You are on page 1of 17

Course Code: F501

Course Name: Financial Theory and Practices

Report on
Weighted Average Cost of Capital (WACC) of
HeidelbergCement Bangladesh Limited

Prepared For:
Mrs. Shakila Yasmin
Assistant Professor
Institute of Business Administration
University of Dhaka

Prepared By:
Rashid Muntasir
ID No. ZR 42
MBA 53rd Batch
Institute of Business Administration
University of Dhaka

Date of Submission:
November 22, 2015

Letter of Transmittal
November 22, 2015

Mrs. Shakila Yasmin


Assistant Professor
Institute of Business Administration
University of Dhaka
Subject: Submission of report titled Weighted Average Cost of Capital (WACC) of
HeidelbergCement Bangladesh Limited.

Madam
It gives me immense pleasure to submit my report on Weighted Average Cost of Capital
(WACC) of HeidelbergCement Bangladesh Limited. This report was assigned to me as a
partial requirement of the Financial Theory and Practices (F501) course in 2nd semester.
This report gave me an opportunity to apply my theoretical expertise, sharpen my views,
ideas, and communication skills, and bridge them with the real world of practical experience,
which will be a good head start for my future professional career.
I have tried sincerely to comprehend and translate my knowledge in writing this report. I
enjoyed this project work and gladly attend any of your calls to clarify on my point, if
necessary. I hope you would find the report in appropriate manner.
Sincerely yours

______________________
Rashid Muntasir
ID No. ZR 42
MBA 53rd Batch
Institute of Business Administration
University of Dhaka

Acknowledgement
I am thankful and grateful to almighty Allah who has given me the strength and ability to
complete the report on Weighted Average Cost of Capital (WACC) of HeidelbergCement
Bangladesh Limited. I am also grateful to my Course Teacher Mrs. Shakila Yasmin to
prepare this very important report. She has given all sorts of help required to complete this. I
am again grateful to those who have given me necessary information and documents.

I also do sincerely declare that this report has been submitted, in partial fulfillment of the
requirement for the Financial Theory and Practices (F5401) course. This report is written in
my own language. Though I studied and followed some books and websites, no part of this
report consists of materials, copied or plagiarized from published or unpublished work of
other writers and that all materials borrowed and reproduced from other published or
unpublished sources have either been put under quotation or duly acknowledged with full
reference in appropriate places. I understand that the report may be cancelled if subsequently
it is discovered that this report is not my primeval work that it consists of materials copied or
plagiarized or borrowed without proper acknowledgement.

I, at last, express special thanks from the bottom of my heart to all who have helped me
directly & indirectly to complete this report.

Executive Summary
Cement industry of Bangladesh is in its growth stage. The industry is developing day by day.
HeidelbergCement Bangladesh Limited is one of the major producers of quality cement in
Bangladesh. This company is listed in DSE and CSE as an "A" category stock. As per the
course requirement, I had to find Weighted Average Cost of Capital (WACC) of a company
and I have chosen HeidelbergCement Bangladesh Limited for this purpose.

I have collected price data of last seven years and from the data, I have conducted regression
analysis to find the appropriate Beta () for this stock which is .79. Through the Capital Asset
Pricing Model (CAPM), this Beta has been used to find the cost of equity, RE = 11.52%.Then
dividing the amount of interest paid last year by total interest accruing debt, I found the cost
of debt to be RD = 10.13%.
After using Market Value as weight for Equity and Book Value as weight for Debt and
multiplying them with respective required return, I have found the Weighted Average Cost of
Capital (WACC) which is 11.04%.

After the considering all this factors, I have concluded that the stock is less volatile than
overall market. That means the share is preferred by the risk adverse investors.

Table of Contents
1Introduction ........................................................................................................................................ 1
1.1 Origin ............................................................................................................................................ 1
1.2 Objectives ..................................................................................................................................... 1
1.3 Scope ............................................................................................................................................. 1
1.4 Methodology ................................................................................................................................. 1
1.5 Limitations .................................................................................................................................... 1
2Company Profile ................................................................................................................................ 2
3 Calculation of Weighted Average Cost of Capital (WACC) of HeidelbergCement Bangladesh
Limited .................................................................................................................................................... 3
3.1 Capital Structure ........................................................................................................................... 3
3.2 Cost of Equity, RE ......................................................................................................................... 4
3.3 Cost of Debt, RD............................................................................................................................ 5
3.4 WACC .......................................................................................................................................... 5
4Findings .............................................................................................................................................. 7
5References .......................................................................................................................................... 8
6Appendix ............................................................................................................................................ 9

1Introduction
1.1 Origin
As a partial requirement of MBA program, I am required to study the Financial Theory and
Practices (F501) course. In the classroom, I get the opportunity to know the theoretical part of
the subject. However, without practical orientation, it is somewhat difficult to grasp the core
concept. Valuation of stock, which requires determining the appropriate Weighted Average
Cost of Capital (WACC), is entirely based on practical situation. So, in order to enhance the
understanding of the core concept, I was required to prepare a report on practical situation to
understand how to implement and practice the theoretical part in real life situation.

