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The concept of cost of capital is very important in financial management. It is weighted average cost of various sources of finance used by a firm may be in form of debentures, preference share capital, retained earning and equity share capital. A decision to invest in a particular project depend upon the cost of capital of the firm or the cut off rate which is minimum rate of return expected by the investors. When a firm is not able to achieve cut off rate, the market value of share will fall. Infact, cost of capital is minimum rate of return expected by its investors. Every firm have different types of goals or objectives such as profit maximization , cost minimization , wealth maximization and maximum market share. If a firm have main objective is wealth maximi-sation then that firm earn a rate of return more than its cost of capital. The cost of capital is the rate of return the firm requires from investment in order to increase the value of firm in market place. :-HAMPTON JOHN J.-: Thus we can say, cost of capital is a minimum rate of return which a firm must and is expected to earn on its investment so as to maintain the market value of its shares.

Conclusion of meaning of cost of capital: Cost of capital is not a cost as such. It is minimum rate of return. It included three components risk involves in every investment :(a) The expected normal rate of return at zero risk level. Example:investment in Banks. (b) The premium for business risk. (c) The premium for financial risk on account of pattern of capital structure.


It is very important concept of financial management. It play a crucial role in both capital budgeting as well as decision relating to planning of capital structure. It is helpful to evaluate the performance of a firm. As a acceptance criteria in capital budgeting. As a determinant of capital mix in capital structure. Evaluate the performance of firm. Other decisions :(a) Dividend policy (b) Capitalization of profit (c) Making right issue and working capital (d) Leasing decision


Determination of cost of capital of a firm is not a easy task because of both conceptual problem as well as uncertainties of proposed investment and the pattern of financing. Conceptual controversies regarding the relationship between cost of capital and the capital structure. Historical cost and future cost Problem in computation of cost of capital. Problem in computation of retained earning Problem in assigning weights


Computation of overall cost of capital of a firm involves: Computation of cost specific source of finance Computation of weighted average cost of capital COMPUTATION OF COST SPECIFIC SOURCE OF FINANCE Computation of each specific source of finance ,viz ,debt, preference share capital, equity share capital and retained earning. Cost of debt. Capital Cost of preference share capital. Cost of equity share capital Cost of retained earning COMPUTATION OF WEIGHTED AVERAGE COST OF CAPITAL Weighted average cost of capital is average cost of costs of various sources of financing. Weighted average cost of capital known as composite cost of capital,overall cost of capital or average cost of capital .

COST OF DEBENTURE CAPITAL MEANING O F DEBENTURE:Debt. is includes debt stock, loans and other securities of a company whether constituting a change on the assets of the company or not. Debt is like as loan. A fix rate of interest payable on debenture either company earn profit or not. Interest on debt is liability on company. FEATURE OF DEBENTURE: A debt is issued under the seal of company. It contains a contract for repayment of principal sum of specific date. Debt is issued in form of certificate A debenture holders receive interest on his debt at fix rate as mentioned in the certificate COST OF DEBT:The cost of capital is the rate of interest payable on debt. The cost of debt capital is measured as the rate of discount which equates the value of post tax interest and principal repayment with the net proceeds of debt issue. Before tax cost of capital After tax cost of capital Before tax cost of debt:-Kdb = I/P Kdb = Before tax cost of debt I = Interest P = Principal (NOTE = all figure in crores.) For the of Year 2004-05 GRASIM HAVE DIFFERENT TYPES & QUANTITY DEBT. I. Cost of debt = 9.891/78.5 = 12.60% II. 10.213/95 = 10.75% III. 3.535/35 = 10.10% IV. 4.365/45 = 9.70% V. 10.974/124 = 8.85% VI. 3.28/40 = 8.20% VII. 1.888/25 = 7.55% VIII. 6.75/100 = 6.75%

