EXICUTIVE

INDEX
CONTENTS Executive Summary
PAGE NO. 6-7

8-13
Chapter 1 Introduction
Objective
Hypothesis Chapter 2 Company Background Chapter 3 Research Methodology Chapter 4 Cost of Capital of Reliance Infra. ltd Chapter 5 Conclusion Chapter 6 Bibliography Chapter 7 Appendices 35-61 14-26 27-29 30-31 32-34
EXECUTIVE SUMMARY
EXECUTIVE SUMMARY
The report presented here is a project report on ANALYSIS OF COST OF CAPITAL WITH SPECIAL REFERANCE TO RELIANCE INFRASTRCTURE LTD. Analysis is one of the important tools in the hands of the company to check its performance.
Cost of Capital Analysis is a fascinating topic to study because it can teach us so much about accounts and business. When Company use WACC analysis Company can work out how profitable a business is, Company can tell if it has enough money to pay its bill and company can even tell whether its shareholder should happy.
To analyze a company's optimum capital structure and identify key factors involved in establishing a company's worldwide capital structure.
Cost of capital is a decisive factor in financial decision-making. We measure and compare the cost of capital in deciding the capital structure of the company so as to earn a fair return to the owner an at least a fair return to the contributors.
By factoring cost of capital metrics (what companies need to return to investors and lenders) into discounting formulae such as Net Present Value (NPV) companies are effectively and efficiently enabled to identify satisfactory returns
Cost of Capital provides very useful tools for the Manager to assess the organization by making to basic types of comparisons. First, the analyst can compare a present WACC with past (or expected).
Cost of Capital for the Organization to determine if there has been an improvement or Deterioration or no change over time. Second, the Cost of Capital of one organization may be compared with similar organization or with apples and with oranges. This is Type of benchmarking so that one may determine whether the organization is Average in performance or doing better or worse than other.
Cost of Capital is simple measures or comparisons of one thing to another. These tools allow vital comparisons that are not possible when dealing with a single number. The insights gained by
WACC analysis will assist in gaining vital understating but WACC will never give answer, only clues. WACC are found in all types of organization from sports to education to business to the military too. Probably well aware of some and have been using them without really thinking that company actually using COST OF CAPITAL analysis.
Chapter -1
INTRODUCTION
INTRODUCTION OF COST OF CAPITAL
The cost of capital is the cost of a company's funds (both debt and equity), or, from an investor's point of view "the expected return on a portfolio of all the company's existing securities". It is used to evaluate new projects of a company as it is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet. To analyze a company's optimum capital structure and identify key factors involved in establishing a company's worldwide capital structure to explain how to compute the weighted average cost of capital and its component costs of capital to discuss how corporate and country characteristics influence the cost of capital for Foreign projects. to describe the relationship between the marginal cost of capital and foreign investment analysis.To discuss the capital structure across major countriesFor an investment to be worthwhile, the expected return on capital must be greater than the cost of capital. The cost of capital is the rate of return that capital could be expected to earn in an alternative investment of equivalent risk. If a project is of similar risk to a company's average business activities it is reasonable to use the company's average cost of capital as a basis for the evaluation. A company's securities typically include both debt and equity, one must therefore calculate both the cost of debt and the cost of equity to determine a company's cost of capital. The cost of debt is relatively simple to calculate, as it is composed of the rate of interest paid. In practice, the interest-rate paid by the company can be modelled as the risk-free rate plus a risk component (risk premium), which itself incorporates a probable rate of default (and amount of recovery given default).
The cost of equity is more challenging to calculate as equity does not pay a set return to its investors. Similar to the cost of debt, the cost of equity is broadly defined as the risk-weighted projected return required by investors, where the return is largely unknown. The cost of equity is therefore inferred by comparing the investment to other investments (comparable) with similar risk profiles to determine the "market" cost of equity. It is alternatively referred to as the opportunity cost of capital or the required rate of return It is calculated based on the expected average rate of return of investors in a firm. Once cost of debt and cost of equity have been determined, their blend, the weighted-average cost of capital (WACC), can be calculated. This WACC can then be used as a discount rate for a project's projected cashflows.
Meaning of Cost of Capital

Cost of capital is a decisive factor in financial decision-making. We measure and compare the cost of capital in deciding the capital structure of the company so as to earn a fair return to the owner an at least a fair return to the contributors.
Calculation of Cost Of Capital

Cost of capital can be divided into two heads 1. Cost Of Equity 2. Cost Of Debt The formula for calculating the Cost of Capital is
RD WACC = WE * RE + WD * (1-TC) * RD COST OF EQUITY

In financial theory, the return that stockholders require for a company. The traditional formula for cost of equity (COE) is the dividend capitalization model:
A firm's cost of equity represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership.
Meaning:
A stock or any other security representing an ownership interest. On a company's balance sheet, the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses). Also referred to as "shareholders' equity". In the context of margin trading, the value of securities in a margin account minus what has been borrowed from the brokerage. In the context of real estate, the difference between the current market value of the property and the amount the owner still owes on the mortgage. It is the amount that the owner would receive after selling a property and paying off the mortgage. There are two major types of equity including: 1.COMMON SHARES 2.PREFERRED SHARES.
COMMON SHARES : Equity give rights of ownership rights to the shareholders and they get
the right to vote through this equity type. Every year when the company earns and distributes dividends then right of common shareholders come after creditors. 2 PREFERRED SHARES : Preferred shareholders do not have the vote to fixed dividend rate regardless of company incurs loss or gain. right and they have
Importance of Cost of Capital in Decision Making

