Summer Internship Project

Cost of Capital
Sub heading

Submitted in partial fulfillment of MBA program

2009-11

Submitted by
Name= chetan prakesh sankhla
Roll No= 11

Company Guide Faculty Guide

N.C. Jain amit shrivastav
Asst. Vice President Finance
Shree Cement Ltd.

MAHARISHI ARVIND INSTITUTE OF

ENGINEERING & TECHNOLOGY

jaipur

Certificate of Approval
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The following Summer Internship Report titled "Cost of Capital" is hereby approved
as a certified study in management carried out and presented in a manner satisfactory
to warrant its acceptance as a prerequisite for the award of Post-Graduate Diploma in
Business Management for which it has been submitted. It is understood that by this
approval the undersigned do not necessarily endorse or approve any statement made,
opinion expressed or conclusion drawn therein but approve the Summer Internship
Report only for the purpose it is submitted.

Summer Internship Report Examination Committee for evaluation of Summer

Internship Report
Organizational Guide

: Signature………………………….

: Name: Mr. N. C Jain

: Designation: Assist. Vice President, Finance

: Address: Bangur Nagar, post box no -33, Beawar

305901, Rajasthan, INDIA

: Tel No: 09214337403

: Email: jainnc@shreecementltd.com

Certificate of Approval

2
The following Summer Internship Report titled "Cost of Capital" is hereby approved
as a certified study in management carried out and presented in a manner satisfactory
to warrant its acceptance as a prerequisite for the award of Post-Graduate Diploma in
Business Management for which it has been submitted. It is understood that by this
approval the undersigned do not necessarily endorse or approve any statement made,
opinion expressed or conclusion drawn therein but approve the Summer Internship
Report only for the purpose it is submitted.

Summer Internship Report Examination Committee for evaluation of Summer

Internship Report

Institutional Guide

Acknowledgement

At the outset, I offer my sincere thanks to SHREE CEMENTS LTD. for giving me
an opportunity to work on the project titled, “Cost of Capital”.

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It’s a moral responsibility of each individual to acknowledge the help of each
individual who has made your journey smoother for you. First of all I would like to
express my gratitude to Mr. N.C. Jain (Assist. Vice President, Finance) who despite
his tight schedule spared time for discussions and informed about basic groundwork
and direction without whose support, this report would not have been possible. I
appreciate him of giving me an option of selecting such a wonderful project. The
learning has been immense for me from this project.

I am thankful to all employees at Shree Cement Ltd. for providing me all the
information and help I required for completion of this project. I am highly grateful to
the management at Shree Cement for giving me this opportunity to work on a dream
project and in the process harness myself with the huge learning on all aspects.

I would like to give credit to all sources form where I have drawn material for this
project.

Last but not the least, I am grateful to my institute Fortune Institute of International
Business, Delhi which provided me this opportunity to interact with this organization
and understand the intricacies of the corporate world.

Yogesh Sharma

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Sr. No. Particulars Page No.

1 Preface 7

2 Focus of the Project 8

3 The Indian Cement Industry 9

4 Cement-types 10

5 The Cement Industry Structure 11

6 Characteristic of Cement Industry 21

7 Major Demand Drivers 23

8 Major Players in Cement Industry 24

9 Cement Manufacturing 27

10 Business and Managerial Challenges 30

11 Risk and Return of Cement Companies 31

12 Introduction of Shree Cement Limited 31

The Company’s Vision & Mission 33

Marketing 34

Product & Policies 35

Trade & Non-Trade Network 38

SWOT Analysis 39

Award of the Company 41

13 Concept of “Cost of Capital” 43

14 Classification of “Cost of Capital” 46

15 Computation of specific Costs 48

Cost of Equity

Cost of Debts

Capital Structure

Analysis of Capital Structure

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 PREFACE

About three decade ago, the scope of financial management was confined to the
raising of funds, whenever needed and little significance used to be attached to
financial decision-making and problem solving. As a consequence, the traditional
finance texts were structured around this theme and contained description of the
instruments and institutions of raising funds and of the major events, such as
promotion, reorganization,

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 Readjustment, merger, consolidation etc. When funds were raised. In the mid
fifties, the emphasis shifted to the judicious utilization of funds. The modern thinking
in financial management accords a far greater importance to management decision-
making and policy. Today, financial management donot perform the passive role of
scorekeepers of financial data and information, and arranging funds, whenever
directed to do so. Rather, they occupy the key position in top management areas and
play a dynamic role in solving complex management problems. They are now
responsible for the fortune of the enterprises and are involved in the most vital
management decision of allocation of capital. It is their duty to insure the funds are
raised most economically and used in the most efficient and effective manner.
Because of this change in emphasis, the descriptive treatment of the subject of
financial management is being replaced by growing analytical content and sound
theoretical underpinnings.

FOCUS OF THE PROJECT

The project is structured for the purpose of getting good insight of, Capital Structure
and Cost of Capital, theory and its implication. The Projects Focus On Cost Of
Different Component Of Capital And Optimal Capital Structure For Minimizing The
Cost And Risk. It also discusses the different sources of funds, different approaches of
cost of capital.

The project is being made as a part of summer training and gives good insight of the
topic covered under it.

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OBJECTIVE OF THE STUDY

• To get a good insight of the cement industry

• To understand the theory of capital and its implication in business structure

• To know about the various sources of funds in the company

• To find out the cost of various components of capital and how to minimize it.

The Indian Cement Industry

The Indian Cement industry dates back to 1914, with first unit were set-up at
Porbandar with a capacity of 1000 tones. Currently The Indian cement industry with a
total capacity of about 170 m tones (excluding mini plants) in FY07-08, has surpassed
developed nations like USA and Japan and has emerged as the second largest
market after China. Although consolidation has taken place in the Indian cement
industry with the top five players controlling almost 50% of the capacity, the
remaining 50% of the capacity remains pretty fragmented.

Per capita consumption has increased from 28 kg in 1980-81 to 115 kg in 2005. In

relative terms, India’s average consumption is still low and the process of catching up

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with international averages will drive future growth. Infrastructure spending
(particularly on roads, ports and airports), a spurt in housing construction and
expansion in corporate production facilities is likely to spur growth in this area.

South-East Asia and the Middle East are potential export markets. Low cost
technology and extensive restructuring have made some of the Indian cement
companies the most efficient across global majors. Despite some consolidation, the
industry remains somewhat fragmented and merger and acquisition possibilities are
strong. Investment norms including guidelines for foreign direct investment (FDI) are
investor-friendly. All these factors present a strong case for investing in the Indian
market.

Types of Cement

Cements are of two basic types- gray cement and white cement. Grey cement is used only for
construction purposes while white cement can be put to a variety of uses. It is used for mosaic
and terrazzo flooring and certain cements paints. It is used as a primer for paints besides has a
variety of architectural uses. The cost of white cement is approximately three times that of
gray cement. White cement is more expensive because its production cost is more and excise
duty on white cement is also higher. Shree cement does not manufacture white cement at
present.

GREY
WHITE

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 Portland Pozzolona Ordinary Portland cement
Cement (PPC)

Pozzolona used in the manufacture of Portland cement is burnt clay of flyash generated at
thermal power plants. PPC is hydraulic cement. PPC differs from OPC on a number of
counts. Pozzolona during manufacturing consumes lot of hydration heat and forms
‘cementious gel’. Reduced heat of hydration leads to lesser shrinkage cracks. An additional
gel formation leads to lesser pores in concrete or mortar. It also minimizes problem of
leaching and efflorescence.

The Cement Industry Structure

Presently the total installed capacity of Indian Cement Industry is more than 175 mn
tones per annum, with a production around 168 mn tones. The whole cement industry
can be divided into Major cement plants and Mini cement plants.

Major Cement Plants:

• Plants : 140

• Typical installed capacity

• Per plant : Above 1.5 mntpa

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 • Total installed capacity : 170 mntpa

• Production 07-08: 161 mntpa

• All India reach through multiple plants

• Export to Bangladesh, Nepal, Sri Lanka, UAE and Mauritius

• Strong marketing network, tie-ups with customers, contractors

• Wide spread distribution network.