IX. 6.08/100 = 6.08% After tax cost of debt.:Kda = Kdb (1-t) or I/NP (1-t) Kda = After tax cost of debt T = Rate of tax (NOTE:- Tax rate 35.88%) I. 12.60%(1-35.88%) = 8..08% II. 10.75%(1-35.88%) = 6.89% III. 10.10%(1-35.88%) = 6.48% IV. 9.70%(1-35.88%) = 6.22% V. 8.85%(1-35.88%) = 5.68% VI. 8.20%(1-35.88%) = 5.26% VII. 7.55%(1-35.88%) = 4.84% VIII. 6.75%(1-35.88%) = 4.33% IX. 6.08%(1-35.88%) = 3.90% CONCULSION:-When debt is used in form of a source of a finance , the firm save considerable amount in repayment of tax as interest is allowed as a deductable expenses in computation of tax cost of debt is reduced or after tax cost of debt is minimum than before tax. COST OF REDEEMABLE DEBT:Some debt. is issued to be redeemed after a certain period during the life time of a company such types of debt known as redeemable debt. Before tax cost of debt. After tax cost of debt. BEFORE TAX COST OF DEBT.:-Kdb = I+1/n (p np) / ( p+ np ) I = Interest P = proceeds at par Np = Net proceeds N = Number of years in which debt is to be redeemed I. II. III. IV. V. kdb = 10.213+1/1(95-95) / (95+95) = 10.75% 3.535+1/2(35-35) / (35+35) = 10.10% 4.365+1/3(45-45) / (45+45) = 9.70% 10.974+1/3(124-124)/ (124+124) = 8.85% 3.28+1/4(40-40)/ (40+40) = 8.20%

VI. 1.888+1/2(25-25)/ (25+25) = 7.55% VII. 6.75+1/4(100-100)/ (100+100) = 6.75% VIII.6.08+1/5(100-100)/ (100+100) = 6.08% AFTER TAX COST OF DEBT:-Kda = kdb ( 1-t ) kdb = Before tax cost of debt. t = tax rate I. Kda = 10.75%(1-35.88) = 6.89% II. 10.10%(1-35.88%) = 6.48% III. 9.70%(1-35.88%) = 6.22% IV. 8.85%(1-35.88%) = 5.68% V. 8.20%(1-35.88%) = 5.26% VI. 7.55%(1-35.88%) = 4.84% VII. 6.75%(1-35.88%) = 4.33% VIII. 6.08%(1-35.88%) = 3.90% COST OF DEBT. REDEEMABLE IN INSTALMENTS:Financial institutions generally require principal to be amortised in installments. A company may also issue bond or debenture to bond or debenture to be redeemed periodically. In such a case , principal amount is repaid each period instead of a lump sum at maturity and hence cash flows each period include interest and principal. The amount of interest goes on decreasing each period as it is calculated on the outstanding amount of debt.

Vd = I 1+ p1 / ( 1+ kd )1 + I 2+ P2 / ( 1 + Kd) 2+. ..+ I n+ Pn / ( 1+K )n Vd = Present value of bond or debenture I1,I2,In = Annual interest in period 1,2,., and so on P1,P2,Pn = Periodic payment of principal in period 1,2,...and so on N = Number of years to maturity Kd = Cost of debt or required rate of return

60 = 2.573+21/(1+Kd) 1+2.573+21/(1+Kd)2 +2.205+18/(1+Kd)3 = 5.87%

MEANING OF PERFERENCE SHARE CAPITAL :Preference share are those which carry the followings two right:1) preference shareholder have a right receive dividend at fixed rate before equity shareholder. 2) When company is wound up preference shareholders have a right to the return of capital before that of equity share. COST OF PERFERENCE CAPITAL :A fixed rate of divided is payable on preference shares . Dividend is payable at the discretion of the Board of directors and there is no legal binding to pay dividend, yet it does not mean that preference capital is cost free. In case dividends are not paid to preference shareholders, it will be affect the fund raising capacity of the firm. Hence, diviends are usally paid regulary on preference share except when there are no profits to pay dividends. Formula of calculation cost of preference capital:KP = D/P KP = Cost of Preference Capital D = Annual Preference Dividend P = Preference Share Capital IF PREFERENCE SHARES ARE ISSUES AT PREMIUM OR DISCOUNT OR FLOATATION COST ARE INCURRES TO ISSUE PREFERENCE SHARES KP = D/NP NP = Net Proceeds Sometimes REDEEMABLE Preference Share are issued which can be redeemed or cancelled on maturity date. The cost of redeemable Preference share capital can be calculated following formula:Kpr = D + MV-NP/n /1/2 ( MV+NP )

Kpr = Cost of redeemable Preference Shares D = Annual Preference Dividend MV = Maturity Value Of Preference Shares NP = Net Proceeds of Preference Shares ( THERE IS NO PREFERENCE SHARE ISSUED BY GRASIM INDUSTRIES LTD.)

