86 Corporate Finance
Chapter 4
Estimation of Cost of Capital
OBJECTIVES
Be able to apply CAPM, DCF, Risk Premium, and Fama-French approaches to esti-
mate cost of equity for firms.
Be aware of estimation issues in applying CAPM to estimate divisional required
returns.
Be able to estimate cost of debt, preferred stock and cost of capital for listed and
unlisted firms.
Be able to calculate beta for listed and unlisted firms/projects.
Be aware of factors influencing a firm’s cost of capital.
Be aware of practices in select, large, international companies.Welspun India Ltd is one of the largest manufacturers of terry towels in Asia. Its manufacturing plant is
situated at Morai, Vapi, in Gujarat; and its office is in Mumbai. It was established to manufacture terry
towels. Later it started its own spinning division to prepare cotton yarn, which is one of the major raw
materials for making terry towels. Recently the spinning division was spun off into a separate entity called
Glofame Cotspin Industries Ltd. Welspun has a total annual production capacity of 7,800 MT. The Welspun
portfolio encompasses five companies. They are:
- Welspun India Ltd, manufacturer of terry towels.
- Welspun Gujarat Stahl Rohen Ltd, a manufacturer of submerged arc welded pipes.
- Welspun Syntex Ltd, manufacturer of specialty polyester filament yarn.
- Glofame Cotspin, manufacturer of cotton yarn.
- Welspun Zucchi Textiles Ltd, a JV with Vincenzo Zucchi which owns such brands as Calvin Klein,
Tommy Hilfiger.
The Terry Towel Industry
There was a huge demand for terry towels made in 100 percent cotton yarn in the early-1990s in the US and
UK. But the recent economic slowdown in the US and Europe and its spillover to other countries has posed
a threat of recession. The global production capacity has increased only marginally. A number of renowned