concept of cost of capital is a very important concept in financial management decision making. The concept, is however, a recent development and has relevance in almost every financial decision making but prior to that development,the problem was ignored or by-passed. The progressive management always takes notice of the cost of capital while taking a financial decision. The concept is quite relevant in the following managerial decisions.
(1) Capital Budgeting Decision. Cost of capital may be used as the measuring road for adopting an investment proposal. The firm, naturally, will choose the project which gives a satisfactory return on investment which would in no case be less than the cost of capital incurred for its financing. In various methods of capital budgeting, cost of capital is the key factor in deciding the project out of various proposals pending before the management. It measures the financial performance and determines the acceptability of all investment opportunities. (2) Designing the Corporate Financial Structure. The cost of capital is significant in designing the firm's capital structure. The cost of capital is influenced by the chances in capital structure. A capable financial executive always keeps an eye on capital market fluctuations and tries to achieve the sound and economical capital structure for the firm. He may try to substitute the various methods of finance in an attempt to minimise the cost of capital so as to increase the market price and the earning per share. (3) Performance of Top Management. The cost of capital can be used to evaluate the financial performance of the top executives. Evaluation of the financial performance will involve a comparison of actual profitabilitys of the projects and taken with the projected overall cost of capital and an appraisal of the actual cost incurred in raising the required funds. (4) Other Areas. The concept of cost of capital is also important in many others areas of decision making, such as dividend decisions, working capital policy etc.
COST OF DEBT:
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 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. Cost of Debt In measuring cos of capital, the cost of debt should be considered first. In calculating cost of debt, contractual cost as well as Imputed cost should be considered. Generally, the cost of debt (Debenturesand long-term debts) is defined in terms of the required rate of return that the debt-investment must yield to protect the share holders' interest. Hence cost of debt is the contractual interest rate adjusted further for the tax-liability of the firm. 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 friskiness of the company compared to others, because riskier
companies generally have a higher cost of debt.
Factors Affecting the Cost of Capital