MEANING OF EQUITY SHARE CAPITAL:Equity share are those share which are paid dividend only when profit left after the preference shareholders. There will be no fixed rate of interest . If company not earn sufficient profit equity shareholders will received nothing. Equity shareholder have voting rights. KINDS OF SHARE CAPITAL:1) Authorised or registered share capital 2) Issued share capital 3) Subscribed share capital 4) Called up share capital 5) Paid up share capital 6) Reserve share capital COST OF EQUITY SHARE CAPITAL:The cost of equity capital is a function of the expected return by its investors. The cost of equity capital is not the out-of-pocket cost using equity capital as the shareholders are not paid dividend at a fixed rate every year. Payment of dividend is not a legal binding. I t may or may not be paid. But it does not mean that equity share capital is cost free capital. Equity shareholder is the owner of the company. Equity share is the part of capital of company. THERE ARE THREE METHOD OF COMPUTATION OF COST OF EQUITY SHARE CAPITAL:1) Dividend yield method or Dividend/price ratio method 2) Dividend yield plus growth in dividend method 3) Earning yield method 4) Realised yield method

Dividend yield method or Dividend/price ratio method

The cost of equity capital is the discount rate that equates the present value of expected future dividend per share with the net proceeds or current market price of a share. ASSUMPTIONS:1) Dividend rate of company unchanged 2) Risk in the company remains unchanged FORMULA Ke = D/NP OR D/MP D = Expected dividend per share NP = Net proceeds MP = Market price per share (NOTE: All the figure in crores.) FOR THE YEAR 2003-2004 Ke = 15.8/1236.3 = 1.28% (1236.3 is the market price of Grasims share) FOR THE YEAR 2004-2005 Ke = 18.2/1213.6 = 1.50% (1213.6 is the market price of Grasims share) LIMITATIONS OF THIS METHOD: It does not consider future earning or retained earning It does not consider capital gain. This method suitable only when company has stable earning and stable dividend policy over a period of time.

Dividend yield plus growth in dividend method

This method used when the growth rate and dividend rate constant. According this method the cost of equity capital is based on the dividend and the growth rate. FORMULA Ke = D1 / NP + G Ke = Cost of equity capital NP = Net proceeds per price G = Growth rate (Grasim have not issued share on discount, premium) Ke = D1 / MP + G Ke = Cost of equity capital MP = Market price of share G = Growth rate For the year 2003-2004 Ke = 15.8/1236.3 +15.2% = 16.48% FOR THE YEAR 2004-2005 Ke = 18.2/1213.6 +15.2% = 16.70 %

Earning yield method

Ke = Earning per share Market price per share Or EPS / MP FOR THE YEAR 2003-04 Earning per share = Dividend available for shareholder No of equity share EPS= 779.26/91671233 =Rs. 85 Ke = 85/1236.3 =6.88% FOR THE YEAR 2004-05 EPS = 885.71/91672097 =Rs. 96.61 Ke = 96.61/1213.6 = 7.96% USE OF THIS METHOD: Earning per share are expected to remain constant Companys pay-out-ratio is 100% or when retention ratio is zero or all available profits distribute as dividend

Realised method
All 1st three method have some drawbacks regarding future dividend and earning. It is not possible to estimate future dividend and earning correactly, both of these depend upon the many uncertain factors.This method remove all drawbacks of 1st three method. In this method calculate actual average rate of return realised in the past, dividend received in past alongwith the gain realized at the time of sale of shares should be considered.

MEANING OF RETAINED EARNING:Retained earning those earning which is not distribute among shareholders. Company retained earning for the contingency works ,other works. Main purpose of retained earning is for smoothing running the business in future and fulfill their needs. Kr = D / NP + G AFTER TAX Kr = ( D / NP + G ) .(1-t).(1-b) B = Cost of purchasing new securities or brokerag Costs. OR Kr = Ke (1-t).(1-b)] FOR THE YEAR 2003-04 Kr = 16.48% (1-35.88%) (1-0) = 10.57% FOR THE YEAR 2004-05 k r = 16.70% (1-35.88%) (1-0) = 10.71% (GRASIM INDUSTRIES HAVE NOT ISSUED THE SHARE ON DISCOUNT OR PREMIUM)

# PROFILE OF GRASIM INDUSTRIES Introduction to GRASIM INDUSTRIES LTD. Features of the GRASIM INDUSTRIES LTD. Roots of Exellence Objectives of the Company SWOT Analysis Mission of the Company GRASIMs key products Management Structure Page No.