• Sales primarily through the dealer channel

Mini Cement Plants:

• Nearly 300 plants & Located in Gujarat, Rajasthan, MP mainly

• Typical capacity < 200 tpd

• Installed capacity around 9 mn. Tones

• Production around : 6.2 mn tones

• Mini plants were meant to tap scattered limestone reserves. However most set up in AP

• Most use vertical kiln technology

• Production cost / tonne - Rs. 1,000 to 1,400

• Presence of these plants limited to the state

• Infrastructural facilities not the best

REGIONAL DIVISION

The Indian cement industry has to be reviewed in terms of five regions:-

• North – Punjab, Delhi, Haryana, Himachal Pradesh, Rajasthan,

Chandigarh, J&K and Uttaranchal
• West – Maharashtra and Gujarat
• South – Tamil Nadu, Andhra Pradesh, Karnataka, Kerala, Pondicherry,
Andaman & Nicobar and Goa

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 • East – Bihar, Orissa, West Bengal, Assam, Meghalaya, Jharkhand and
Chhattisgarh, and
• Central – Uttar Pradesh and Madhya Pradesh

INDUSTRY CURRENT SCENARIO

SECTOR OUTLOOK

Indian Cement Industry is set to increase production capacity by 28.3 mt in FY09E,

41.4 mt in FY10E and 18.9 mt in FY11E. This will take the aggregate installed
capacity to ~288 mt. In FY08, 21 mt of capacity was added. The Industry planned this
massive capacity expansion of 108 mt because they had never seen such a good run
till FY2006. During this period, the capacity utilization rate of the Industry reached
an all time high level of ~99% in FY08. In the period FY05 to FY08, cement demand
grew at a CAGR of 10.5% and average retail price increased by a whopping 41% to
Rs 230 per bag. Cement manufacturers made huge profits and the Industry average
per tonne of operating profits crossed Rs 1100. Driven by theses profitability levels,
average RoCE level of the Industry crossed the 25% mark.

Cement Industry is set to add ~89 mn tonnes of capacity between FY09-FY11E,

which accounts for ~48% of FY08 installed capacity. We expect ~21 mt of capacity
addition in Q4FY09, followed by 41 mt of additional capacity in FY10 and 18.9 mt in

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FY11. Of the new capacities, ~ 41 mt (~50%) is expected to be commissioned in the
South, followed by 13.3 mt (~16.4%) in the North and 13 mt (16.1%) in the East.

SHARE OF CAPACITY ADDITION (REGION-WISE AND TOP 5

GROUPS)

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ANTICIPATED GROWTH IN CEMENT DEMAND

Housing construction accounts for around 60-65% of the total cement demand and the
balance comes from infrastructure sectors including roads, railways, ports and power,
among others. The demand for cement is directly linked to economic activity and has
a high correlation with GDP growth. Infrastructure investments and construction
activities, which are the major drivers of cement demand, are also key components of
GDP. Further, rural housing, which is a determinant of cement demand, depends on
agricultural productivity, which again is a key component of GDP.

Historical data of last 12 yrs shows that cement demand in India has increased at the
rate of 1.27x the growth rate of GDP. It is expected that cement consumption growth

14
would shrink over the next two years due to uncertain economic conditions and
slowdown in real estate construction activities. Cement demand will consequently
grow by 8.7%, 7.6% and 8.9% in FY09, FY10 and FY11 respectively.

CAPACITY EXPANSION TO WEAKEN PRICING POWER

It is believed that the capacity expansion program will only weaken the pricing power
and profitability of the companies in the future. In a scenario where oversupply is
inevitable, companies could try to increase their market share by decreasing their
prices, leading to a possible price war.

Economic Analysis

-Key Economic Indicators

World GDP, also known as world gross domestic product or GWP - gross world
product, calculated on a nominal basis, was estimated at $65.61 trillion in 2007 by the
CIA World Fact book. While the US is the largest economy, growth in world GDP of
5.6% was led by China (11.9%) and India (7.2%)

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Inflation worldwide

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The recessionary pressures felt across the globe resulted in a massive decline in
the supply of money. This, in turn, affected commodity prices, resulted in low
inflation rates

Higher degrees of inflation, particularly in two digits, will defeat all business
planning, lead to cost escalations and squeeze on profit margins. These will
adversely affect the performance of industry and companies.

Unemployment Rates:

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Interest rates: the rate offered on overnight deposits by the Central Bank or
other authority

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If interest rates increase across the board, then investment decreases, causing a
fall in national income.

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 Characteristics of Cement Industry

This section describes the basic economic characteristics of the cement industry by
following the classical approach which consists of successively examining demand,
supply and market structure. On the basis of these characteristics are described the
main economic stakes in the sector.

Demand &Market
Demand in the cement industry is typically that of an activity which is mature,
cyclical and with low price elasticity. It is also characterized by a high degree of
horizontal differentiation in terms of location and a low degree of vertical
differentiation in terms of quality.

Cement is a homogeneous product. Most of its sales concern about half a dozen
commercial varieties, of which Portland cement is by far the leader. No brand name
exists, so that one supplier’s products can easily be substituted for another. Cement is,
however, an experience good; its quality is guaranteed by standards with which the
supplier has to comply. These standards are often national but in most cases the
products of one country can easily be approved in neighboring countries. Standards
therefore do not constitute trade barriers as such, even if they may hinder trade.

The demand for cement is geographically widely dispersed and corresponds roughly
to population density. Although cement is an upstream industry, it differs from other
basic industries such as aluminum, steel or glass, for which demand id concentrated
both geographically and in terms of the number of customers. In the cement industry
demand is by, by contrast, dispersed in multiple zones of consumption, each of which
comprises numerous customers. Geographical factors thus determine the structure of
the market.

Supply

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Two economic considerations are important a priori in structuring supply in a market
characterized by strong horizontal differentiation:

• The trade-off between fixed costs and transport costs which, depending on the
economic size of the factories, gives an initial idea of the density of the
network of production units covering the territory, in relation to the density of
demand.

• The level of investment costs and the life-span of facilities which determine
the rigidity and the duration of the network.

Expected Demand and

Supply

Major Demand Drivers

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Present Demand drivers
• Infrastructure & construction sector the major demand drivers. Some demand determinants

• Economic growth

• Industrial activity

• Real estate business

• Construction activity

• Investments in the core sector

• Growth in mortgage business in retail housing

• Higher surplus income of household

Opportunities
• growth in the housing sector

• central road fund established for national highways and railway over bridges to
provide the necessary impetus

• expansion plans, Greenfield projects on the anvil

• Demand – supply balance expected in the next 12 – 15 months

• Encouraging trend in demand due to pick-up in rural housing demand and industrial revival

• Industry likely to grow at 8-10% in the next few years

• Newer capacities in future

MAJOR PLAYERS IN CEMENT INDUSTRY:

SHREE CEMENT LTD

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Shree Cement Ltd is a Rajasthan based company, located at Beawar. The company
has installed capacity of 10.2 mn tonnes per annum in Rajasthan. It is a leading
cement manufacture company in North India and has been participating in the
infrastructure transformation of India for over two decades now. It started operations
in the year 1985 and has been growing ever since. Its manufacturing units are located
at Beawar, district Ajmer, and Ras, district Pali, in Rajasthan. It also has grinding
units at Khushkhera, district Alwar in Rajasthan, near Gurgaon.. It has three brands
under its portfolio viz. Shree Ultra Jung Rodhak Cement, Bangur Cement and
Rockstrong Cement. The multi-brand strategy makes Shree the number one cement
player in Rajasthan, Haryana and Delhi. The company has also established two
grinding units one at Suratgarh (Rajasthan) and another at Roorke (Uttaranchal),.

GUJARAT AMBUJA CEMENT LIMITED

GACL was set up in 1986 with 0.7 million tonnes. The capacity has grown 25 times
since then to 18.5 million tonnes. GACL exports as much as 15 percent of its
production. 35% of the company products transported are by sea which is the cheapest
mode. It has earned the reputation of being the lowest cost producer in the cement
industry. Ambuja cement is one of GACL’s well established brands. The company
plans to increase capacity by 3-4 million tonnes in the near future.

