FINANCIAL
MANAGEMENT
CIA - III
School of Business and Management
Christ University (Deemed to be University)
Bangalore
2022-2023
SUBMITTED BY :
ANNA ROSE P F - 2113036
ARDRA SAJI : 2113041
SHARMILA S : 2113066
GMR LTD
INTRODUCTION
In1978, G M Rao started off with a small jute mill, and established, over three decades later,
what is known today as GMR Group. GMR is today a major player in the Infrastructure
Sector, with world class projects in India and abroad. GMR Group is headquartered in New
Delhi, and has been developing projects in high growth areas such as Airports, Energy,
Transportation and Urban Infrastructure.
CALCULATION OF WACC
WACC = E / (E + D) * Cost of Equity + D / (E + D) * Cost of Debt * (1 - Tax
Rate)
1. Weights:
Generally speaking, a company's assets are financed by debt and equity. We need to calculate
the weight of equity and the weight of debt.
The market value of equity (E) is also called "Market Cap". As of today, GMR
Infrastructure's market capitalization (E) is $0.000 Mil.
The market value of debt is typically difficult to calculate, therefore, the value of debt (D) to
do the calculation. It is simplified by adding the latest two-year average Short-Term Debt &
Capital Lease Obligation and Long-Term Debt & Capital Lease Obligation together. As of
June. 2022, GMR Infrastructure's latest two-year average Short-Term Debt & Capital Lease
Obligation was $534.89979256921 Mil and its latest two-year average Long-Term Debt &
Capital Lease Obligation was $3743.6679555837 Mil. The total Book Value of Debt (D) is
$4278.5677481529 Mil.
a) weight of equity = E / (E + D) = 0.000 / (0.000 + 4278.5677481529) = 0
b) weight of debt = D / (E + D) = 4278.5677481529 / (0.000 + 4278.5677481529) = 1
2. Cost of Equity:
(CAPM) to calculate the required rate of return. The formula is:
Cost of Equity = Risk-Free Rate of Return + Beta of Asset * (Expected Return of the Market
- Risk-Free Rate of Return)
a) The current risk-free rate is 7.40000000%.
b) Beta is the sensitivity of the expected excess asset returns to the expected excess market
returns. GMR Infrastructure's beta cannot be obtained because it has a price history shorter than
3 years. It will thus be set to 1 as default to calculate WACC.
c) (Expected Return of the Market - Risk-Free Rate of Return) is also called market premium.
Cost of Equity = 7.40000000% + 1 * 6% = 13.4%
3. Cost of Debt:
We have used last fiscal year end Interest Expense divided by the latest two-year average debt to
get the simplified cost of debt.
As of Mar. 2022, GMR Infrastructure's interest expense (positive number) was
$260.89781282485 Mil. Its total Book Value of Debt (D) is $4278.5677481529 Mil.
Cost of Debt = 260.89781282485 / 4278.5677481529 = 6.0978%.
WACC = E / (E + D)* Cost of Equity + D / (E + D)* Cost of Debt *(1 - Tax Rate) =
0*13.4% + 1 *6.0978% * (1 - 10.165%) = 5.48%
As of today, GMR Infrastructure's weighted average cost of capital is 5.48%. GMR
Infrastructure's ROIC % is 4.62% . GMR Infrastructure earns returns that do not match up to
its cost of capital. It will destroy value as it grows.
LEVERAGES
Operating Leverage:
=contribution/EBIT
=1055.2/1183
=0.89 (approx.)
Positive operating leverage, in which revenue growth outstrips expense growth, is a virtual
guarantee of earnings growth
Financial Leverage:
=EBIT/EBT
=1183/-835
= -1.42 (approx.)
Negative leverage occurs when the borrowing costs are greater than the overall return
produced by the property's cash flow.
Combined Leverage:
=OL*FL
= 0.89* - 1.42
= -1.26 (approx.)
Negative leverage indicates the company is not generating enough revenue to cover costs or
when the contribution margin is less than the total fixed cost.