Controllable Factors Affecting the Cost of Capital:
These are the factors affecting cost of capital that the company has control over:
1.Capital-structure policy 2.Dividend policy 3.Investment policy
1 Capital Structure Policy : As we have been discussing above, a firm has control over its capital structure, targeting an optimal capital structure. As more debt is issued, the cost of debt increases, and as more equity is issued, the cost of equity increases.
Policy:
Given that the firm has control over its payout ratio, the breakpoint of the MCC schedule can be changed. For example, as the payout ratio of the company increases the breakpoint between lower-cost internally generated equity and newly issued equity is lowered 3 Investment Policy:
It is assumed that, when making investment decisions, the company is making investments with similar degrees of risk. If a company changes its investment policy relative to its risk, both the cost of debt and cost of equity change.
Uncontrollable Factors Affecting the Cost of Capital: These are the factors affecting cost of capital that the company has no control over: 1Level of interest rates 2 Tax rates
Level of Interest Rates:
The level of interest rates will affect the cost of debt and, potentially, the cost of equity. For example, when interest rates increase the cost of debt increases, which increases the cost of capital.
Tax Rates:
Tax rates affect the after-tax cost of debt. As tax rates increase, the cost of debt decreases, decreasing the cost of capital.
Marginal Cost:
The increase or decrease in the total cost of a production run for making one additional unit of an item. It is computed in situations where the breakeven point has been reached: the fixed costs have already been absorbed by the already produced items and only the direct (variable) costs have to be accounted for. Marginal costs are variable costs consisting of labor and material costs, plus an estimated portion of fixed costs (such as administration overheads and selling expenses). In companies where average costs are fairly constant, marginal cost is usually equal to average cost. However, in industries that require heavy capital investment (automobile plants, airlines, mines) and have high average costs, it is comparatively very low. The concept of marginal cost is critically important in resource allocation because, for optimum results, management must concentrate its resources where the excess of marginal revenue over the marginal cost is maximum. Also called choice cost, differential cost, or incremental cost.
The Concept of the Opportunity Cost
A benefit, profit, or value of something that must be given up to acquire or achieve something else. Since every resource (land, money, time, etc.) can be put to alternative uses, every action, choice, or decision has an associated opportunity cost. Opportunity costs are fundamental costs in economics, and are used in computing cost benefit analysis of a project. Such costs, however, are not recorded in the account books but are recognized in decision making by computing the cash outlays and their resulting profit or loss.The opportunity cost is the rate of return foregone on the next best alternative investment
opportunity of comparable risk.
General Formula for the Opportunity Cost of Capital Opportunity cost of capital is given by the following formula: I0 = C1/(1+K) + C2/(1+K)2 +...+ Cn/(1+K)n where Io is the capital supplied by investors in period 0 (it represents a net cash inflow to the firm), Ct are returns expected by investors (they represent cash outflows to the firm) and k is the required rate of return or the cost of capital. The opportunity cost of retained earnings is the rate of return, which the ordinary shareholders would have earned on these funds if they had been distributed as dividends to them.
Weighted Average Cost Of Capital - W.A.C.C
A company has to employ owner's funds as well as creditors' funds to finance its project so as to make the capital structure of the company balanced and to increase the return to the shareholders.
The total cost of capital is the aggregate of costs of specific capitals. In financial decision making, the concept of composite cost is relevant. The composite costs of capital is the weighted average of the cost of various sources of funds, weights being the proportion of each source of funds in the capital structure. It should be remembered, tat it is weighted average, and not the simple average, which is relevant in calculating the overall cost of capital. The composite cost of all capital lies between the leas t and the most expensive funds. This approach enables the maximizations of corporate profits and the wealth of the equity shareholders by investing the funds in a projects earnings in excess of the cost of its capitalmix. Weighted average, as the name implies, is an average of the costs of specific source of Capital employed in a business, properly weighted by the proportion, they hold in the firm's capital structure. As the cost of capital is used as a cut off rate for investment projects, the market approach is considered better because of the following reasons. (i) It evaluates the profitability as well as the long-term financial position of the firm (ii) The investor always considers the committing his funds to an enterprise adequate return on his investment. In such cases, book values are of little significance (iii) It does not indicate the true economic value of the concern (iv) It considers price level changes. and an value
In weighted average cost of capital concept, the firm's cost of capital is calculated by proportionately weighing each category of capital. All capital sources - common stock, preferred stock, bonds and
any other long-term debt - are included in a WACC calculation. All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk.
The WACC equation is the cost of each capital component multiplied by its proportional weight and then summing both. For WACC, the discount rate is calculated with the following formula:
rd WACC = WE * re + WD * (1-tc) * rd
Where:
Re = cost of equity Rd = cost of debt E = market value of the firm's equity D = market value of the firm's debt tc = corporate tax rate WD = Weighted debt Wd = (E) /(D+E) WE = Weighted equity We = (D)/(D+E) tc = corporate tax rate Capital Asset Pricing Model CAPM
A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. A method of valuing assets and calculating the cost of capital (for an alternative, see arbitrage pricing theory). The capital asset pricing model (CAPM) has come to dominate modern finance. The rationale of the CAPM can be simplified as follows. Investors can eliminate some sorts of risk, known as residual risk or alpha, by holding a diversified portfolio of assets (see modern portfolio theory). These alpha risks are specific to an individual asset, for example, the risk that a companys managers will turn out to be no good. Some risks, such as that of a global recession, cannot be eliminated through diversification. So even a basket of all of the shares in a stock market will still be risky. People must be rewarded for investing in such a risky basket by earning returns on average above those that they
can get on safer assets, such as treasury bills. Assuming investors diversify away alpha risks, how an investor values any particular asset should depend crucially on how much the assets price is affected by the risk of the market as a whole. The markets risk contribution is captured by a measure of relative volatility, beta, which indicates how much an assets price is expected to change when the overall market changes. Safe investments have a beta close to zero: economists call these assets risk free. Riskier investments, such as a share, should earn a premium over the risk-free rate. How much is calculated by the average premium for all assets of that type, multiplied by the particular assets beta. But does the CAPM work? It all comes down to beta, which some economists have found of dubious use. They think the CAPM may be an elegant theory that is no good in practice. Yet it is probably the best and certainly the most widely used method for calculating the cost of capital Mathematically, CAPM is calculated as
re = rf + (rm - rf)
Rf - Risk-Free Rate - This is the amount obtained from investing in securities considered free from credit risk, such as government bonds from developed countries. The interest rate of U.S. Treasury bills or the long-term bond rate is frequently used as a proxy for the risk-free Rate.
- Beta - This measures how much a company's share price moves against the market as a whole. A beta of one, for instance, indicates that the company moves in line with the market. If the beta is in excess of one, the share is exaggerating the market's movements; less than one means the share is more stable. Occasionally, a company may have a negative beta (e.g. a gold mining company), which means the share price moves in the opposite direction to the broader market. (To learn more, see Beta: Know The Risk.)
(Rm Rf) = Equity Market Risk Premium - The equity market risk premium (EMRP) represents the returns investors expect, over and above the risk-free rate, to compensate them for taking extra risk by investing in the stock market. In other words, it is the difference between the risk-free rate and the market rate. It is a highly contentious figure. Many commentators argue that it has gone up due to the notion that holding shares has become riskier.
SWOT Analysis
Strengths 1.Consistently growing market 2.Increasing business volume of rail borne containers
Weaknesses 1.Highly capital intensive 2.Cost of rolling stock 3.Cost of inland container depot 4.High startup charges of wagons/ wheels/ rakes/ trained manpower 5.Large gestation period 6.High concentration of traffic at selected ports/ hinterland 7.78% of total container traffic at western coast 8.70% of total container traffic at western coast is handled by a single port JNPT 9.60% of the traffic of west coast moves to northern hinterland leading to limited routes thereby creating congestion
Opportunities 1.Huge potential as the market is untapped 2.Consistent growth rate/ robust growth in EXIM container trade 3.Entry of private players in container train operations 4.Congestion at existing rail linked ICDs and opportunity for development of competing facilities 5.Untapped demand for domestic container movement - lower haulage charges and better utilization of limited scope for expansion provides
6.Potential for running double stack trains rolling stock and Track capacity
Threats Change in government policies High dependence on external agencies
Indian railways
port terminal operators shipping lines Coping with uncertainties on operational issues stability of rakes service guarantee Timeline for dedicated freight corridor Routes for double stack operations Fragmentation of volumes due to multiple operators No control on haulage cost Too many players resulting in price war
Objectives of the project
1.. capital
To explain how to compute the weighted average cost of capital and its component costs of
2..
To discuss how corporate and country characteristics influence the cost of capital for Foreign
projects.
3..
To analyze a company's optimum capital structure and identify key factors involved in
establishing a company's worldwide capital structure.
4.To describe the relationship between the marginal cost of capital and foreign investment analysis.
5.To discuss the capital structure across major countries.
6.To analyze The WACC last 5 year
Scope of the study
This consultation asks for the views of respondents on a number of specific aspects of RInfra proposed policy approach to the cost of capital and other aspects of risk and return. This review is not intended as a comprehensive investigation into all aspects of cost of capital estimation. It does not, for example, discuss a number of issues that are relevant to estimating the cost of capital such as the risk free rate, inflation risk premium, optimal gearing, taxation adjustments, or detailed estimation techniques for the companys beta. Instead, it focuses, and requests the views of stakeholders, on the following specific areas:
systematic risk, i.e. risk that which can not be diversified away; and specific risk, i.e. risk specific to a given company or project the appropriate approach to estimation of the Equity Risk Premium (ERP) within the Pricing Model (CAPM) framework; Capital asset
the appropriate treatment of variations in risk across different activities and projects in the context of both:
whether and how the value of real options might be incorporated into regulators analysis.
HYPOTHESIS :
Hypothesis is considered as main instrument in research. It stands for the midpoint of Research. It is the purposed assumption, explanation, supposition or solution to be proved or disproved. Hypothesis gives us guideline for an investigation to be carried out on the basis of previous available information. The use of hypothesis thus prevents a blind search and Indiscriminate gathering of data which may letter to prove irrelevant to the problem study For the purpose of our following hypothesis formulated.
Calculation of cost of capital is beneficial for company.
When we calculated cost of capital must be understand meaning and Use of it.
Data of use totally reliance infra.
Increase and decrease of cost of capital is based on capital of Company.
Chapter -2
COMPANY BACKGROUND
COMPANY BACKGROUND
Reliance Anil Dhirubhai Ambani Group India is a booming trillion dollar economy. An overwhelmingly young country, with more than 55% of its population i.e. over 550 million people below the age of 30. One of the fastest growing GDPs in the world has translated into rising income levels, complementing Indias ongoing economic revolution coupled with the energy, dynamism and ambition of its youth. Indias future will be propelled by strategic drivers such as the quality of its human capital, their access to cutting-edge technology, availability of hi-quality products and services at a lower cost and their will power to make India shine on the world map. The Reliance Anil Dhirubhai Ambani Group strongly believes that it has a pivotal role to play in shaping the destiny of our great nation. Through its various consumer facing businesses, the group provides a robust platform to every Indian to realize his potential and shape his / her destiny, through its state-of-the art products and services. The group, barely four years in the making, now ranks among Indias top 3 business houses in terms of market capitalization. Its dominant presence across a wide array of high- growth consumer facing businesses, range from telecom and financial services to infrastructure, entertainment and healthcare. Across different companies, the group positively influences the lives of over 150 million customers, i.e., 1 in every 10 young and aspirational Indians every single day across 5 lakh villages and 20,000 towns. It enjoys unparalleled trust, faith and confidence of nearly 12 million shareholders, the largest such family in India, perhaps even in the world. It is one of the largest employers in the country with a young, highly trained and motivated workforce approaching 130,000 strong. All this is focused towards achieving two goals; Building a great enterprise for its stakeholders and a great future for our country. The Reliance Anil Dhirubhai Ambani Group is among Indias top three private sector business houses on all major financial parameters, net worth in excess of Rs. 64,000 crore (US$ 13.6 billion), cash flows of Rs. 13,000 crore (US$ 2.8 billion), net profit of Rs. 8,400 crore (US$ 1.8 billion).
The Major Companies of the group are:
Reliance Infrastructure Limited Reliance Communications Limited Reliance Capital Limited Reliance Power Limited Reliance Natural Resources Limited Reliance BIG Entertainment Limited
Reliance Infrastructure Limited