ACC LIMITED

Being formed in 1936, ACC has a capacity of 22.40 million (0.53 million tonnes of
Damodar Cement and Slag and 0.96 million tonnes of Bargarh Cement). ACC Super
is one of the company’s well established brands. It is planning to expand the capacity
of its wholly-owned subsidiary Damodar Cement and Slag at Purulia in West Bengal.
This is aimed at increasing its presence in the eastern region.

THE ADITYA BIRLA GROUP

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The Aditya Birla Group is the world’s eight largest cement producer. The first cement
plant of Grasim, the flagship of the Aditya Birla Group, at Jawad in Madhya Pradesh
went on stream in 1985. In total, Grasim has five integrated grey cement plants and
six ready-mix concrete plants. The company is India’s largest white cement producer
with a capacity of 4 lakh tonnes. It has one of the world’s largest white plants at
Kharia Khangar (Rajasthan). Shree Digvijay Cement, a subsidiary of Grasim, which
was acquired in 1998, has its integrated grey cement plant at Sikka (Gujarat). Finally
Grasim acquired controlling stake in Ultra Tech Cement Limited (Ultra Tech), the
demerged cement business of L&T. Grasim has a total cement capacity of 31 million
tonnes and eyeing to increase it to 48 MT by FY 09. Grasim has a portfolio of
national brands which include Birla Super, Birla Plus, Birla White and Birla Ready
mix and also regional brands like Vikram Cement and Rajshree Cement.

BINANI CEMENT

A fierce competition with a 2.2 MTPA plant is located at Binanigram, Pindwara, a

village in Sirobi in the state of Rajasthan. It’s a tough nut player which is outside
CMA (Cement Manufacturer’s Association) and is prime reason for driving prices
low in markets. Offers a good quality product at cheap rates and has very good brand
image. Sales are focused in the North India, Gujarat and Rajasthan. It holds around
14% of the Rajasthan market.

JK

An entrenched competitor that has brands across the price spectrum with JK
Nembahera leading the pack. Also operates in the white cement market with Birla as
its only competitor. It lost significant market when Ambuja came to Rajasthan.

Others

Other players like Shriram have insignificant share and are highly localized. Shriram
has a small presence and that too largely in southern Rajasthan. There are various
mini plants operating too which supply cheap cement which has no ISI certification
and does not confirm BIS standards. Quite often they are supplied in other established

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brand’s cement bags. L&T is a strong player nationally and regarded as quality
product. It has a footprint but not a foothold in Rajasthan market

Cement Manufacturing

Raw Material Preparation

Limestone of differing chemical composition is freely
available in the quarries. This limestone is carefully
blended before being crushed. Red mineral is added
to the limestone at the crushing stage to provide
consistent chemical composition of the raw materials.
Once these materials have been crushed and subjected
to online chemical analysis they are blended in a
homogenized stockpile. A bucket wheel reclaimer is
used to recover and further blend this raw material
mix before transfer to the raw material grinding mills.

Raw Mill

Transport belt conveyor transfers the blended raw

materials to ball mills where it is ground. The
chemical analysis is again checked to ensure excellent
quality control of the product. The resulting ground
and dried raw meal is sent to a homogenizing and
storage silo for further blending before being burnt in
the kilns.

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Fuels

The heat required to produce temperatures of 1,800°C

at the flame is supplied by ground and dried
petroleum coke and/or fuel oil. The Petcock is
imported via the companies' internal wharf, stored
and then ground in dedicated mills. Careful control of
the mills ensures optimum fineness of the Petcock
and excellent combustion conditions within the kilns system.

Burning

The raw meal is fed into the top of a pre-heater

tower equipped with four cyclone stages. As it
falls, the meal is heated up by the rising hot gases
and reaches 800°C. At this temperature, the meal
dehydrates and partially decarbonizes. The meal
then enters a sloping rotary kiln, which is heated by
a 1,800°C flame, which completes the burning
process of the meal. The meal is heated to a
temperature of at least 1,450°C. At this temperature
the chemical changes required to produce cement
clinker are achieved. The dry process kiln is shorter than the wet process kiln and is
the most fuel-efficient method of cement production available.

Cooler Units

The clinker discharging from the kiln is cooled by

air to a temperature of 70°C above ambient
temperature and heat is recovered for the process
to improve fuel efficiency. Some of the air from
the cooler is de-dusted and supplied to the coal
grinding Plant. The remaining air is used as
preheated secondary air for the main combustion
burner in the kiln. Clinker is analyzed to ensure
consistent product quality as it leaves the cooler.
Metal conveyors transport the clinker to closed storage areas.

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Filters

Dedicated electrostatic precipitators dedust the air and gases used in the Clinker
Production Line Process. In this way, 99.9% of the dust is collected before venting to
the atmosphere. All dust collected is returned to the process.

Constituents

Different types of cement are produced by mixing and weighing proportionally the
following constituents:

• Clinker
• Gypsum
• Limestone addition
• Blast Furnace Slag

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Cement manufacturing from the quarrying of limestone to the bagging of cement.

Business & Managerial Challenges

Cement market is highly competitive with major players having advantage of brand
equity, capacity and early movers. The major players are Binaani, Birla (with
products like Birla Super and Birla Chetak), Grasim (with products like Vikram and
Birla Plus), Gujarat Ambuja, JK (with products like JK Nimbahera), Laxmi,

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Mangalam (with products like Mangalam and Birla Uttam), ACC, DCM Shriram, L &
T and Kamdhenu. Each of these players has their dominance across whole Rajasthan
in addition to their respective regional dominance.

Another issue is that the product (cement) cannot be differentiated clearly on the basis
of quality and hence, cost plays one of the most important role in this industry. If the
company can control cost of manufacturing & distribution, then not only would
profitability of the company increase, but this benefit would also trickle down to the
customers.

Logistics is the most important cost associated with cement industry. This is the single
most important reason for strong dominance of all cement companies in the regions
around their factory. But if this system can be improved upon, and costs can be
managed, then Shree Cements Ltd. can strengthen their hold in present states of
distribution as well as look forward to gaining foothold in newer and farther regions.

Risk and Return of Cement Companies

General Risk Factors

• Economic Conditions - The performance of cement companies may be
significantly affected by changes in economic conditions, and particularly
conditions which affect the cement industry, its top consumers. These
industries include the real estate sector and construction companies.
Profitability of the business may also be affected by factors such as market
conditions, interest rates, and inflation.

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 • Geo-political Factors –The companies may be affected by the impact that
geo-political factors have on the world economy or on financial markets and
investments generally or specifically. These include the demand for cement
from China, and other export destinations.

• Government policies and legislation –The companies may be affected

by changes to government policies and legislation, including those relating to
the real estate and construction industry in addition to the cement sector.
Taxation and the regulation of trade practices and competition. In recent times
there has been an attempt by the government to control the price of cement by
changing the tax structure. Such attempts could cause price instability and hit
on margins.

• Currency Risk: The recent appreciation of the Indian rupee is going to be a

major hindrance to export to other countries especially china as well as other
nations. Currency risk represents a major issue facing exports however the risk
is currently less due to the robust demand for cement in the domestic
economy. However with addition to plant capacity and increase in volume of
production, such a risk would prove to be a major challenge.

ABOUT THE ORGANISATION

COMPANY PROFILE

COMPANY Shree Cement Ltd.

INCORPORATION YEAR 1979

Bangur Nagar, Beawar, Ajmer
REGISTERED OFFICE
(Rajasthan)
CORPORATE OFFICE 21, Strand Road, Kolkata

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INDUSTRY Cement Manufacturing

CHAIRMAN B.G. Bangur

MANAGING DIRECTOR H.M. Bangur

EXECUTIVE DIRECTOR M.K. Singhi

Shree Cements Ltd.

