Bharat Consumers Limited has been in business for over 5 decades and has always placed equal focus on serving both consumers as well as shareholders. Over the years the company has built a diversified portfolio of powerful brands, number of them being household names. The company requires from you estimates on its cost of capital for evaluating its acquisitions, investment decisions and the performance of its business. In addition to that the company also aim to setup a target capital structure and dividend pay-out policy (if residual policy is followed). Following are the exhibits reflecting important information to address the problem-at-hand Exhibit – 1 The company considers, at present level, cost of debt as the effective rate of interest applicable to an ‘AAA’ rated company. It thinks that considering the trends over years, this rate is 9.5 percent in current year. The risk-free rate is assumed as the yield on long-term government bonds, which the company regards as about 8 percent. BCL regards the market-return is equal to about 11 percent. The company uses CAPM to calculate its cost of equity. The alternative method is the constant growth model. BCL has 30% Debt and 70% Equity in its capital structure. At current level of debt, it`s beta is 0.708. Exhibit – 2 Year 2016 2017 2018 2019 2020 EPS 10.10 10.58 12.46 17.56 18.95 DPS 15 15.75 16.54 17.36 18.23 Price 307.4 322.8 338.8 355.73 ? MCap (in 10 Lakhs) 5207 6145 8860 10079 10280 Exhibit – 3 2017 2018 2019 2020 Gross Sales (in Crores) 20285 22800 25626 28802 PBIT 2730 3350 4374 5587 PAT 2153 2599 3314 4320 Exhibit – 4 Debt Level Cost of Debt (2020 BCL`s beta 20% 9 0.700 30% 9.5 0.708 40% 10 0.720 50% 11 0.8 * Tax rate for the current year 2020 is 30% Questions 1. Calculate WACC of the company at current debt level. 2. Calculate expected price of BCL`s share in year 2020. solve as soon as possible
Bharat Consumers Limited has been in business for over 5 decades and has always placed equal focus on serving both consumers as well as shareholders. Over the years the company has built a diversified
portfolio of powerful brands, number of them being household names. The company requires from you estimates on its cost of capital for evaluating its acquisitions, investment decisions and the performance of its business. In addition to that the company also aim to setup a target capital structure and dividend pay-out policy (if residual policy is followed). Following are the exhibits reflecting important information to address the problem-at-hand
Exhibit – 1
The company considers, at present level, cost of debt as the effective rate of interest applicable to an ‘AAA’ rated company. It thinks that considering the trends over years, this rate is 9.5 percent in current year. The risk-free rate is assumed as the yield on long-term government bonds, which the company regards as about 8 percent. BCL regards the market-return is equal to about 11 percent. The company uses
Exhibit – 2
| Year | 2016 | 2017 | 2018 | 2019 | 2020 |
| EPS | 10.10 | 10.58 | 12.46 | 17.56 | 18.95 |
| DPS | 15 | 15.75 | 16.54 | 17.36 | 18.23 |
| Price | 307.4 | 322.8 | 338.8 | 355.73 | ? |
| MCap (in 10 Lakhs) | 5207 | 6145 | 8860 | 10079 | 10280 |
Exhibit – 3
| 2017 | 2018 | 2019 | 2020 | |
| Gross Sales (in Crores) | 20285 | 22800 | 25626 | 28802 |
| PBIT | 2730 | 3350 | 4374 | 5587 |
| PAT | 2153 | 2599 | 3314 | 4320 |
Exhibit – 4
| Debt Level | Cost of Debt (2020 | BCL`s beta |
| 20% | 9 | 0.700 |
| 30% | 9.5 | 0.708 |
| 40% | 10 | 0.720 |
| 50% | 11 | 0.8 |
* Tax rate for the current year 2020 is 30%
Questions
1. Calculate WACC of the company at current debt level.
2. Calculate expected price of BCL`s share in year 2020.
solve as soon as possible
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