roup Assignment

Financial Management IIAssignment-I

Topic: Cost of Capital for TATA STEEL Ltd.

Group Number - 12

Submitted by: 1) Prasenjit Maity, 1412352) Prateek Singh, 1412363) Praveen Kumar Jha, 141237

Submitted to Prof. Deepak Danak

No. of pages: 9

INSTITUTE OF MANAGEMENT, NIRMA UNIVERSITY

INTRODUCTIONTata Steel Limited(formerly Tata Iron and Steel Company Limited (TISCO)) is anIndianmultinationalsteel-making company headquartered inMumbai, Maharashtra, India, and a subsidiary of theTata Group. It was the11th largest steel producing company in the worldin 2013, with an annualcrude steelcapacity of 25.3 million tonnes, and the second largest private-sector steel company in India (measured by domestic production) with an annual capacity of 9.7 million tonnes afterSAIL.Tata Steel has manufacturing operations in 26 countries, including Australia, China, India, the Netherlands, Singapore, Thailand and the United Kingdom, and employs around 80,500 people.Its largest plant is located inJamshedpur,Jharkhand. In 2007 Tata Steel acquired the UK-based steel maker Corus which was the largest international acquisition by an Indian company till that date.It was ranked 486th in the 2014Fortune Global 500ranking of the world's biggest corporations.It was the seventh most valuable Indian brand of 2013 as perBrand Finance.

HISTORYTata Iron and Steel Company was established byDorabji Tataon 25 August 1907, as part of his fatherJamshedji'sTata Group. By 1939 it operated the largest steel plant in the British Empire. The company launched a major modernization and expansion program in 1951. Later in 1958, the program was upgraded to 2 Million metric tonnes per annum (MTPA) project. By 1970, the company employed around 40,000 people at Jamshedpur, with a further 20,000 in the neighbouring coal mines.In 1971 and 1979, there were unsuccessful attempts to nationalize the company.In 1990, it started expansion plan and established its subsidiary Tata Inc. in New York. The company changed its name from TISCO to Tata Steel in 2005.

CALCULATION OF COST OF EQUITY AND WACC

From Ace Equity Database we have taken the different values of BETA, which are

Company NameSENSEXBSE 100BSE 200BSE 500METAL

TATA STEEL Ltd. ()1.351.401.461.491.15

From the BALANCE SHEET and P&L account of TATA STEEL Ltd. we have taken the following values

Equity (S)63699.74

Debt (B)27917.26

Value of the firm (V= S+B)91617.00

Interest1820.58

PBT9713.50

Tax3301.31

%Tax0.34

We have taken the value of BETA as the average value of SENSEX and BSE 100.So, BETA () = (1.35+1.40)/2 = 1.375We have taken the value of Risk free return (RF)* = 7.72% and Market Return (Rm) = 18.05%Cost of Debt (Rb) = Interest/Debt = 1820.58/27917.26 = 6.5%Therefore Cost of Equity (Rs) = RF + * (Rm - RF)= 7.72 + 1.375 * (18.05 7.72)= 21.92WACC (Ro) = (S/V) * Rs + (B/V) * Rb * (1-Tax) = (63699.74/91617.00) * 21.92 + (27917.26/91617.00) * 6.5 * (1-0.34) = 16.55NOTE: - * the value of RF is taken from http://www.tradingeconomics.com/india/government-bond-yieldANALYSIS OF BETABeta is a numeric value that measures the responsiveness of a stock's price to changes in the overall stock market. This helps the investor to decide whether he wants to go for the riskier stock that is highly correlated with the market (beta above 1), or with a less volatile one (beta below 1).SENSEXHere we got the value of = 1.35. Theoretically, it means that this stock is 35% more volatile than the market.BSE 100Here we got the value of = 1.40. Theoretically, it means that this stock is 40% more volatile than the market.AVVERAGE VALUE OF BOTHHere we got the value of = 1.375.Theoretically, it means that this stock is 37.5% more volatile than the market.

Here in all the cases value of BETA is more than 1. Hence, stock is comparatively more risky.

TATA STEEL Ltd.Page 8