Shree Cements Ltd. is a Rajasthan based company, located at Beawer. The company
has installed capacity of 10.2 mtpa tones per annum in Rajasthan.. For the last 18
years, it has been consistently producing many notches above the nameplate capacity.
The company retains its position as north India’s largest single-location manufacturer.
Shree’s principal cement consuming markets comprise Rajasthan, Delhi, Haryana,
Punjab, Uttar Pradesh and Uttranchal. Shree manufactures Ordinary Portland Cement
(OPC) and Portland Pozzolana Cement (PPC). Its output is marketed under the Shree
Ultra Ordinary Portland Cement’ and ‘Shree Ultra Red Oxide jung rodhak Cement’
brand names.

THE SHREE VISION

Vision
“To drive and sustain industry leadership Within a global context - by
developing individual Competencies at every level, through a robust Trust,
support, innovation and reward”

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Guiding Principles

• Enforce good corporate governance practices

• Encourage integrity of conduct
• Ensure clarity and un-ambiguity in communication
• Remain accountable to all stakeholders
• Encourage socially responsible behavior

Mission

• To harness sustainability through low carbon philosophy

• To sustain its reputation as one of the most efficient manufacturers
globally.
• To continually have most engaged team
• To drive down cost through innovative practices
• To continually add value to its products and operations meeting
expectations of all its stakeholders

Marketing

Shree caters to cement demand arising in Rajasthan, Delhi, Haryana, UP and Punjab.
What is strategic for SCL is that it is located in central Rajasthan so it can cater to the
entire Rajasthan market with the most economic logistics cost. Also, Shree Cement is
the closest plant to Delhi and Haryana among all cement manufacturers in its state and
proximity to these profitable cement markets renders the company an edge over other
cement companies of the company in terms of lower freight costs. SCL has a 160 MW
captive thermal power plant, which has achieved over 90 per cent load factor. In
2000-01, the company has succeeded in substituting conventional coke with 100 per
cent pet coke, a waste from refineries, as primary fuel resulting in lower inventory and
input costs. In the past two years the price of coal has gone up. Earlier dependent on
good quality imported coal, the company's switch to pet coke could not have come at
a better time. The company also replaced indigenous refractory bricks with imported
substitutes, reducing its consumption per tonne of clinker. The company has one of
the most energy efficient plants in the world. The captive plant generates power at a
much lower cost of Rs 2.5 per unit (excluding interest and depreciation) as compared
to over Rs 5 per unit from the grid. In appreciation of its achievements in Energy

32
sector, the Company has been awarded the prestigious 'National Energy Conservation
Award" various times. Shree is rated best by Whitehopleman, an international agency
specializing in the rating of cement plants.

PRODUCTS

Following are the various products of Shree Cements Ltd.

1 Shree Ultra Red Oxide Jung Rodhak Cement (ROC)

2 Shree OPC
3 Bangur Cement
4 Rockstrong Cemento

POLICIES:
Quality Policy:

• To provide products conforming to national standards and meeting customers

requirements to their total satisfaction.
• To continually improve performance and effectiveness of quality management
system by setting and reviewing quality objectives for –
a) Customer satisfaction
b) Cost effectiveness

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Energy Policy:

• To reduce to the maximum extent possible the consumption of energy without

impairing productivity which should help in:
• Increase in the profitability of the company
• Conservation of Energy
• Reduction in Environmental pollution at Energy producing areas.

Environment Policy:

To ensure:
• Clean, green and healthy environment
• Efficient use of natural resources, energy, plant and equipment
• Reduction in emissions, noise, waste and greenhouse gases
• Continual improvement in environment management
• Compliance of relevant environment legislation

Water Policy:

• To provide sufficient and safe water to people and plant as well as to conserve
water, we are committed to efficient water management practices viz.
• Develop means and methods for water harvesting
• Treatment of waste discharge water for reuse
• Educate people for effective utilization and conservation of water
• Water audit and regular monitoring of water consumption

Health and Safety Policy:

• To ensure good health and safe environment for all concerned by:
• Promoting awareness on sound health and safe working practices
• Continually improving health and safety performance by regularly setting and
reviewing objectives and targets
• Identifying and minimizing injury and health hazards by effective risk control
measures

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 • Complying with all applicable legislations and regulations

Human Resource Policy:

Shree Cement is committed to:

• Empower people
• Honor individuality of every employee
• Non discrimination in recruitment process
• Develop Competency
• Employees shall be given enough opportunity for betterment
• None of the person below the age of 18 shall be engaged to work
• Incidence of Sexual harassment shall be viewed seriously
• To follow Safety & Health, Quality, Environment, Energy policy

ADVERTISING

Need for Advertising:-

• Cement has evolved into a highly commoditized product category. Due to

competitive pricing within the industry, there was not much differentiation
among the various brands on offer.
• People too did not pay much attention to this product unless there was a need
felt. Hence people who were currently making their houses or were soon to
embark on such a project became the target market.
• Because of the product being commoditized, there was a need for
differentiation for which there were some changes made to the product.

35
Shree Cement Ltd was not advertising its products for the past few years but looking
at the competitive market and opportunities ahead it introduced a new ad campaign
which was targeted to differentiate its products from other cement brands. It
introduced an ad campaign showing the anti rusting capability of the Red Oxide
Cement of the company. But still the presence of the company has not been as intense
as other brands have like Ambuja and Grasim etc.

Trade and Non-Trade

Networks
There are two types of Networks: Trade
and Non-tradea) Non-trade Network

A) Non trade network Non- Trade Network

36
 Govt. Non-trade Private Non-trade

for govt infrastructure building – for Group housing /

Govt. Housing Projects retail housing
Railways – Contractor’s projects
Airports on behalf of govt.
Cement Roads – Any industrial projects
Bridges taken up by the
Dams private sector like
Canals bridges, roads etc.
These are all bulk
requirements

B) Trade Network

Company Handling Agent Stockiest Retailers

Cons
umers

SWOT ANALYSIS

Strength and weaknesses are essentially internal to the organization and relate to the
matter
Concerning resources, programmes and organization in key areas such as
• Sales
• Marketing
• Capacity
• Manufacturing cost etc

Opportunity and Threat are external to the organization and can exist or develop in the
following areas
• Size & Segmentation
• Growth pattern and maturity
• International dimensions
• Relative attractive of segments

37
• New Technologies etc

STRENGTH

• Company is established in Beawar where most of the land is rocky and

material is suitable for the production of cement, thus it is closely bound to the
resources.
• Specific chemical composition which makes it co erosion free and also have
very Good chemical recovery efficiency.
• Company has its own electricity production unit thus need not to depend on
the Availability of power n dependency on electricity department.
• Well transport facility; it has its own railway track.
• Leading brand in north India. Thus people give preference to the brand.
• Maintain a very good customer loyalty and relationship.
• A very superior production quality thus customer is always satisfied.
• Upper level of management is too skillful.

Weakness

• Poor access of distribution.

• Very less advertising thus in other part of country it’s not as popular.
• Technical knowledge is less at lower level of employee, which is draw back
for Achieving maximum profit.
• It’s difficult for them to change to an alternate line o production with existing
Machinery.

Opportunities

• Changing customer taste, thus they may get the market from the switchers.
• Liberalization of geographic works, thus they can enter into different
market.
• Huge land available for expansion of business in future.
• Govt. is planning for betterment on infra structure thus there will be huge
demand for cement.
• Booming real estate sector.
• Good relation with bankers thus for expansion of business they need not to
look too far.

Threats

• Changing customer taste, any time they may switch to other.

• Advancement in technology.
• Entry of new player.
• Few major players are situated near the main plant thus market share is
difficult to Increase.
• Change in Govt. policy as they may increase the tax.
• Non availability on raw material.
• Labor and higher technical personnel may switch to another plants.

38
 AWARDS OF THE COMPANY

• 4 star rating from Whitehopleman UK, an International Cement Consultants,

since 2000 (No one in world has been rated 5 star!!