1.2 Objectives

To measure the risk of a stock using Regression Analysis

To understand the relationship between risk and required rate of return

To determine the appropriate Weighted Average Cost of Capital (WACC) based on


the risk level

1.3 Scope
This report can give an approximate Weighted Average Cost of Capital (WACC) to be
applicable for the stock of HeidelbergCement Bangladesh Limited. This information can be
used in further valuation of this particular stock.

1.4 Methodology
The report in this study is an inductive one.
Two different types of systems have been selected here based on convenience. The report is
based on both primary and secondary information.

1.5 Limitations

Time Constraint

Lack of Experience

Confidentiality of Information

Page | 1

2Company Profile
HeidelbergCement Bangladesh Limited is one of the largest producers of quality cement in
Bangladesh. HeidelbergCement Bangladesh Limited is a member of Heidelberg Cement
Group, Germany. The group has 136 years of experience in producing cement and is
operating in more than 40 countries. In Bangladesh, it represents two reputed brands, Ruby
Cement and Scan Cement. In 1998, Heidelberg Cement Group established its presence in
Bangladesh by setting up a floating terminal with onboard packing facilities in the port of
Chittagong and by distributing the cement to the key markets of Dhaka and Chittagong. In
1999, the group further strengthened its position in Bangladesh and built Greenfield
manufacturing plant near Dhaka namely Scan Cement International Limited with an
installed capacity of 0.750 million tons per year. In 2000, Heidelberg Cement Group bought a
minority position at Chittagong based company Chittagong Cement Clinker Grinding Co.
Limited (CCCGCL) quickly followed by the acquisition of a controlling stake. The plant in
Chittagong has an installed capacity of 0.7 million tons per year. In 2003, the two companies
were amalgamated and the companys name was changed to HeidelbergCement Bangladesh
Limited. Since 2004, the company has diversified its product range by introducing Portland
Composite Cement (PCC) in to the market. The company also produces other types of
cement namely Ordinary Portland Cement (OPC).

Page | 2

3 Calculation of Weighted Average Cost of Capital (WACC) of


HeidelbergCement Bangladesh Limited
3.1 Capital Structure

The capital structure is how a firm finances its overall operations and growth by using
different sources of funds. Debt comes in the form of bond issues or long-term notes payable,
while equity is classified as common stock, preferred stock or retained earnings.

HeidelbergCement Bangladesh Limited uses both debt and equity to meet its financing needs.
But it heavily relies on equity financing which is evident from the following pie-chart:

Source of Fund

Equity
Debt

For equity financing, it only uses common stock and retained earnings rather than using
preferred stock.
In case of debt financing, it heavily relies on short term debt financing.

Debt Financing

Short Term
Long Term

Page | 3

So, to calculate the WACC of the stock, we have to determine required return for both equity
and debt financing and then, we have to apply their relative weight to derive the WACC.

WACC

Cost of
Equity, RE
Cost of
Debt, RD

3.2 Cost of Equity, RE

The cost of equity is the return (often expressed as a rate of return) a firm theoretically pays
to its equity investors, i.e., shareholders, to compensate for the risk they undertake by
investing their capital.
To determine the Cost of Equity, Capital Asset Pricing Model (CAPM) is widely used.
According to this model,
= + ( )
Here,
RE

Cost of Equity

RM

Market Return

Rf

Risk-free Return

Measure of Risk

Now,
1. For risk-free rate, I have used 364-day T-bill rate to match the investment horizon
which is 3.76%.
2. I have used average market return over the last 7 years to incorporate both the bullish
and bearish trend. Average return has been calculated monthly and then annualized. I
have found it to be 13.53%.
Page | 4

3. Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in


comparison to the market as a whole. Beta is calculated by dividing the covariance of
stock return and market return by the variance of market return.
a. I have used monthly price data of last seven years.
b. Beta has been found to be .79 which means the stock is less volatile then the
market.
After putting this information in the above equation, I have found the cost of equity to be
11.52 %.
3.3 Cost of Debt, RD

To calculate cost of debt, I have used total interest paid last year and divided it by those
liabilities which accrue interest. These liabilities include:

Quasi Equity Loan

ADP Loan

Gratuity

Short Term Loan

There are other liabilities which do not require interest payment such as trade credit, unpaid
dividend, deferred tax etc. These liabilities are not included in this calculation.
After the calculation, I found cost of debt to be 10.13%.
3.4 WACC

Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each
category of capital is proportionately weighted.
All sources of capital, including common stock, preferred stock, bonds and any other long-term debt,
are included in a WACC calculation. A firms WACC increases as the beta and rate of return on
equity increase, as an increase in WACC denotes a decrease in valuation and an increase in risk.
To calculate WACC, multiply the cost of each capital component by itsweight and take the sum of the
results. The method for calculating WACC can be expressed in the following formula:
=

1 +

Page | 5

Here,
V = Total Value of Firm where V = D + E
D = Book Value of Debt
E = Market Value of Equity
Tc = Corporate Tax Rate
Now,
1. Market Value of Equity has been found by multiplying no. of outstanding shares with Market
Price of the share.
2. Book Value of Debt has been used because of lack of market data.
3. Corporate tax rate is 35%.
Using this information, we find the WACC to be 11.04%.

Page | 6

4Findings
This stock has a Beta of .79 which is less than 1. That means this stock is less volatile then
overall market. So, it is a less risky stock and can be an ideal choice for risk adverse
investors.
Most of its needs of fund have been met up by equity. Debt has been used minimally. Most of
its liabilities are non-interest accruing.

Page | 7

5References
1. Richard A. Brealey, Stewart C. Myers and Alan J. Marcus : Fundamentals on
Corporate Finance (7th Edition, 2012), McGraw Hill/Irwin, New York, NY-10020
2. HeidelbergCement Bangladesh Limited, Annual Report 2014
3. www.dsebd.org
4. www.stockbangladesh.com
5. www.heidelbergcementbd.com