Reliance Infrastructure Limited (RInfra) is a flagship company of the Reliance Anil Dhirubhai Ambani Group which is one of the largest business houses in the country. The company has a strong presence in the infrastructure sector with projects in Urban Infrastructure (viz, Mass Rapid Transit System, Airport Rail Links), Airports, Roads and Sea links, Logistics sector etc.
Reliance Infrastructure Limited is one of the fastest growing company in the infrastructure sector. It ranks among Indias top listed private companies on all major financial parameters; or with aggregate estimated group revenues of Rs 14,055 crores and gross fixed assets of Rs 13,650 crores. The group generates 940 MW of electricity through its power plants located at Dahanu in Maharastra, Samalkot in Andhra Pradesh, Goa and Kochi in Kerala. The Company distributes more than 36 billion units of electricity to over 30 million consumers across an area that spans over 124,300 sq kms and icludes Indias two premier cities Mumbai and Delhi. The Company has emerged as one of the leading players in India in the Engineering, Procurement and Construction (EPC) segment of the power sector. The divisionhas developed a reputation for execution and commissioning of projects on time. The EPC division had an order book position of Rs 20,625 crore as on March 31, 2009.Reliance Power Transmission Limited, a wholly owned subsidiary of Reliance Infrastructure Limited is executing three projects worth Rs 4,000 crore in the transmission sector including the Parbati Koldam Transmission project through a joint venture. Reliance Energy Trading Limited, another wholly owned subsidiary of the company is among the top three private players in the trading market
In the last few years, Reliance Infrastructure has expanded its foot - print much beyond the power sector. Currently, Reliance Infrastructure is engaged in the implementation of projects in other key infrastructural areas such as highways, roads, airport, bridges, metro rail and other mass rapid transit systems, special economic zones, speciality real estate etc. A snapshot of the infrastructure projects being implemented by the company is provided below: Road Reliance Infrastructure is the largest developer of road and highway projects for the National Highways Authority of India under the build, own, transfer (BOT) scheme. With an investment involving Rs 4,500 crore, the company is developing 7 major road projects of which 5 are in Tamil Nadu totaling nearly 400 kms of length and sixth in Delhi NCR (Gurgaon Faridabad) of length 66 kms . The Company has recenty received the Letter of Award for Jaipur Reengus Project (53 Kms) which is the seventh project in its road portfolio recently Two projects have already started
commercial operation in the current financial year whereas the other projects are progressing as per the schedule specified by NHAI. Mass Rapid Transit System Reliance Infrastructure is the countrys first and only private sector developer and operator for Metro Rail Systems and is currently developing three projects in the country. The following projects being implemented under this category entails a capital outlay of approx Rs.16,000 Cr. 3.First line of Mumbais Metro system stretching 12 kms from Versova to Ghatkopar. 4.Mumbai Metro line 2 from Mankhurd- Bandra-Charkop stretching 32 kms with 27 stations.
5.Delhi airport express rail link project, a first of its kind in the country, which shall connect the New Delhi Railway station to the Airport with a high speed rail covering a length of 22.5 kms. Specialty Real Estate Reliance Infrastructure is also the countrys first and only private sector infrastructure company to win Indias first 100 storeyed building, a trade tower and business district in 80 acres of land in Hyderabad, the total investment for this project is Rs 7,000 crore. The Company is also developing over 45 acres area of Special Economic Zones for IT and IT Enabled Services, retail hospitality in Mumbai and Noida. Airport
Reliance Infrastructure has been recently awarded 5 brown field regional airports in Maharashtra; namely Nanded, Latur, Yavatmal, Baramati and Osmanabad. Reliance Infrastructure Limited is committed to creating superior value for all its stakeholders and be amongst the most admired and trusted companies in the world by setting new benchmarks in standards of corporate governance, operational and financial excellence, responsible corporate citizenship and sustainable growth.
Western Freeway Sea Link R-Infra emerged as the preferred bidder through International Competitive Bidding for the construction of Western Freeway Sea Link project in Mumbai.
Market creation :
Figure Parameters required for market creation
Chapter -3
RESEARCH METHODOLOGY
RESEARCH METHODOLOGY:
Research may be defined as a systematic and objective analysis and recording of controlled observations that may lead to the development of generalization of principles or theories resulting in prediction and possibly ultimate control of events. These researches mean manipulating of things, concepts or symbols for the purpose of generalizing to extend correct knowledge.
RESEARCH TYPE: Here the exploratory design type of research was used.
Data collections:
1) Annual Reports which includes Balance Sheet, Profit and Loss a/c an 2) Books of Accounts such as Ledger and Trial Balance 3) Data collected through direct discussion with Company staff and Officers 4) Financial web sites
5) Financial management book In dealing with the real life problem , it is found that data at hand are inadequate and hence it becomes necessary to collect data that are inadequate.. The data for this project has been collected by primary as well as secondary sources.
METHODS OF DATA COLLECTION: Primary data:

Data is collected by discussion with the concerned staff. Primary data are those, which are collected afresh and for the first time, and thus happen to be original in character.
Secondary data:
Secondary data means data that are already available The secondary data is collected from companys books of accounts and annual reports, which includes balance sheet, profit and loss account . The secondary information has been collected through Internet, newspaper, journals, etc.
Method of data collection primary data define my research best on my secondary data
DATA ANALYSIS:
Data analysis is a practice in which raw data is order and organized so that useful information can be extracted from it. The process of organizing and thinking about data is key to understanding what the data does and does not content. This are a variety of ways in which people can approach data analysis and it is notoriously. Easy to manipulate data during the analysis phase to push certain conclusion and agendas for this reason it is important to pay attention when data analysis presentation and to think to critically about the data and conclusion which were drawn.
Chapter -4
Cost of Capital of Reliance Infra. Ltd
DEBT & EQUITY RATIO OF RELIANCE INFRASTRUCTRE LTD. For last 5th year
As on march 31, 2011 Source of funds : Shareholders funds Share capital Equity Warrants Issued & 267.47 Rs Cr.
Subscribed Reserves & surplus Total Equity Loan funds Secured loans Unsecured loans Total Debt 1,583.92 2,385.37 3969.29 16918.16 17,185.63
As per the balance sheet of Reliance Infrastructure ltd. dated March 31, 2011 the debt of the company is 3969.29 Cr and equity is 17,185.63 Cr. as mentioned above.
The rate at which the debt is taken in the form of various secured and unsecured loans is as mentioned below: Secured loan Debenture 6-35% NCD* 6.70% NCD 5.95% NCD 5.60% NCD 11.55%NCD Unsecured Loan 4% ECB** * NCD- Non convertible Debenture ** ECB- External Commercial Borrowing 3855 250 125 100 150 850 (RS Cr)
CALCULATION
OF
COST
OF
CAPITAL
FOR
RELIANCE
INFRASTRUCTURE LTD.
As on march 31, 2011
Calculation for re for R-Infra using CAPM model:
re = rf + (rm - rf) Risk-free rate: (rf)