• Reckoned as 2nd fastest growing mid sized Company in 2006 by “Business

Today” a national level magazine (6 May 07 edition

• Golden Peacock Award - 2007 for Excellence in Corporate Governance

• Golden Peacock Award - 2007 in recognition of excellent Environment

Management practices

• National Awards for Energy Conservation from Ministry of Power, Govt of

India

• CII National Award for Excellence in Energy Management 2006

• National Safety Award awarded by the Honorable President of India, Smt.

Pratibha Patil

• Best Annual Report Award by Rajasthan Chamber of Commerce and

Industry in 2007

• “Amity Corporate Excellence Award” by Amity International Business

School, Noida.

• ICWAI National Award 2005 for excellence in cost management

39
 • Green-Tech Environment Excellence Award

• Golden Peacock Award for Combating Climate Change

• Corporate Excellence Award by Rajasthan Chamber of Commerce & Industry

(RCCI) in all four categories namely Corporate Governance & Capital Market,
Financial Performance & Analysis, Business & Qualitative Aspects and
Annual Report Presentation as well as Management

• SILVER CIO Award by the CIOL Dataquest

Enterprise Connect Awards 2008.
Note: Recently their name is registered for Limca book of Records (National Records
2010), for the completion of 1 new mtpa plant in a record 12 months –from march 23,
2008 to march 24, 2009.

40
COST OF CAPITAL

The main objective of a business firm is to maximize the wealth of its

shareholders in the long-run, the Management Should only invest in those projects
which give a return in excess of cost of fund invested in the project of the business.
The difficulty will arise in determination of cost of funds, if is raised from different
sources and different quantum. The various sources of funds to the company are in the
form of equity and debt. The cost of capital is the rate of return the company has to
pay to various suppliers of fund in the company. There are main two sources of
capital for a company – shareholder and lender. The cost of equity and cost of debt
are the rate of return that need to be offered to those two groups of suppliers of the
capital in order to attract funds from them.

The primary function of every financial manager is to arrange adequate capital

for the firm. A business firm can raise capital from various sources such as equity and
or preference shares, debentures, retain earning etc. This capital is invested in
different projects of the firm for generating revenue. On the other hand, it is necessary
for the firm to pay a minimum return to each source of capital. Therefore, each project
must earn so much of the income that a minimum return can be paid to these sources
or supplier of capital. What should be this minimum return? The concept used to
determine this minimum return is called Cost of Capital. On the basis of it the
management evaluates alternative sources of finance and select the optimal one. In
this chapter, concepts and implications of firms cast of capital, determination of cast
of difference sources of capital and overall cost of capital are being discussed.

CONCEPT OF COST OF CAPITAL

41
 Cost of capital is the measurement of the sacrifice made by investors in order to
invest with a view to get a fair return in future on his investments as a reward for the
postponement of his present needs. On the other hand form the point of view of the
firm using the capital, cost of capital is the price paid to the investor for the use of
capital provided by him. Thus, cost of capital is reward for the use of capital. Author
Lutz has called it” BORROWING AND LANDING RATES”. The borrowing rates
means the rate of interest which must be paid to obtained and use the capital.
Similarly, landing rate is the rate at which the firm discounts its profits. It may also
the opportunity cost of the funds to the firm i.e. what the firm would earn by investing
these funds elsewhere. In practice the borrowing rates used indicate the cost of capital
in preference to landing rates.

Technically and Operationally, the cost of capital define as the minimum rate
of return a firm must earn on its investment in order to satisfy investors and to
maintain its market value. I.e. it is the investors required rate of return. Cost of capital
also refers to the discount rate which is used while determining the present value of
estimated future cash flows. In the other word of John J. Hampton, “The cost of
capital is the rate of return in the firm requires from investment in order to
increase the value of firm in the market place”. For example if a firm borrows Rs.
5 crore at an interest of 11% P.A., then the cost of capital is 11%. Hear it’s the
essential for the firm to invest these Rs. 5 Crore in such a way that it earn at least Rs.
55 lacks i.e. rate of return at 11%. If the return less then this, then the rate of dividend
which the share holder are receiving till now will go down resulting in a decline in its
market value thus the cost of capital is the reward for the use capital. Solomon Ezra,
has called “It the minimum required rate of return or the cut of rate for capital
expenditure.”

FEATURES OF COST OF CAPITAL

It is not a cost in reality the cost of capital is not a cost as such, but its rate of
return which it requires on the projects.

MINIMUM RATE OF RETURN:

42
 Cost of capital is the minimum rate of return a firm is required in order to
maintain the market value of its equity shares.

REWARDS FOR RISKS

Cost of capital is the reward for the business and financial risk. Business risks
is the measurement of variability in profits due to changes in sales, while financial
risks depends on the capital structure i.e. that equity mix of the firm.

SIGNIFICANCE OF CONCEPT OF COST OF CAPITAL

The cost of capital is very important concept in the financial decision making. The
progressive management always likes to consider the cost of capital while taking
financial decisions as it’s very relevant in the following spheres...

1. Designing the capital structure: the cost of capital is the significant factor in
designing a balanced an optimal capital structure of a firm. While designing it,
the management has to consider the objective of maximizing the value of the
firm and minimizing cost of capital. I comparing the various specific costs of
different sources of capital, the financial manager can select the best and the
most economical source of finance and can designed a sound and balanced
capital structure.
2. Capital budgeting decisions: the cost of capital sources as a very useful tool in
the process of making capital budgeting decisions. Acceptance or rejection of
any investment proposal depends upon the cost of capital. A proposal shall not
be accepted till its rate of return is greater then the cost of capital. In various
methods of discounted cash flows of capital budgeting, cost of capital
measured the financial performance and determines acceptability of all
investment proposals by discounting the cash flows.
3. Comparative study of sources of financing: there are various sources of
financing a project. Out of these, which source should be used at a particular

43
 point of time is to be decided by comparing cost of different sources of
financing. The source which bears the minimum cost of capital would be
selected. Although cost of capital is an important factor in such decisions, but
equally important are the considerations of retaining control and of avoiding
risks.

4. Evaluations of financial performance of top management: cost of capital can

be used to evaluate the financial performance of the top executives. Such as
evaluations can be done by comparing actual profitability of the project
undertaken with the actual cost of capital of funds raise o finance the project.
If the actual profitability of the project is more than the actual cost of capital,
the performance can be evaluated as satisfactory.
5. Knowledge of firms expected income and inherent risks: investors can know
the firms expected income and risks inherent there in by cost of capital. If a
firms cost of capital is high, it means the firms present rate of earnings is less,
risk is more and capital structure is imbalanced, in such situations, investors
expect higher rate of return.
6. Financing and Dividend Decisions: the concept of capital can be conveniently
employed as a tool in making other important financial decisions. On the
basis, decisions can be taken regarding dividend policy, capitalization of
profits and selections of sources of working capital.

CLASSIFICATION OF COST OF CAPITAL

1. Historical Cost and future Cost

Historical Cost represents the cost which has already been incurred for
financing a project. It is calculated on the basis of the past data. Future cost
refers to the expected cost of funds to be raised for financing a project.
Historical costs help in predicting the future costs and provide an evaluation of
the past performance when compared with standard costs. In financial
decisions future costs are more relevant than historical costs.

2. Specific Cost and Composite Cost

44
Specific costs refer to the cost of a specific source of capital such as equity
share. Preference share, debenture, retain earnings etc. Composite cost of
capital refers to the combined cost of various sources of finance. In other
words, it is a weighted average cost of capital. It is also termed as ‘overall
costs of capital’. While evaluating a capital expenditure proposal, the
composite cost of capital should be as an acceptance/ rejection criterion. When
capital from more than one source is employed in the business, it is the
composite cost which should be considered for decision-making and not the
specific cost. But where capital from only one source is employed in the
business, the specific cost of those sources of capital alone must be
considered.

3. Average Cost and Marginal Cost

Average cost of capital refers to the weighted average cost of capital

calculated on the basis of cost of each source of capital and weights are
assigned to the ratio of their share to total capital funds. Marginal cost of
capital may be defined as the ‘Cost of obtaining another rupee of new capital.’
When a firm rises additional capital from only one sources (not different
sources), than marginal cost is the specific or explicit cost. Marginal cost is
considered more important in capital budgeting and financing decisions.
Marginal cost tends to increase proportionately as the amount of debt increase.

