Professional Documents
Culture Documents
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
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report consists of materials, copied or plagiarized from published or unpublished work of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unpublished sources have either been put under quotation or duly acknowledged with full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
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
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
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
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:
ADP Loan
Gratuity
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
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
0.006056189
0.007627907
0.793951586
0.0376
0.0113
0.135313704
0.11517995
Page | 11
Ending
Beginning
Average
122636000
122636000
122636000
12699000
12699000
12699000
107882000
75908000
91895000
38242000
10795000
24518500
251748500
25500000
0.1013
602.90
56503580
Weight
Cost
Tax Rate
WeightedAverage
34,066,008,382
0.903251491
0.11517995
3,648,857,000
0.096748509
0.101291567
Total
37714865382
0.104036462
0.35
0.006369875
0.110406337
Page | 12