DIVIDEND POLICY
2022 2013 2014
Dividend - 0.1 0.1
Yield 0% 0.39% 0.70%
RELEVANT RATIOS
FINANCIAL TRENDS AND
POSITION
In the last 16 years, only 4.63 % trading sessions saw intraday declines higher than 5 % .
Company has posted a loss of Rs 136.98 cr for the 4th consecutive quarter.Company's annual
revenue growth of 24.08% outperformed its 3 year CAGR of -15.58%.Stock gave a 3 year
return of 83.65% as compared to Nifty Midcap 100 which gave a return of 86.2%. (as of last
trading session)
In the past three years there has been a continuous decline in the total expenses and there has
been a fluctuating revenue structure . If we take its EPS into consideration , it is negative .
This justifies that the company's income is negative, which means that the company is losing
money, or spending more than it is earning. A negative EPS does not necessarily mean that a
stock is a sell.
There has been a decline in the assets and liabilities , but there has been an increase in the
total equity growth ratio.the total debt to equity is -32.42.This means that it has negative
shareholder equity. In other words, the company's liabilities exceed its assets. In most cases,
this would be considered a sign of high risk and an incentive to seek bankruptcy protection.
LARSEN AND TOUBRO
INTRODUCTION
Larsen & Toubro Ltd, commonly known as L&T, is an Indian multinational conglomerate
company, with business interests in engineering, construction, manufacturing, technology,
information technology and financial services, headquartered in Mumbai.Larsen & Toubro
originated from a company founded in 1946 in Bombay by two Danish engineers, Henning
Holck-Larsen and Søren Kristian Toubro. The company began as a representative of Danish
manufacturers of dairy and allied equipment.As of 2020, L&T Group comprises 118
subsidiaries, 6 associates, 25 joint-venture and 35 joint operations companies, operating across
basic and heavy engineering, construction, realty, manufacturing of capital goods, information
technology, and financial services.
CALCULATION OF WACC
WACC =E / (E + D) * Cost of Equity + D / (E + D) * Cost of Debt * (1 - Tax Rate)
1. Weights:
Generally speaking, a company's assets are financed by debt and equity. We need to calculate
the weight of equity and the weight of debt.
The market value of equity (E) is also called "Market Cap". As of today, Larsen & Toubro's
market capitalization (E) is ₹2835532.931 Mil.
The market value of debt is typically difficult to calculate, therefore, value of debt (D) to do
the calculation. It is simplified by adding the latest two-year average Short-Term Debt &
Capital Lease Obligation and Long-Term Debt & Capital Lease Obligation together. As of
Sep. 2022, Larsen & Toubro's latest two-year average Short-Term Debt & Capital Lease
Obligation was ₹565738.9 Mil and its latest two-year average Long-Term Debt & Capital
Lease Obligation was ₹734946.9 Mil. The total Book Value of Debt (D) is ₹1300685.8 Mil.
a) weight of equity = E / (E + D) = 2835532.931 / (2835532.931 + 1300685.8) = 0.6855
b) weight of debt = D / (E + D) = 1300685.8 / (2835532.931 + 1300685.8) = 0.3145
2. Cost of Equity:
Capital Asset Pricing Model (CAPM) to calculate the required rate of return. The formula is:
Cost of Equity = Risk-Free Rate of Return + Beta of Asset * (Expected Return of the Market -
Risk-Free Rate of Return)
a) The current risk-free rate is 7.40000000%.
b) Beta is the sensitivity of the expected excess asset returns to the expected excess market
returns. Larsen & Toubro's beta is 1.15.
c) (Expected Return of the Market - Risk-Free Rate of Return) is also called market premium.
Cost of Equity = 7.40% + 1.15 * 6% = 14.3%
3. Cost of Debt:
using last fiscal year end Interest Expense divided by the latest two-year average debt to get
the simplified cost of debt.
As of Mar. 2022, Larsen & Toubro's interest expense (positive number) was ₹30554.2 Mil. Its
total Book Value of Debt (D) is ₹1300685.8 Mil.
Cost of Debt = 30554.2 / 1300685.8 = 2.3491%.