Risk-free rate is the rate of return available in the market which one can get with certainty on an investment without any risk being involved.
We have used the 10 year bond yield as the risk free rate. The 10 year bond yield as on July, 2011 is 8.36.. Hence we have taken the risk free rate as 8.36 %
Year 2011 2010 2009 2008 2007
Jul 8.36 7.62 7.03 9.18 8.90
Beta ()
The leveraged beta for Reliance Infrastructure according to BSE India is at 1.5781. For the purpose of simplicity we would be using this beta value for our calculations.
Market Risk Premium (rm- rf)

The risk premium for the market (Rm - Rf) is calculated by subtracting the return on long-term government bond from the return given by Sensex (An index of 30 large cap stocks) for last 9 years which is 9.94%. Hence market risk premium would be (9.94% -8.36%) which is 1.58%
Cost of Equity:
re = rf + (rm- rf) re = 8.36+ 1.5781 * (9.94-8.36) = 15.70% re = 15.70%
Calculation of Weighted debt & Weighted equity
WE = (Equity) /(Debt+ Equity ) WE = (17,185.63) / (3969.29+17,185.63) WE = 0.82 =82%
WD = (Debt) ) /(Debt + Equity ) WD = (3969.29) / (3969.29+17185.63) WD = 0.18 =18%
Calculation of Rate of Debt
RD = 6.35%*250+6.70%*125+5.95%*100+5.60%*150+11.55%*850+4%*3854 1475+3854
15.875+8.357+5.6+8.4+98.175 1475+3854
0.054
RD =
5.4%
W.A.C.C.
rd WACC =0.81*15.70% + 0.18 *(1 - 33%)*5.4%
rd WACC = 8.21%
Interpretation:
In the year ending 31st March 2011, company has used 82% equity and 18% debt in the capital structure which is significantly different than the industry average of 40% equity and 60% debt. Had the company utilized its borrowing capacity, it would have been able to use interest-tax-shield to increase the firm value.
DEBT & EQUITY RATIO OF RELIANCE INFRASTRUCTRE LTD.
As on march 31, 2010 Source of funds : Shareholders funds Share capital Equity Warrants Issued & 244.92 541.08 Rs Cr.
Subscribed Reserves & surplus Total Equity Loan funds Secured loans Unsecured loans Total Debt 1475 2639.90 4114.9 13830.35 14616.35
As per the balance sheet of Reliance Infrastructure ltd. dated March 31, 2010 the debt of the company is 4114.9Cr and equity is 14616.35Cr. as mentioned above.
CALCULATION
OF
COST
OF
CAPITAL
FOR
RELIANCE
INFRASTRUCTURE LTD. As on 31st march 2010
Calculation for re for R-Infra using CAPM model: Beta ()


Cost of Equity:
re = rf + (rm- rf) re = 7.62+ 1.5781 * (9.94+7.62) = 11.28%
re = 11.28%
WE = (Equity) /(Debt+ Equity ) WE = (14616.35) / (4114.9+14616.35) WE = 0.78 %
WD = (Debt) ) /(Debt + Equity ) WD = (4114.9) / (4114.9+(14616.35) WD = 0.21 % Calculation of Rate of Debt
RD = 6.35%*250+6.70%*125+5.95%*100+5.60%*150+11.55%*850+4%*3854 1475+3854
15.875+8.357+5.6+8.4+98.175 1475+3854
0.054
RD =
5.4%
W.A.C.C.
rd WACC =0.78*11.28% + 0.21 *(1 - 33%)*5.4%
rd WACC = 9.55%
As on march 31, 2009 Source of funds : Rs Cr.
Shareholders funds Share capital Equity Warrants Issued & 226.07 783.49
Subscribed Reserves & surplus Total Equity Loan funds Secured loans Unsecured loans Total Debt 1,848.33 5483.85 7,332.18 10,897.88 11,907.44
As per the balance sheet of Reliance Infrastructure ltd. dated March 31, 2009 the debt of the company is 7322.18 Cr and equity is 11,907 Cr. as mentioned above.
CALCULATION
OF
COST
OF
CAPITAL
FOR
RELIANCE
INFRASTRUCTURE LTD.
re = rf + (rm - rf) Risk-free rate: (rf) Beta ()


Cost of Equity:
re = rf + (rm- rf) re = 7.62+ 1.5781 * (9.94+7.62) = 11.28% re = 11.28%
WE = (Equity) /(Debt+ Equity )
WE = (11907.44) / (7332.18+11907.44) WE = 0.62 %
WD = (Debt) ) /(Debt + Equity ) WD = (7332.18) / (7332.18+11907.44) WD = 0.38 % Calculation of Rate of Debt
RD = 6.35%*250+6.70%*125+5.95%*100+5.60%*150+11.55%*850+4%*3854 1475+3854
15.875+8.357+5.6+8.4+98.175 1475+3854 = 0.054
RD =
5.4%
W.A.C.C.
rd WACC =0.62*11.28% + 0.38 *(1 - 33%)*5.4%
rd WACC = 8.36%
Subscribed Reserves & surplus 10024.16
Total Equity Loan funds Secured loans Unsecured loans Total Debt
11043.27
1125.00 3884.04 5009.04
As per the balance sheet of Reliance Infrastructure ltd. dated March 31, 2008 the debt of the company is 5009.04 Cr and equity is 11043.27 Cr. as mentioned above.
CALCULATION
OF
COST
OF
CAPITAL
FOR
RELIANCE
INFRASTRUCTURE LTD.
re = rf + (rm - rf)
Risk-free rate: (rf) Beta ()


