Corporate Finance

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Corporate Finance

In 2002, Welspun had the following capital structure:

March 31, 2002

(Rs lac)

Equity capital 15,778.43
Preference capital 2,332.00
Debentures 2,405.93

Loans

• From financial institutions 9,284.56


• From banks 3,476.08

33,277.00

To calculate WACC we need to estimate the market value of equity.

No. of shares outstanding = 460,223,000

Share price on 31.03.2002 = Rs 75.30

Market value of equity = Rs 346,547.92 lac

Book value of debt = Rs 15,166.58 lac

Tax rate = 20 percent

Cost of preferred stock = 13 percent

Beta = 0.469

M.R.P = 10 percent

Rf = 10 percent

CARE has rated Welspun BBB+. The yield on such bonds is 15.99 percent.

The after-tax cost of debt = 15.99(1 – 0.2) = 12.80 percent.

Source Cost Amount Weight^3

Equity 15.46 346,547.92 0.952
Preference 13.00 2,332.00 0.006
Debentures 12.80 2,405.93 0.007
Loan 12.80 12,760.65 0.035

WACC = 14.98 percent

AN INTERNATIONAL EXAMPLE: JOHNSON & JOHNSON (J&J)

J&J is the world’s most comprehensive and broadly based manufacturer of health care products, as well as a
provider of related services, for the consumer, pharmaceutical and medical devices and diagnostics markets.

(^3) Actually the weights are supposed to be target, market value weights, and not current weights. Second, the beta estimate
reflects current leverage. It should be relevered at the target debt ratio.