Page | 8

6Appendix
Table 1: Calculation of Return

Date

Month End DSEX

DSEX Return

Month End

HeidelBCem

HeidelBCem

Return

31.08.2015

4768.67

-0.0049

602.90

-0.0511

30.07.2015

4792.31

0.0456

635.40

0.1142

30.06.2015

4583.10

-0.0008

570.30

0.1264

31.05.2015

4586.95

0.1333

506.30

0.0928

30.04.2015

4047.29

-0.1067

463.30

0.0289

31.03.2015

4530.48

-0.0489

450.30

-0.1069

26.02.2015

4763.22

0.0083

504.20

0.0267

29.01.2015

4724.05

-0.0290

491.10

-0.0166

30.12.2014

4864.96

0.0200

499.40

0.0126

30.11.2014

4769.43

-0.0781

493.20

-0.0524

30.10.2014

5173.23

0.0195

520.50

-0.0205

30.09.2014

5074.31

0.1154

531.40

0.0759

31.08.2014

4549.52

0.0276

493.90

-0.0382

24.07.2014

4427.16

-0.0119

513.50

0.0098

30.06.2014

4480.62

0.0113

508.50

-0.0274

29.05.2014

4430.48

-0.0299

522.80

-0.1140

30.04.2014

4566.86

0.0088

590.10

0.3987

31.03.2014

4526.94

-0.0469

421.90

-0.0570

27.02.2014

4749.87

-0.0007

447.40

0.0552

30.01.2014

4753.17

0.1141

424.00

0.1137

30.12.2013

4266.55

0.0085

380.70

-0.0055

28.11.2013

4230.73

0.0663

382.80

0.0366

31.10.2013

3967.73

0.0076

369.30

-0.0240

30.09.2013

3937.68

-0.0460

378.40

-0.0906

29.08.2013

4127.48

0.0430

416.10

0.3527

31.07.2013

3957.20

-0.0359

307.60

-0.0818

30.06.2013

4104.65

0.0584

335.00

0.2403

30.05.2013

3878.07

0.1277

270.10

0.1657

30.04.2013

3438.90

-0.0421

231.70

-0.0228
Page | 9

31.03.2013

3590.05

-0.0965

237.10

-0.0350

28.02.2013

3973.28

-0.0458

245.70

-0.0608

31.01.2013

4163.83

-0.0132

261.60

-0.0117

30.12.2012

4219.31

0.0021

264.70

-0.0105

29.11.2012

4210.58

-0.0630

267.50

-0.0223

31.10.2012

4493.92

-0.0111

273.60

0.0190

30.09.2012

4544.41

0.0219

268.50

0.0121

30.08.2012

4446.87

0.0692

265.30

0.0685

30.07.2012

4159.17

-0.0905

248.30

0.0402

28.06.2012

4572.88

-0.0341

238.70

0.0170

31.05.2012

4734.33

-0.0715

234.70

0.0942

30.04.2012

5098.90

0.0218

214.50

0.0127

29.03.2012

4990.32

0.0628

211.80

0.0974

29.02.2012

4695.41

0.1303

193.00

0.1427

31.01.2012

4153.96

-0.2099

168.90

-0.3400

29.12.2011

5257.61

-0.0021

255.90

0.0120

30.11.2011

5268.55

0.0461

2528.75

-0.0293

31.10.2011

5036.50

-0.1478

2605.00

-0.1317

29.09.2011

5910.20

-0.0486

3000.00

-0.0128

25.08.2011

6212.00

-0.0383

3038.75

0.0034

31.07.2011

6459.62

0.0560

3028.50

-0.0038

30.06.2011

6117.23

0.0623

3040.00

-0.0042

31.05.2011

5758.26

-0.0484

3052.75

-0.0005

28.04.2011

6050.85

-0.0474

3054.25

-0.0591

31.03.2011

6352.10

0.2208

3246.25

0.2464

28.02.2011

5203.08

-0.3048

2604.50

-0.2468

31.01.2011

7484.23

-0.0972

3457.75

-0.0551

30.12.2010

8290.41

-0.0363

3659.25

-0.0556

30.11.2010

8602.44

0.0811

3874.50

0.0573

31.10.2010

7957.12

0.1211

3664.50

-0.0466

30.09.2010

7097.38

0.0660

3843.75

0.1198

31.08.2010

6657.97

0.0497

3432.50

-0.0245

29.07.2010

6342.76

0.0307

3518.75

0.1229

Page | 10

30.06.2010

6153.68

0.0075

3133.50

0.1194

31.05.2010

6107.81

0.0801

2799.25

0.0980

29.04.2010

5654.88

0.0130

2549.50

0.0448

31.03.2010

5582.33

0.0039

2440.25

0.0122

28.02.2010

5560.56

0.0360

2410.75

-0.0927

30.01.2010

5367.11

0.1833

2657.00

0.2344

30.12.2009

4535.53

0.0353

2152.50

0.0705

26.11.2009

4380.95

0.3022

2010.75

0.1493

29.10.2009

3364.26

0.0909

1749.50

0.0294

30.09.2009

3083.89

0.0485

1699.50

0.0833

31.08.2009

2941.28

0.0092

1568.75

0.0370

30.07.2009

2914.53

-0.0318

1512.75

0.0584

30.06.2009

3010.26

0.1703

1429.25

0.1199

31.05.2009

2572.18

0.0070

1276.25

0.0800

30.04.2009

2554.36

0.0439

1181.75

-0.0138

31.03.2009

2446.92

-0.0482

1198.25

-0.0089

26.02.2009

2570.96

-0.0296

1209.00

0.0246

29.01.2009

2649.49

1180.00

Table 2: Calculation of Cost of Equity

Covariance of HeidelBCem & Market Return


Variance of Market Return
Beta
Risk-free Rate
Average Market Return (Monthly)
Average Market Return (Yearly)
Cost of Equity

0.006056189
0.007627907
0.793951586
0.0376
0.0113
0.135313704
0.11517995

Page | 11

Table 3: Calculation of Cost of Debt

Ending
Beginning
Average
122636000
122636000
122636000
12699000
12699000
12699000
107882000
75908000
91895000
38242000
10795000
24518500

Quasi Equity Loan


ADP Loan
Gratuity
Short Term Loan
Total Debt
Interest Expense
Cost of Debt

251748500
25500000
0.1013

Table 2: Calculation of WACC


Share Price

602.90

No. of Shares Outstanding

56503580
Weight

Cost

Tax Rate

WeightedAverage

Market Value of Equity

34,066,008,382

0.903251491

0.11517995

Book Value of Debt

3,648,857,000

0.096748509

0.101291567

Total

37714865382

0.104036462
0.35

0.006369875
0.110406337

Page | 12

You might also like