Cost of Equity:
re = rf + (rm- rf) re 9.18+ 1.5781 * (9.94+9.18) = 8.17% re = 8.17%
WD = (Debt) ) /(Debt + Equity ) WD = (5009.4) / (5009.4+11043.27) WD = 0.31 %
RD = 6.35%*250+6.70%*125+5.95%*100+5.60%*150+11.55%*850+4%*3854 1475+3854
15.875+8.357+5.6+8.4+98.175 1475+3854
0.054
RD =
5.4%
W.A.C.C.
rd WACC =0.68*8.17% + 0.31 *(1 - 33%)*5.4%
rd WACC = 6.67%
Subscribed Reserves & surplus Total Equity Loan funds Secured loans Unsecured loans 1125.00 3884.04 10024.16 11043.27
Total Debt
5009.04
CALCULATION
OF
COST
OF
CAPITAL
FOR
RELIANCE
INFRASTRUCTURE LTD.


Cost of Equity:
re = rf + (rm- rf) re 9.18+ 1.5781 * (9.94+9.18) = 8.17% re = 8.17%
RD = 6.35%*250+6.70%*125+5.95%*100+5.60%*150+11.55%*850+4%*3854 1475+3854
15.875+8.357+5.6+8.4+98.175 1475+3854
0.054
RD =
5.4%
W.A.C.C.
rd WACC =0.68*8.17% + 0.31 *(1 - 33%)*5.4%
rd WACC = 6.67%
As on march 31, 2007 Source of funds : Shareholders funds Share capital Equity Warrants Issued & 228.57 Rs Cr.
Subscribed Reserves & surplus Total Equity Loan funds Secured loans Unsecured loans Total Debt 1435.00 4423.32 5858.32 8412.74 8641.31
CALCULATION
OF
COST
OF
CAPITAL
FOR
RELIANCE
INFRASTRUCTURE LTD.

Cost of Equity:
re = rf + (rm- rf) re 8.90+ 1.5781 * (9.94-8.90) = 10.89% re = 10.89%

RD = 6.35%*250+6.70%*125+5.95%*100+5.60%*150+11.55%*850+4%*3854
1475+3854 = 15.875+8.357+5.6+8.4+98.175 1475+3854 = 0.054
RD =
5.4%
W.A.C.C.
rd WACC =0.58*10.89% + 0.39 *(1 - 33%)*5.4%
rd WACC = 7.82%
5 YEAR CALCULATION OF COST OF CAPITAL FOR INFRASTRUCTURE LTD.(WACC) Year 2011 2010 2009 2008 2007 WACC 8.21% 9.55% 8.36% 6.67% 7.82%
RELIANCE
On the above calculation WACC Decrease for 2011. WACC 8.21% as par the 2010.
Chapter -5
CONCLUSION
CONCLUSION
Cost of Capital for Reliance Infrastructure Ltd. has been calculated using Weighted Average cost of Capital (WACC) method. By our calculations the Cost of Capital for Reliance Infrastructure is 8.21% in 31st march 2011. Decrease for as par the 2010. By factoring cost of capital metrics (what companies need to return to investors and lenders) into discounting formulae such as Net Present Value (NPV) companies are effectively and efficiently enabled to identify satisfactory returns. Compensating managers to achieve in excess of the shareholder return requirement is another key element of the modern approach. Shareholders want managers to invest only if the expected rate of return exceeds the cost of capital. Because of this managers cannot ignore the cost of capital imperative and indeed their focus should be on returns over and above the cost of capital. This has given rise to a growing number of companies using EVA in manager compensation packages, especially since it resolves agency problems and generates incentives for managers to focus on increasing shareholder wealth. It is hoped that contrasting the contemporary with the classical approach to cost of capital and investing will have served to better illustrate the scope of this often complex subject. No apology is made to MBA colleagues for the management nature of some of the material above since management, above all else, is what we are reputed to be.
Chapter -6
BIBLIOGRAPHY
BIBLIOGRAPHY
Sr.No Books Name
1 Financial Management
Authors Name
M.Y.KHAN P.K. JAIN
Edition
5th
Published
Tata Mc Graw-Hill
2 3
Financial Management Fundamentals Of financial management
R.P. Rustagi
D.Chandra Bose
1.http://www.investorwords.com 2. http://encyclopedia.thefreedictionary.com/Cost+of+Capital 3.http://www.pwc.com/nz/en/cost-of-capital/pwc-wacc-formula.jhtml
4.Annual Report Book of Reliance Infrastructure 5.Fact Sheet and statement
Chapter -7 APPENDICES
Balance sheet of Reliance Infrastructure Ltd. Past 5year.

(Rs crore) In year
Mar ' 11 Mar ' 10
Mar ' 09
Mar ' 08
Mar ' 07
Sources of funds
Owner's fund Equity share capital Share application money Preference share capital Reserves & surplus 16,918.16 13,830.35 541.08 10,308.14 783.49 10,024.16 783.49 8,412.74 267.47 244.92 226.07 235.62 228.57
Loan funds
Secured loans Unsecured loans Total
1,583.92 2,385.37 21,154.92
1,475.00 2,639.90 18,731.25
1,848.33 5,483.85 18,649.88
1,125.00 3,884.04 16,052.31
1,435.00 4,423.32 14,499.63
Uses of funds
Fixed assets Gross block Less : revaluation reserve Less : accumulated depreciation Net block Capital work-inprogress Investments 649.25 12,584.08 602.27 10,019.57 564.42 12,147.10 568.92 7,664.36 288.49 2,511.88 4,307.75 5,724.09 3,951.13 2,941.30 3,582.52 2,750.43 3,328.56 2,423.89 3,082.49 2,117.94 481.88 535.84 589.74 643.69 697.93 10,513.72 7,428.27 6,922.69 6,396.14 5,898.36
Net current assets

