Cost of Capital: National Cement Company Ltd Cost of Capital Case Study

1. Original Work:

2. Proper Citation: Follow the APA citation guidelines consistently throughout your assignment (in-text & end-text).

3. Avoid Plagiarism:

Objective:

This case study explores the determination of the cost of capital for National Cement Company Ltd., a leading Indian cement manufacturer, as they consider a significant investment project in Bangalore. The objective is to estimate the company's cost of capital, incorporating various sources of financing, to evaluate the project's economic feasibility.

Introduction:

In May 2021, Suni Kumar, a business analyst at National Cement Company, embarked on a critical project: estimating the cost of capital for a prospective cement works project in Bangalore. As one of India's leading cement manufacturers, the company needed to determine the project's financial viability. Suni's task was to calculate the corporate cost of capital, considering various sources of finance. With financial statements in hand and complexities surrounding debt structures, equity components, and capital structure targets, Suni faced a challenging journey to provide a precise estimate, making this his first significant project at the company.

Read thiscase studyDownload case study Case 1 - Cost of Capital-1.pdf and use your knowledge to address the following topics:

1. What is theprojectcost of capital?How does it differ from the corporate cost of capital? Is there any difference in this case?

2. Suni could attempt to calculate the companyscost of debt from data on interest expense and theaveragelevel of debt. Use the data in Exhibits1and2to calculatethe companyscost of debt using this procedure, keeping in mind the warning from the accounting team.

3. Estimate the cost of equity capital using the (i) CAPM and (ii) dividend discount models. Which estimate is the most appropriate? Justify your answer.

4. Critiquethe colleaguessuggestionsthatSuni could estimate the cost ofequity usingeitherthe dividend yieldorthe earnings yieldon National Cements stock.

5. Which tax rate shouldSuniuse forNational Cement? Justify your answer.

6. Calculate the cost of capital of National Cement using (i) target capital structure weights, (ii) book value weights, and (iii) market value weights.Use the costs of debt estimates from Question 3 in your calculations.

7. What costof capital figure should Suni recommend for use in the evaluation of the project proposal?Justify your answer.

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