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Submitted By restleshart

Words 502

Pages 3

Words 502

Pages 3

Part 1: WACC CALCULATION

WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. It is the minimum acceptable return that a company must earn on an existing asset base to satisfy its stakeholders.

Calculation of WACC as on 31st March 2012

Total Debt of the company = Rs 2395.53 Cr

Interest = 255.25 Cr Rs.

The cost of Debt before tax = Interest/Tax *100 = 10.65

Now, Tax% = Tax/PBT = 124/689.97 = 0.1797

Hence, Cost of debt after tax = (Cost of debt before tax*(1-Tax %)) = (10.65*(1-.1797)) = 8.74 ……… (1)

Now, the cost of Equity at Market price according to CAPM model is given as

IRF + (RM-IRF)*Beta……. (2)

Where IRF is risk free return, in this case it is 8% ……. (3)

RM is the market return, i.e. change in the market indices over one year given as

((30.30-28.45)/28.45)*100 = 6.50 % ….. (4)

Share price as on 31st march 2012 = 30.30

Share price as on 31st march 2011 = 28.45

The beta value for Ashok Leyland is given as 1.1 in the CRISIL official website

Now putting the value of Beta along with equations (3) & (4) in (2), we get,

Cost of equity = 8 + (6.50-8)*1.1 = 6.35% …. (5)

Let us assume that the cost of reserves and surplus is equivalent to the cost of equity i.e. 6.35% … (6)

Now assigning weights,

The total equity in the market for Ashok Leyland is 2660700000 * market price as on March 31st 2012 30.30 = 8061.921 Cr Rs.

The total debt = 2395.53 Cr Rs.

Total reserve = 2632.34 Cr Rs.

Thus the weightage is given as 0.5 for Cost of equity, 0.2 for cost of debt and 0.3 for reserves & surplus

Thus final WACC, using equation (1), (5) and (6) is

WACC = (0.5*6.35) + (0.2* 8.74) + (0.3*6.35) = 3.175 + 1.748 + 1.905

WACC = 6.828

PART 2: DEGREE OF COMBINED LEVERAGE CALCULATION

DCL is A leverage ratio that summarizes the combined effect the degree of operating leverage (DOL), and the degree of financial leverage has on earnings per share (EPS), given a particular change in sales.

The value of DCL is calculated as = (% change in EPS) / (%change in sales) ….. (1)

EPS as on 31st march 2012 = 2.13

EPS as on 31st march 2011 =4.75

Thus % change in EPS = 23.01% …… (2)

Net sales as on 31st March 2012 = 13309.59 Cr Rs.

Net sales as on 31st March 2011 = 11407.15 Cr Rs.

Thus, % change in sales = 16.67% ……. (3)

Putting the values of (2) & (3) in (1), we get

DCL = 23.01/16.67 = 1.38

DCL = 1.38

REFERENCE: www.investopedia.com/terms/d/dcl.asp#axzz2NDq5FBVJ www.investopedia.com/terms/w/wacc.asp#axzz2NDq5FBVJ