# OBJECTIVE & SCOPE OF STUDY Introduction to project Significance of cost of capital Problem in determination of cost of capital Computation of cost of capital I. Cost of Debt Capital II. Cost of Preference Capital III. Cost of Equity Share Capital IV. Cost of Retained Earnings V. Weighted Average Cost of Capital # LIMITATION OF STUDY # RESEARCH METHODOLOGY # FINDING & SUGGESTION # CONCLUSIONS # ANNEXURS B/S of last 2 years.

Profit & loss A/c of 2 years Bibliography

MEANING OF WEIGHTED AVERAGE COST OF CAPITAL:It is also known as composite cost of capital ,in this method weights are provide to specific cost of capital in proportion of various sources of funds source. The weights may be given either by using the book value or market value of the source. If there are differences between both then difference came weighted average cost of capital. LIMITATIONS: It is difficult to determine the market value because frequent fluctuations. It is difficult to assign weights to specific cost of capital. FORMULA:Kw = XW /W W = Weight , proportion of specific source of finance X = Cost of specific source of finance


Grasim is more than an Industrial enterprise . It is the symbol of INDIAS surge for economic and industrial liberation . Grasim is world largest producer of viscose staple fibre and edible oil and textile production . The organization BHIWANI TEXTILE MILLS is a unit of Grasim Industrial Ltd. Its Head Office at NAGDA ( M.P.) and working office at Bhiwani . This mill is under dynamic leadership of Mr. KUMAR MANAGLAM BIRLA . This mill was under the inspiring leadership of Chief Operative Officer Mr. S. Krishnamoorthy along with modernisation has successfully diversified its production to synthetic blended fabric , which is modern trend , enjoy a very good reputation in India as in modern trend . It got ISO 9002 for its quality and at present undertaking W.C.M. (World Class Manufacturing ) in the organization .


1. 2. 3. 4. This is one of the ten largest private sector companies in the country. It has a solid financial base. A group of units producing various products. A leading group in market

Established in 1947, Grasim Industries Ltd. Has displayed remarkable business acumen to grow both vertically and horizontally. Grasim has tapped opportunities as a result of its dynamic approach to emerge as a leading industrial giant of our country. Today, it is more than an industrial enterprise, it is a symbol of Indias search for economic and industrial liberalization. The group of operates in the core sectors of iron, petroleum, fertilizers, cement, chemicals and textiles. With a turnover of approximately US& million, the group enjoys a pioneer status in numerous industrial disciplines such as viscose staple fibre, rayon grade pulp, caustic soda, textiles, cement and sponge iron. It try to a faster a simple corporate philosophy, that is to achieve perfection and excellence in all spheres. Its tradition is that of innovation, dynamism and experiments. Research and Development plays a vital role in its vertical and horizontal integration programmes. It perfectly compliments its goals of leadership, quality and growth its aim to be best.


Objectives establish the goals and the aims of the business and determine the shape of future events. Objectives are the way of achieving motives for profit of social service. Main objectives of Bhiwani Textile Mills as in its Memorandum of Association are: Increasing productivity of work force To introduce new products and create new markets Customers service and customer satisfaction Improving work culture among the employees Capitalizing on company strength and use of corporate assets Continuous innovation To provide a growth rate of about 10% p.a. Improve the advertising effectiveness To ensure that a large proportion of its sales is directed towards the sectors and urban sectors


Strengths of BTM 1. 2. 3. is followed) 4. date. 5. Product quality is given equally to all (Wholesaler, Retailers) Facilities given to employees & employers on time and upto BTM is a composite firm in Haryana. BTM is a financially sound firm. Working environment is peacefully (Union is strength principle

Weaknesses of BTM 1. Basic salary structure is not up to date some manipulations are needed 2. Not sufficient facilities are given employers & employees . Opportunities for BTM 1. Given chance to Grasim to make & sale its product providing them manpower, machine , money , market , material 2. In near future they will start readymade garments Threats to BTM 1. BTM face threats from its competitors like Vimal , ocm , Siyaram , Raymonds 2. BTM face in overseas market like Phillipines , Malaysia , Canada , Mexico , America

1) Education for all: to secure them a brighter future. 2) Sustainable Livelihood: through training and education for skill development. 3) Health care and Hygienic living conditions. 4) Family Welfare 5) Restoring self esteem of the physically handicapped 6) Empowerment of Women 7) Community Development: holistic development of the community including infrastructure 8) Espousal of social causes .