Current assets, loans & advances Less : current liabilities & provisions Total net current assets Miscellaneous expenses not written Total 21,154.92 18,731.25 18,649.88 16,052.31 14,499.63 14,504.85 2,197.50 7,046.15 5,168.11 5,784.48 3,187.93 3,678.71 5,395.14 3,267.72 9,581.32 16,702.35 12,214.26 8,972.41 9,073.85 12,849.04
Notes:
Book value of unquoted investments Market value of quoted investments 17,861.00 17,282.50 16,398.06 33,986.71 1,601.17 7,067.13 7,177.00 5,130.99 4,336.92 942.53
Contingent liabilities Number of equity sharesoutstanding (Lacs)
4,315.11
3,145.19
3,934.79
3,237.54
1,992.48
2674.2
2448.7
2260.24
2365.3
2285.3

EXICUTIVE

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EXICUTIVE

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INDEX

CONTENTS Executive Summary

PAGE NO. 6-7

INTRODUCTION OF COST OF CAPITAL

Meaning of Cost of Capital

Calculation of Cost Of Capital

RD WACC = WE * RE + WD * (1-TC) * RD COST OF EQUITY

Importance of Cost of Capital in Decision Making

companies generally have a higher cost of debt.

Factors Affecting the Cost of Capital

1.Capital-structure policy 2.Dividend policy 3.Investment policy

Level of Interest Rates:

The Concept of the Opportunity Cost

opportunity of comparable risk.

Weighted Average Cost Of Capital - W.A.C.C

Threats Change in government policies High dependence on external agencies

Objectives of the project

establishing a company's worldwide capital structure.

5.To discuss the capital structure across major countries.

6.To analyze The WACC last 5 year

Scope of the study

Calculation of cost of capital is beneficial for company.

Data of use totally reliance infra.

Increase and decrease of cost of capital is based on capital of Company.

The Major Companies of the group are:

Reliance Infrastructure Limited

Figure Parameters required for market creation

METHODS OF DATA COLLECTION: Primary data:

Calculation for re for R-Infra using CAPM model:

re = rf + (rm - rf) Risk-free rate: (rf)

Year 2011 2010 2009 2008 2007

Jul 8.36 7.62 7.03 9.18 8.90

Market Risk Premium (rm- rf)

re = rf + (rm- rf) re = 8.36+ 1.5781 * (9.94-8.36) = 15.70% re = 15.70%

Calculation of Weighted debt & Weighted equity

WE = (Equity) /(Debt+ Equity ) WE = (17,185.63) / (3969.29+17,185.63) WE = 0.82 =82%

WD = (Debt) ) /(Debt + Equity ) WD = (3969.29) / (3969.29+17185.63) WD = 0.18 =18%

Calculation of Rate of Debt

rd WACC =0.81*15.70% + 0.18 *(1 - 33%)*5.4%

DEBT & EQUITY RATIO OF RELIANCE INFRASTRUCTRE LTD.

INFRASTRUCTURE LTD. As on 31st march 2010

Calculation for re for R-Infra using CAPM model: Beta ()

Market Risk Premium (rm- rf)

re = rf + (rm- rf) re = 7.62+ 1.5781 * (9.94+7.62) = 11.28%

Calculation of Weighted debt & Weighted equity

WE = (Equity) /(Debt+ Equity ) WE = (14616.35) / (4114.9+14616.35) WE = 0.78 %

WD = (Debt) ) /(Debt + Equity ) WD = (4114.9) / (4114.9+(14616.35) WD = 0.21 % Calculation of Rate of Debt

rd WACC =0.78*11.28% + 0.21 *(1 - 33%)*5.4%

As on march 31, 2009 Source of funds : Rs Cr.

Calculation for re for R-Infra using CAPM model:

re = rf + (rm - rf) Risk-free rate: (rf) Beta ()

Market Risk Premium (rm- rf)

re = rf + (rm- rf) re = 7.62+ 1.5781 * (9.94+7.62) = 11.28% re = 11.28%

Calculation of Weighted debt & Weighted equity

WE = (Equity) /(Debt+ Equity )

WE = (11907.44) / (7332.18+11907.44) WE = 0.62 %

WD = (Debt) ) /(Debt + Equity ) WD = (7332.18) / (7332.18+11907.44) WD = 0.38 % Calculation of Rate of Debt

15.875+8.357+5.6+8.4+98.175 1475+3854 = 0.054

rd WACC =0.62*11.28% + 0.38 *(1 - 33%)*5.4%

Subscribed Reserves & surplus 10024.16

1125.00 3884.04 5009.04

Calculation for re for R-Infra using CAPM model:

Risk-free rate: (rf) Beta ()

rd WACC =0.8115.70% + 0.18 (1 - 33%)*5.4%

rd WACC =0.7811.28% + 0.21 (1 - 33%)*5.4%

rd WACC =0.6211.28% + 0.38 (1 - 33%)*5.4%

rd WACC =0.688.17% + 0.31 (1 - 33%)*5.4%

rd WACC =0.688.17% + 0.31 (1 - 33%)*5.4%

rd WACC =0.5810.89% + 0.39 (1 - 33%)*5.4%