4. Explicit Cost and Implicit Cost

Explicit cost refers to the discount rate which equates the present value of cash
outflows or value of investment. Thus, the explicit cost of capital is the
internal rate of return which a firm pays for procuring the finances. If a firm
takes interest free loan, its explicit cost will be zero percent as no cash outflow
in the form of interest are involved. On the other hand, the implicit cost
represents the rate of return which can be earned by investing the funds in the
alternative investments. In other words, the opportunity cost of the funds is the
implicit cost. Port field has defined the implicit cost as “the rate of return with
the best investment opportunity for the firm and its shareholders that will be
forgone if the project presently under consideration by the firm were
accepted.” Thus implicit cost arises only when funds are invested somewhere,

45
 otherwise not. For example, the implicit cost of retained earnings is the rate of
return which the shareholder could have earn by investing these funds, if the
company would have distributed these earning to them as dividends.
Therefore, explicit cost will arise only when funds are raised whereas implicit
cost arises when they are used.

Assumption of Cost of Capital

While computing the cost of capital, the following assumptions are made:

• The cost can be either explicit or implicit.

• The financial and business risks are not affected by investing in
new investment proposals.
• The firm’s capital structure remains unchanged.
• Cost of each source of capital is determined on an after tax
basis.
• Costs of previously obtained capital are not relevant for
computing the cost of capital to be raised from specific source.

Computation of specific costs

A firm can raise funds from different sources such as loan, equity shares, preference
shares, retained earnings etc. All these sources are called components of capital. The
cost of capital of these different sources is called specific cost of capital. Computation
of specific cost of capital helps in determining the overall cost of capital for the firm
and in evaluating the decision to raise funds from a particular source. The
computation procedure of specific costs is explained in the pages that follow –

COST OF DEBT CAPITAL

Cost of Debt is the effective rate that a company pays on its current debt. This
can be measured in either before- or after-tax returns; however, because interest

46
expense is deductible, the after-tax cost is seen most often. This is one part of the
company's capital structure, which also includes the cost of equity.

Much theoretical work characterizes the choice between debt and equity, in a
trade-off context: Firms choose their optimal debt ratio by balancing the benefits and
costs. Traditionally, tax savings that occur because interest is deductible while equity
payout is not have been modelled as a primary benefit of debt. Large firms with
tangible assets and few growth options tend to use a relatively large amount of debt.
Firms with high corporate tax rates also tend to have higher debt ratios and use more
debt incrementally. A company will use various bonds, loans and other forms of debt,
so this measure is useful for giving an idea as to the overall rate being paid by the
company to use debt financing. The measure can also give investors an idea as to the
riskiness of the company compared to others, because riskier companies generally
have a higher cost of debt.

Example-: If a company issues 12% debentures worth Rs. 5 lacs of Rs. 100 each at
par, then it must be earn at least Rs.60000(12% of Rs. 5 lacs) per year on this
investment to maintain the income available to the shareholders unchanged. If the
company earns less than this interest rate (12%) than the income available to the
shareholders will be reduced and the market value of the share will go down.
Therefore, the cost of debt capital is the contractual interest rate adjusted further for
the tax liability of the firm. But, to know the real cost of debt, the relation of the
interest rate is to be established with the actual amount realised or net proceeds from
the issue of debentures.

To get the after-tax rate, you simply multiply the before-tax rate by one minus the
marginal tax rate.

Cost of Debt = (before-tax rate x (1-marginal tax))

The before tax rate of interest can be calculated as below:

47
 = Interest Expense of the company

---------------------------------------- X 100

Total Debt

Net Proceeds:

1. At par = Par value – Floatation cost

2. At premium = Par value + Premium – Floatation cost
3. At Discount = Par value – Discount – Floatation cost

COST OF PREFERENCE SHARE CAPITAL

Preference share is another source of Capital for a company. Preference Shares are the
shares that have a preferential right over the dividends of the company over the
common shares. A preference shareholder enjoys priority in terms of repayment vis-à-
vis equity shares in case a company goes into liquidation. Preference shareholders,
however, do not have ownership rights in the company. In the companies under
observation only India Cement has preference shares issued.

Cost of Preference Capital = Preference Dividend/Market Value of Preference

Shree Cement has not paid any dividend to the Preference Shareholders. Thus the
Cost of Preference Capital is 0 (Zero).

COST OF EQUITY SHARE CAPITAL

The computation of cost of equity share capital is relatively difficult because

neither the rate of dividend is predetermined nor the payment of dividend is legally
binding, therefore, some financial experts hold the opinion the p.s capital does not
carry any cost but this is not true. When additional equity shares are issued, the new
equity share holders get proponate share in future dividend and undistributed profits

48
of the company. If reduces the earning per shares of existing share holders resulting in
a fall in marker price of shares. Therefore, at the time of issue of new equity shares, it
is the duty of the management to see that the company must earn at least so much
income that the market price of its existing share remains unchanged. This expected
minimum rate of return is the cast o equity share capital. Thus, cost of equity share
capital may be define as the minimum rate of return that a firm must earn on the
equity financed portion of a investment- project in order to leave unchanged the
market price of its shares. The cost of equity can be computed by any of the following
method:

1. Dividend yield method:

Ke = DPS\MP*100

Ke= cost of equity capital

Dps= current cash dividend per share

Mp=current market price per share

2. Earning yield method:

Ke= EPS\mp*100

Eps= earnings per share

3. Dividing yield plus growth in dividend method:

While computing cost of capital under dividend yield(d\p
ratio)method, it had been assumed that present rate of dividend will
remain the same in future also. But, if the management estimates that
companies present dividend will increased continuously for the year to
come, then adjustment for this increase is essential to compute the cost
of capital.

The growth rate in dividend is assumed to be equal to the growth rate

in earning per share. For example if the EPS increase at the rate of
10% per year, the DPS and market price per share would show an
increase at the rate of 10%. Therefore, under this method, cost of
equity capital is computed by adjusting the present rate of dividend on
the basis of expected future increase in company’s earning.

49
 Ke= DPS\MP*100+G

G= Growth rate in dividend.

4. Realised yield method:

In case where future dividend and market price are uncertain, it is very difficult to
estimate the rate of return on investment. In order to overcome this difficulty, the
average rate of return actually realise in the past few year by the investors is used to
determine the cost of capital. Under this method, the realised yield is discounted at the
present value factor, and then compare with value of investment this method is based
on these assumptions.

The company’s risk does not change i.e. dividend and growth rate are stable.

The alternative investment opportunities, elsewhere for the investor, yield the return
which is equal to realised yields in the company, and

The market of equity share of the company does not fluctuate widely.

Cost of newly issued equity shares

when new equity share are issued by a company, it is not possible to realise the
market price per share, because the company has to incur some expenses on new
issue, including underwriting commission, brokerage etc. so, the amount of net
proceeds is calculated by deducting the issue expenses form the expected market
value or issue price. To ascertain the cost of capital, dividend per share or EPS is
divided by the amount of net proceeds. Any of the following formulae may be used
for this purpose:

Ke= DPS\NP*100

Or

Ke= EPS\NP*100

Or

50
 Ke=DPS\NP*100+G

COST OF RETAIN EARNINGS OR INTERNAL EQUITY

Generally, company’s do not distribute the entire profits by way of dividend

among their share holders. A part of such profit is retained for future expansion and
development. Thus year by year, companies create sufficient fund for the financing
through internal sources. But , neither the company pays any cost nor incur any
expenditure for such funds. Therefore, it is assumed to cost free capital that is not
true. Though retain earnings like retained earnings like equity funds have no explicit
cost but do have opportunity cost. The opportunity cost of retained earnings is the
income forgone by the share holders. It is equal to the income what a share holders
could have earns otherwise by investing the same in an alternative investment, if the
company would have distributed the earnings by way of dividend instead of retaining
in the business. Therefore , every share holders expects from the company that much
of income on retained earnings for which he is deprived of the income arising o its
alternative investment. Thus, income forgone or sacrificed is the cost of retain
earnings which the share holders expects from the company.