4. Multiply by one minus Average Tax Rate:
The calculated average tax rate is limited to between 0% and 100%. If the calculated average
tax rate is higher than 100%, it is set to 100%. If the calculated average tax rate is less than
0%, it is set to 0%.
The latest Two-year Average Tax Rate is 31.02%.
WACC = E / (E + D) * Cost of Equity + D / (E + D) * Cost of Debt * (1 - Tax Rate) =
0.6855 * 14.3% +0.3145 *2.3491%* (1 - 31.02%) = 10.31%
As of today, Larsen & Toubro's weighted average cost of capital is 10.31%. Larsen &
Toubro's ROIC % is 6.78%
LEVERAGES
Operating Leverage:
=contribution/EBIT
= 101000.41/17633
= 5.73(approx.)
Positive operating leverage, in which revenue growth outstrips expense growth, is a virtual
guarantee of earnings growth; negative operating leverage, if persistent, virtually guarantees the
absence of profit.
Financial Leverage:
=EBIT/EBT
=17633/14508
= 1.26 (approx.)
Positive leverage arises when a business or individual borrows funds and then invests the
funds at an interest rate higher than the rate at which they were borrowed.
Combined Leverage:
=OL*FL
=5.73 * 1.26
= 7.22 (approx.)
A financial leverage ratio of less than 1 is usually considered good by industry standards. A
leverage ratio higher than 1 can cause a company to be considered a risky investment by
lenders and potential investors, while a financial leverage ratio higher than 2 is cause for
concern.
DIVIDEND POLICY
For the year ending March 2022 Larsen & Toubro has declared an equity dividend of
1100.00% amounting to Rs 22 per share. At the current share price of Rs 2011.10 this results
in a dividend yield of 1.09%.
2020
2021 2022
Face value (in Rs.) 2
2
2
Dividend (in%) 900.0 1,800.0 1,100.0
Dividend per 17.98 35.98 21.99
share(adjusted)(in
Rs)
Dividend payout 23.3 108.3 30
ratio in %)
Dividend yield(in 2.2 2.5 1.2
%)
RELEVANT RATIOS
FINANCIAL TRENDS AND POSITION
L&T reported nearly 45 per cent growth in its consolidated net profit to Rs 1,702 crore for
Q1FY23 from Rs 1,174 crore in the year-ago period. However, sequentially, net profit was
down 53 per cent. The company’s consolidated revenue from operations increased 22.22% to
Rs 35,853 crore during the quarter under review, aided by improved construction activity and
strong execution across projects.
The company expects profitable growth in the coming years after they announced their
'Lakshya 2026 Strategic Plan'. The plan showcased efficient and timely execution of a large
order book, value enhancing measures, retention of leadership position and improved
shareholder returns on a sustainable basis.
The company is on the path of diversification into new businesses of Green Energy and e-
Commerce Platforms. At the same time, the company is also pursuing exit options and
restricting exposure in non-core businesses over the Lakshya 2026 strategic plan period.
RELIANCE INFRASTRUCTURE
INTRODUCTION
Reliance Infrastructure Limited stands at second position. Reliance Infrastructure Company is
involved in many projects related to real estate, airports, roads and highways etc. The market
capitalization of Reliance Infrastructure is Rs 11,098 Crore as on July 2015. This is only for
the distribution of electricity in the suburbs of Mumbai. They are the winners of the National
Award for Excellence in Energy Management.
CALCULATION OF WACC
1. Weights:
Generally speaking, a company's assets are financed by debt and equity. We need to calculate
the weight of equity and the weight of debt.
The market value of equity (E) is also called "Market Cap". As of today, Reliance
Infrastructure's market capitalization (E) is ₹38422.839 Mil.