1. 2. 3. 4. 5. 6. 7. 8.

Viscose Fibre Rayon Viscose Fibre from bamboo and wood Caustic Soda Cement Dress material of Graviera & Gwalior Suiting Sponge Iron Chemical Fertilizers



The EPS has increased by Rs. 11.61 in 2004-05. The dividend per share also increase in every year by Rs. 2.40. Net profit of GRASIM INDUSTRIES LTD also increase in 2004-05 by Rs. 25.15 crores as compared to 2003-04.


MR. VIKRAM D. RAO: TEXTILES FABRIC Group Executive President & Chief Financial Officer MR. D.D. RATHI Company Secretary MR. ASHOK MALU


Rs. in crores Previous year

Shareholders Funds Share Capital Share Capital Suspense Reserves and Surplus

1A 1B 2 91.67 0.02 4236.66 4328.35 91.67 0.02 3519.14 3610.83 1327.80 709.09 28.34 2065.23 632.50 6308.56

Loan Funds Secured Loans 3 Unsecured Loans 4 Documentary Bills Discounted with Bank 5 Deferred Tax Liabilities TOTAL

1439.02 535.79 33.53 2008.34 599.50 6936.19

Fixed Assets Gross Block Less: Depreciation Net Block Capital Work-in-Progress 6 5897.04 2848.17 3048.87 145.94 3194.81 13.73 2982.02 1.09 678.59 522.01 86.70 5705.53 2588.92 3116.61 79.09 3195.70 22.57 2540.65 _

Fixed Assets held for disposal Investments 7 Current Assets, Loans and Advances Interest accrued on Investment Inventories 8 459.46 Sundry Debtors 9 484.63 Cash and Bank Balances 10 227.48

Loan and Advances 324.44 Less: Current Liabilities and Provisions Liabilities Provisions Net Current Assets TOTAL


565.54 1853.93 1496.01 752.10 194.27 946.37 549.64 6308.56

12 13

827.89 280.41 1108.30 745.63 6936.19

Accounting Policies and notes on A/c 22&23


Schedules Rs.in Crores Previous Year 7201.06 971.80 6229.26 114.75 72.44 100.67 6517.12 1873.05 1498.77 49.02 373.13 938.46 21 138.76 284.57 5155.76 1361.36 34.35 (92.00) 1303.71 (451.00) 33.00 885.71 6.86 273.06 4340.93 1077.26 _ 00.00 1077.26 (291.00) (7.00) 779.26 42.04 6129.95 916.74 5213.21 141.60 87.69 (24.31) 5418.19 1372.49 1306.67 50.47 358.90 825.46

Gross Sales Less: Excise Duty Net Sales Interest &Dividend Income 14 Other Income 15 Increase/(Decrease) in stocks 16

Raw Material Consumed 17 Manufacturing Expenses 18 Purchases of Finished and Other Products Payment to and Provisions 19 For Employees Selling, Distribution, Admin- 20 Interest 153.88 Depreciation

Profit beforeTax & Exceptional items Surplus on pre-payment of sales tax loan Provision for diminution in value of Profit before Tax Provision for Current Tax Deferred Tax Profit after Tax Debenture Redemption Reserve

Investment Allowance Reserve Balance brought forward from Previous Year Profit available for Appropriation Appropriations Proposed Dividend Corporate Dividend Tax General Reserve Balance carried to Balance Sheet Basic and diluted earnings per share ( in Rs.) Accounting Policies and Notes on Accounts 22 & 23

0.16 790.20 1682.93 146.68 20.90 700.00 815.35 1682.93 96.60

8.27 955.41 1784.98 128.34 16.44 850.00 790.20 1784.98 84.99

Primary data is not available for study. Lack of time.


A Project report is never the sole product of the person whose name appears on the cover. There are always some people whose guidance proves to be of immense help in giving its final shape. So it becomes my first duty to express towards all of them. I am thankful to MR. S. KRISHNAMOORTHY , Chief Operating Officer , B.T.M. for giving me kind permission to carry out Summer Training in his organization .I feel especially privileged to work under the kind supervision of MR. SURESH SARAF , Manager Finance , who guided me at every step to make this project a real success . I also pay my deep regards to MR. DEEPAK JAIN, (Deputy Manager , Accounts ), who extended me time to time help in this project . Last but not the least , I am extremely thankful to GOD who is the ultimate guide providing me valuable insight , courage and determination at every doorstep . With deep regards always. (ANJALI VERMA)