WEIGHTED AVERAGE COST OF CAPITAL

Once the specific cost of capital of the long-term sources i.e. the debt, the
preference share capital, the equity share capital and the retained earnings have been
ascertained, the next step is to calculate the overall cost of capital of the firm. The
capital raised from various sources is invested in different projects. The profitability
of these projects is evaluated by comparing the expected rate of return with overall
cost of capital of the firm. The overall cost of capital is the weighted average of the
costs of the various sources of the funds, weights being the proportion of each source
of funds in the total capital structure. Thus, weighted average as the name implies,
is an average of the cost of specific sources of capital employed in the business
properly weighted by the proportion they held in firm’s capital structure. It is
also termed as ‘Composite Cost of Capital’ or ‘Overall Cost of Capital’ or ‘Average
Cost of Capital’.

51
WEIGHTED AVERAGE, How to calculate?

Though, the concept of weighted average cost of capital is very simple. Yet there are
many problems in its calculation. Its computation requires:

1. Assignment of Weights: First of all, weights have to be assigned to each

source of capital for calculating the weighted average cost of capital. Weight
can be either ‘book value weight’ or ‘market value weight’. Book value
weights are the relative proportion of various sources of capital to the total
capital structure of a firm. The book value weight can be easily calculated by
taking the relevant information from the capital structure as given in the
balance sheet of the firm. Market value weights may be calculated on the basic
on the market value of different sources of capital i.e. the proportion of each
source at its market value. In order to calculate the market value weights, the
firm has to find out the current market price of each security in each category.
Theoretically, the use of market value weights for calculating the weighted
average cost of capital is more appealing due to the following reasons:
• The market values of securities are closely approximate to the actual
amount to be received from the proceeds of such securities.
• The cost of each specific source of finance is calculated according to
the prevailing market price.
But, the assignment of the weight on the basic of market value is operationally
inconvenient as the market value of securities may frequently fluctuate.
Moreover, sometimes, no market value is available for the particular type of
security, specially in case of retained earnings can indirectly be estimated by
Gitman’s method. According to him, retained earnings are treated as equity
capital for calculating cost of specific sources of funds. The market value of
equity share may be considered as the combined market value of both equity
shares and retained earnings or individual market value (equity shares and
retained earnings) may also be determined by allocating each of percentage
share of the total market value to their respective percentage share of the total
values.

For example:- the capital structure of a company consists of 40,000 equity

shares of Rs. 10 each ad retained earnings of Rs. 1,00,000. if the market price

52
 of company’s equity share is Rs. 18, than total market value of equity shares
and retained earnings would be Rs. 7,20,000 (40,000* 18) which can be
allocated between equity capital and retained earnings as follows-

Market Value of Equity Capital = 7,20,000*4,00,000/5,00,000

=Rs. 5,76,000.

Market Value of Retained Earnings= 7,20,000*1,00,000/5,00,000

=Rs. 1,44,000.

2. Computation of Specific Cost of Each Source :

After assigning the weight; specific costs of each source of capital, as
explained earlier, are to be calculated. In financial decisions, all costs are
‘after tax’ costs. Therefore, if any source has ‘before tax’ cost, it has to be
converted in to ‘after tax’ cost.

3. Computation of Weighted Cost of Capital :

After ascertaining the weights and cost of each source of capital, the weighted
average cost is calculated by multiplying the cost of each source by its
appropriate weights and weighted cost of all the sources is added. This total of
weighted costs is the weighted average cost of capital. The following formula
may be used for this purpose :

Kw = ∑XW/∑W

Here; Kw = Weighted average cost of capital

X = After tax cost of different sources of capital

W = Weights assigned to a particular source of capital

53
Example : Following information is available with regard to the capital structure of
ABC Limited :

Sources of Funds Amount(Rs.) After tax cost of Capital

E.S. Capital 3,50,000 .12

Retained Earning 2,00,000 .10

P.S. Capital 1,50,000 .13

Debentures 3,00,000 .09

You are required to calculate the weighted average cost of capital.

Computation of Weighted Average Cost of Capital

Source Amount Weights After tax Weighted

Rs. Cost Cost

(2) (4) (5)= (3) * (4)

(1) (3)
E.S. Capital 3,50,000 .35 .12 .0420
Retained Earning 2,00,000 .20 .10 .0200
P.S. Capital 1,50,000 .10 .13 .0195
Debentures 3,00,000 .09 .09 .0270
Total 10,00,000 1.00 .1085
Weighted Average Cost of Capital (WACC) .10850 or 10.85%

CALCULATION OF COST OF CAPITAL OF SHREE CEMENT LTD.

Cost of Debt Capital:

54
For the year 2009-10:

Total Debt Capital = Term loan from Banks + Debts

= 131570.37+30000 = 161570.37 lacs

Total Interest Paid = 13065.36 lacs

Tax Rate = 30%

Interest Expense of the company

Kd (before tax) = -------------------------------------------- X 100

Total Debt

Kd (before tax) = 13065.36

................................................. X 100

161570.37

= 8.08 %

Kd (after tax) = Interest Rate Before Tax – Tax Rate ( 30%.)

Kd (after tax) = 8.08% - 30% = 5.65 %

For the year 2008-09:

55
 Total Debt Capital = Term loan from Banks + Debts

= 105716.94+000 = 105716.94 lacs

Total Interest Paid = 9355.94

Tax Rate = 30%

Interest Expense of the company

Kd (before tax) = -------------------------------------------- X 100

Total Debt

9355.94

Kd (before tax) = ---------------------- X 100

105716.94

= 8.85 %

Kd (after tax) = Interest Rate Before Tax – Tax Rate ( 30%.)

Kd (after tax) = 8.85% - 30% = 6.20 %

For the year 2007-08

56
 Total Debt Capital = Term loan from Banks + Debts

= 112573.18+800 = 113373.18 lacs

Total Interest Paid = 9636.72 lacs

Tax Rate = 30%

9636.72

Kd (before tax) = ---------------------- X 100

113373.18

= 8.50%

Kd (after tax) = 8.50% - 30% = 5.95%

For the year 2006-07

Total Debt Capital = Term loan from Banks + Debts

57
 = 83427.02+1400= 84827.02lacs

Total Interest Paid = 6573.02lacs

Tax Rate = 30%

6573.02

Kd (before tax) = ---------------------- X 100

84827.02

= 7.25%

Kd (after tax) = 7.25% - 30% = 5.42%

COMPARATIVE CALCULATION OF Kd FOR FOUR YEAR

Particular 2009-10 2008-09 2007-08 2006-07

58
Total Debts (Term loan from 131570.37+ 105716.94+ 112573.18+ 83427.02+
Bank+ Debts)
30000 000 800 1400

=161570.37 =105716.94 =113373.18 =84824.02

Total Interest paid 13065.36 9355.94 9636.72 6573.86
Interest Rate (Before Tax) 8.08% 8.85% 8.50% 7.75%
Interest Rate (After Tax)= Interest 5.65% 6.20% 5.95% 5.42%
Rate Before Tax – Tax Rate 30%.

COST OF EQUITY CAPITAL:

EQUITY SHARE CAPITAL

Particular 2009-10 2008-09 2007-08 2006-07

59
No. of Shares (In lacs) 348.37 348.37 348.37 348.73

DPS Given 13 10 8 6
Market Price (at the end of 2300.05 710.50 1079.40 921.85
March)
Earning per equity share 194.07 165.91 74.74 50.81
of rs. 10(in Rs.)
Final dividend on equity 4528.84 3483.72 2786.98 Not given
share (in lacs)
Market Capitalisation (in 801268.41 247516.88 376033.01 321146.96
Lacs)

1. Dividend yield plus growth in dividend method:-

Ke = DPS\mP*100 + G

Dps = Current cash dividend per share = 13Rs.

Mp = Current market price per share = 2300.05 Rs.