The market value of debt is typically difficult to calculate, therefore, the value of debt (D) to
do the calculation. It is simplified by adding the latest two-year average Short-Term Debt &
Capital Lease Obligation and Long-Term Debt & Capital Lease Obligation together. As of
June. 2022, Reliance Infrastructure's latest two-year average Short-Term Debt & Capital
Lease Obligation was ₹72865.8 Mil and its latest two-year average Long-Term Debt &
Capital Lease Obligation was ₹60259.5 Mil. The total Book Value of Debt (D) is ₹133125.3
Mil.
a) weight of equity = E / (E + D) = 38422.839 / (38422.839 + 133125.3) = 0.224
b) weight of debt = D / (E + D) = 133125.3 / (38422.839 + 133125.3) = 0.776
2. Cost of Equity:
Capital Asset Pricing Model (CAPM) to calculate the required rate of return. The formula is:
Cost of Equity = Risk-Free Rate of Return + Beta of Asset * (Expected Return of the Market -
Risk-Free Rate of Return)
a)The current risk-free rate is 7.40000000%.
b)Beta is the sensitivity of the expected excess asset returns to the expected excess market
returns. Reliance Infrastructure's beta is 3.14.
c) (Expected Return of the Market - Risk-Free Rate of Return) is also called market premium.
Cost of Equity = 7.40000000% + 3.14 * 6% = 26.24%
3. Cost of Debt:
Using last fiscal year end Interest Expense divided by the latest two-year average debt to get
the simplified cost of debt.
As of Mar. 2022, Reliance Infrastructure's interest expense (positive number) was ₹18634.8
Mil. Its total Book Value of Debt (D) is ₹133125.3 Mil.
Cost of Debt = 18634.8 / 133125.3 = 13.9979%.
4. Multiply by one minus Average Tax Rate:
Using the latest two-year average tax rate to do the calculation. The calculated average tax
rate is limited to between 0% and 100%. If the calculated average tax rate is higher than
100%, it is set to 100%. If the calculated average tax rate is less than 0%, it is set to 0%.
The latest Two-year Average Tax Rate is less than 0%, and it's set to 0%.
WA
= E / (E + D) * Cost of Equity + D / (E + D) * Cost of Debt * (1 - Tax Rate)
CC
= 0.224 * 26.24% + 0.776 * 13.9979% * (1 - 0%)
= 16.74%
DIVIDEND POLICY
For the year ending March 2022 Reliance Industrial Infrastructure has declared an equity
dividend of 30.00% amounting to Rs 3 per share. At the current share price of Rs 1073.45
this results in a dividend yield of 0.28%. The company has a good dividend track report and
has consistently declared dividends for the last 5 years.
2020 2021 2022
Dividend(%)
30
30
30
Dividend(Rs)
3.0 3.0 3.0
During the past 13 years, the highest Dividend Payout Ratio of Reliance Infrastructure was
0.55. The lowest was 0.00. And the median was 0.15.
Dividend Payout Ratio
= Dividends per Share / EPS
= 0 / -35.68 = N/A
LEVERAGES
Operating Leverage:
=contribution/EBIT
= 1,467.37/1404
=1.045(Approx)
Positive operating leverage, in which revenue growth outstrips expense growth, is a virtual
guarantee of earnings growth
Financial Leverage:
=EBIT/EBT
=1404/-656
= -2.14
Negative leverage is a scenario where the addition of debt in a commercial real estate
transaction causes the levered return to be less than the unleveraged return. Negative leverage
occurs when the borrowing costs are greater than the overall return produced by the
property's cash flow.
Combined Leverage:
=OL*FL
=1.045*-2.14
= -2.23
RELEVANT RATIOS
FINANCIAL TRENDS AND POSITION
Reliance Infra share price was Rs 146.20 as on 11 Nov, 2022, 04:04 PM IST. Reliance Infra
share price was up by 2.35% based on previous share price of Rs 146.65. Reliance Infra share
price trend:
● Last 1 Month: Reliance Infra share price moved down by 2.44%
Reliance Infra share price saw a 52 week high of Rs 193.85 and 52 week low of Rs 8.65.
Within the Infrastructure sector, Reliance Infra stock has a market cap rank of 5. Reliance
Infra has a market cap of Rs 3,844.91 Cr.Reliance Infra share can be quickly analysed on
following metrics: Stock's PE is -4.23,Price to Book Ratio of 0.23,EPS (trailing 12 month) of
Reliance Infra share is -34.58
