Capital Estimation for Multi-Industry
Firms’, Financial Management, Vol. 18, pp. 74–84.
Petit, Justin (1999). ‘Corporate Capital Costs: A Practitioner’s Guide’, Journal of Applied Corporate Finance, Spring.
Rosenberg, Barr and J Guy (1976). ‘Prediction of a Beta from Investment Fundamentals’, Financial Analysts Journal,
May–June.
Rosenberg, Barr and V Marathe (1975). ‘Tests of the Capital Asset Pricing Hypothesis’, Working Paper No. 32 of the research
program in Finance, University of California, Berkeley, May.
Siegel, Jeremy (1985). ‘The Application of the DCF Methodology for Determining the Cost of Equity Capital’, Financial
Management, Spring.

Much of research on behavior of emerging market returns is by Prof Campbell Harvey. Some of the important papers on
the subject are:

Erb, Claude B, Campbell Harvey and Tadas Viskanta (1996). ‘Expected Returns and Volatility in 135 Countries’, Journal
of Portfolio Management, Spring.
——— (1996). ‘Political Risk, Economic Risk and Financial Risk’, Financial Analysts Journal, Vol. 52, No. 6, pp. 29–46.
——— (1998). ‘Risk in Emerging Markets’, The Financial Survey, July–Aug, pp. 42–46.
Beakert, Geert and Campbell Harvey (1997). ‘Emerging Equity Market Volatility’, Working Paper, Duke University, Vol. 43,
pp. 29–77.

QUESTIONS

1. Estimate ∝, β, standard error of ∝ and β, R^2 for the following stocks. Establish 95 percent confidence interval for beta.

Stocks

Tata Chemicals

HLL

Cadbury’s

Use monthly returns for the last 5 years. Take Sensex as market proxy. The data is available on CMIE Prowess.

2. Draw characteristic line for the same stocks. Interpret the line. Classify the stocks as aggressive, defensive and neutral.


3. Estimate BSE 30 returns (weekly and monthly) for the last two years. Convert them into annual returns.


4. Estimate cost of equity and cost of capital for HLL, TVS Suzuki, and Tata Chemicals.


5. Estimate the beta for the following portfolio. Use the data given in the chapter or other sources.

Company Weightage

Bajaj Auto 0.2

L&T 0.1

Grasim 0.1

TISCO 0.15

TELCO 0.05

RIL 0.15

Indian Rayon 0.10

Arvind Mills 0.10

Asian Paints 0.05

6. Estimate the industry beta for cement, steel, and pharmaceuticals.