G = Growth rate = 10%

13

Ke = -------------------- X 100 + 10%

2300.05

= 10.56%

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2. Earning yield method:-
Ke= EPS\mp*100

Eps = earning per share = 194.07 Rs.

Mp = Market prise = 2300.05 Rs.

194.07

Ke = -------------------- X 100

2300.05

= 8.43%

3. Dividend per share method:-

Ke = Proposed final dividend on Equity Share / No. of

Equity Share

Final dividend on Equity Share = 4528.84 Lacs

No. of Equity Share = 348.37 Lacs

4528.84

Ke = -------------------- = 13

348.37

COST OF EQUITY SHARE CAPITAL (KE)

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 Particular 2008-09
Dividend Per share method 13
Earning Yeild Method 8.43
Dividend yield plus growth method 10.56

WEIGHTED AVERAGE COST OF CAPITAL (WACC)

WACC = (We * Ke) + (Wd * Kd)

Where………... We = Weight of equity

Wd = Weight of Debt.

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 Ke = Cost of Equity Share capital

Kd = Cost of Debt. capital

WACC = ( 0.8322 * 10.56) +( 0.1678 *05.65 ) = 9.74%

Source Amount Weights After tax Weighted

Rs. Cost Cost

(2) (4) (5)= (3) * (4)

(1) (3)
E.S. Capital 801268.41 .8322 10.56 8.79
Debentures 161570.37 .1678 05.65 0.95
Total 962838.78 1.00 9.74
Weighted Average Cost of Capital (WACC) 9.74%

WACC OF SHREE CEMENT LIMITED (2008-2009)

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MERITS OF WEIGHTED AVERAGE COST OF CAPITAL

The WACC is widely used approach in determining the required return on a

firm’s investments. It offers a number of advantages including the followings-

1. Straight forward and logical : It is the straightforward and logical approach

to a difficult problem. It depicts the overall cost of capital as the some of the
cost of the individual components of the capital structure. It employs a direct
and reasonable methodology and is easily calculated and understood.
2. Responsiveness to Changing Condition : Since, it is based upon individual
debt and equity components, the weighted average cost of capital reflects each
element in the capital structure. Small changes in the capital structure of the
firm will be noted by small changes in overall cost of capital of the firm.
3. Accurate when Profits are Normal : During the period of normal profits, the
weighted average cost of capital is more accurate as a cut-off rate in selecting
the capital budgeting proposals. It is because the weighted average cost
recognises the relatively low debt cost and the need to continue to achieve the
higher return on the equity financed assets.
4. Ideal Creation for Capital Expenditure Proposals : With the help of
weighted average cost of capital, the finance manager decides the cut-off rate
for taking decisions relating to capital expenditure proposals. This cut-off rate
determines the miimum limit for accepting an investment proposal. If an
investment proposal is accepted below this limit, the firm incur a loss.
Therefore, this cut-off rate is always decided above the weighted average cost
of capital.

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LIMITATION OF WEIGHTED AVERAGE COST OF CAPITAL

The weighted Average cost approach also has some weaknesses, important among
them are as follows :

1. Unsuitable in case of Excessive Low-cost Debts : Short term loan can

represent an important sources of fund for firm experiencing financial
difficulties. When a firm relies on Zero cost (in the form of payables) or low
cost short term debt, the inclusion of such debts in the calculation of cost of
capital will result in a low WACC. If the firm accepts low-return projects on
the basic of this low WACC, the firm will be in a high financing risk.
2. Unsuitable in Case of Low Profits : If a firm is experiencing a period of low
profits, not earning profit as compared to other firms in the industry, WACC
will be inaccurate and of limited value.
3. Difficulty in Assigning Weights : The main difficulty in calculating the
WACC is to assign weight to different components of capital structure.
Normally, there are two type of weights- (i) book value weights and (ii)
market value weight. These two type of weights give different results. Hence,
the problem is which type of weight should be assigned. Though, market value
is more appropriate than book value, but the market value of each component
of capital of a company is not readily available. When the securities of the
company are unlisted, the problem becomes more intricate.
4. Selection of Capital Structure : The selection of capital structure to be used
for determining the WACC is also not easy job. Three types of capital
structure are there i.e. current capital structure, marginal capital structure and
optimal capital structure. Which of these capital structure be selected.
Generally, current capital structure is regarded as the optimal structure, but it
is not always correct.

Research Methodology

The research methodology was subdivided and performed in the following method-

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 • Analyzing relevant figures and date for the last financial years.
• Analyzing the future outlook of the companies and its expansion plan.
• Study of the complete process of the uses of Cost of Capital using
literature and discussing with the organizational guide.
• Connection of the data regarding the use of Cost of Capital and
financial policies for Shree Cement.
• On the basis of the data collected, necessary suggestions regarding the
financial structure are given.
• Preparing a questionnaire for the customers to know the image of the
company in the market.
• On the basis of the questionnaire necessary suggestion are given.

DATA SOURCNG

While performing this project both Primary as well as Secondary Data sources
were use.

1. Primary Data:-
Major source of data for the project were the pass years’ financial
statement and information gather from my guide questionnaire also played a
vital role.

2. Secondary Data:-
It included information provided by the company workers. I adopted a
holistic approach and toiled to collect the information about the company
other than Shree Cement through secondary sources such as internet,
newspaper, magazines, research papers , online data basis ect..

QUESTIONNAIRE

The information provided by you (customer) is for the research work and will be kept
confidential.

66
With your help we will be able to improve customer service level.

1.Name:-

2. Occupation: -

3. Income Group : -

a. Up to Rs.50,000 [ ] b. Rs. 50,000-1, 50,000 [ ]

c. Rs. 1,50,000-3,00,000 [ ] d. Above Rs. 3, 00,000 [ ]

4. Which cement brand do you prefer?

a. Shree Cement [ ] b. Ambuja cement [ ] c.ACC Ltd. [ ]

d. J.K. Laxmi Cement [ ] e. Birla White Cement [ ]

5. What influenced you to buy this particular brand?

a. Durability [ ] b. Sustainability [ ] c. Low price [ ]

d. Strength ness [ ] e. Advertising [ ]

6. What is your opinion about the quality of Shree Cement?

a. Excellent [ ] b.Very good [ ] c.Good [ ]

d. Average [ ] e. Poor [ ]

7. How would you rank Shree Cement the basis of its brand image?

a. Excellent [ ] b.Very good [ ] c.Good [ ]

d. Average [ ] e. Poor [ ]

8. What is the status of availability of the grand in you area?

a. Always [ ] b. Mostly [ ] c.Sometimes [ ]

d. Rarely [ ] e. Never [ ]

9. What promotional tools should company adopt to promote their product?

a. Banners [ ] b. News Paper [ ] c. Holdings [ ]

d. Wall painting [ ] e. Promotional offers [ ]

10. Brief recommends your views for the improvement of the brand?

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Ans: -
…………………………………………………………………………………………
…………………………………………………………………………………………
…………………………

Bibliography

1) Shree Cements annual reports 2006-07, 07-08,08-09,09-2010,

2) www.shreecementltd.com

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3) ASSOCHAM Report on Cement Industry 2007
4) www.cseindia.org/programme/industry/cement_rating.htm
5) www.worldcement.com
6) international_cement_industry.htm
7) Fundament of Financial management by Brigham & Huston.
8) Analysis Financial Management by Robert C. Higgins
9) Financial Reports of ACC ltd, Grasim Industries Ltd., Gujarat Ambuja
Cement Ltd. and India Cement Ltd.
10) Quarterly Performance Analysis of Companies, India Cement Industry:
Cygnus,
Business Consulting and Research.

11) Prowess Online Database

12) www.cmaindia.org
13) http://www.wikipedia.com
14) http://www.investopedia.com
15) http://www.moneypore.com
16) http://www.moneycontrol.com
17) www.indiancementindustry.com
18) Times of India (News Paper)
19) Economic times (News paper)
20)Financial management by Ravi M Kishor (Book)
21)Financial management by M. Pandey (Book)

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