Project Report

On
Cost of Capital
SUBMITTED TO THE USBS TALWANDI SABO BTI.
In Partial Fulfilment of the requirement
for the degree of

MBA(IC)
IN
FINANCE MANAGEMENT

Project submitted to:USBS Talwandi Sabo BTI.

Submitted by:Harpreet Kaur

MBA(IC)4th semester
Roll No 713

DECLARATION
I Harpreet Kaur Roll No713, Student of MBA(IC)2ND ,hereby declare that the project report
entitle Cost of capital of Gurukull Technologies Pvt Ltd.is an original work and the same has not
been submitted
to any other institute.

(Signature of the candidate)

ACKNOWLEDGMENT
I express my sincere thanks and gratitude to all those who made it possible for me to complete
this work. First of all, I would like to extend my thanks to Suvidh Mittal who exceeded to me
request and allowed me to work on this project. He always gave valuable guidance through
over the tenure of my work. I also provide thanks
to Sanjeev Sharma for their help
& cooperation. I am also thankful to Nidhi Bansal (Guide) for providing me necessary guidance
to prepare the report. Last but not the least; I would like to thanks all of them, who helped me
directly or indirectly in completion of my work.

CONTENT
PROFILE OF GURUKULL TECHNOLOGIES PVT LTD
1. Introduction to Gurukull Technologies Pvt Ltd
2. Organisation and Management
3. Gurukull Key Products
4. The Gurukull Companies
5. Objectives Of Companies
6. Brand Of Company
7. Brand Advertising History
8. Structure of Finance Department in company
9. Significance Accounting Policy of Company
Scope Of Company
Review of company
Objective of company
Introduction of Project Report
1. Introduction to cost of capital
2. Significance of cost of capital
3. Problem in Determination of cost of capital
4. Computation of cost of capital
COST OF DEBT CAPITAL
1. Cost of debt.(before tax)
2. Cost of debt.(after tax)
3. Cost of redeemable debt.
COST OF EQUITY SHARE CAPITAL
COST OF PREFERENCE SHARE CAPITAL
COST OF RETAINED EARNING
FINDINGS & SUGGESTIONS
CONCLUSION
LIMITATION OF STUDY
RESEARCH METHODOLOGY
BIBLIOGRAPHY
LIST OF TABLE

1.
2.
3.
4.
5.

Introduction of cost of capital

Cost of debt capital
Cost of equity share capital
Cost of preference share capital
Cost of retained earning

PREFACE
A student may acquire sufficient knowledge of business management by reading theory
books during study period but actual and practical knowledge is must for any student .A student
can gain this practical knowledge when he comes to same environment. He must have
knowledge to tackle various types of problems, which arise in business. He can be able to do it,
when he actually faces the problems .A student may have sufficient attiiitude for his future job,
but a systematic practical training is essential bring in his confidence for job performance ,
mental preparation which enable him to take a future job responsibility . As discussed above
importance and objectives of training, besides all this, such training solves following purposes:Developing Skills
In this ability to perform work effectively & efficiently is being developed.
Modifying Attitude developing good attitude on the part of the training in regard
to actual job requirement that is management skills, industrial relations, human relations.
Transmitting Information Information about the company, its product, services & policies. The
management of company offered excellent learning situation &sufficient facilities to fulfil the
objectives of the training.

PROFILE OF GURUKULL TECHNOLOGIES PVT LTD

Company Profile:-Gurukull Web Technologies is a private limited company who is having the
head office in Delhi and a branch office in Bathinda, Gurukull is playing a key role in helping
individuals, organizations and nations adapt to the changing requirements of a knowledgedriven world. Gurukull Web Technologies for IT Excellence commenced its IT education &
training business in 2007, Gurukull is an ISO 9001:2008 organization ,We keep in pace with the
dynamic technological environment of today.
Over 6000 Gurukull trained engineers are working in leading companies. Many are running
their own business. Nearly 2000 students are being trained at any point of time.
The goodwill is not only because GURUKULLWEB TECHNOLOGIES PVT. LTD. provides skilled
manpower in the areas of hardware, software& networking, but also because the students are
taught the latest technology advancements in the industry. This is coupled with hands-on lab
sessions where in the students are faced with simulations of live situations that may arise on a
day to day level in organizations. This equips the students to proactively act to situations and
implement the best possible solution befitting the situation.
Vision and Mission:-Is to become worlds most respected brand in Technology Training and
lead from the front to empower people from the world over though innovative educational
products .
Our mission:-We believe that what & where to study is the important decision in life. But
where one would like to see himself after studying is the most important question which must
come in everybodys mind before one chooses a course. The fundamental mission is:-

1.
To train & connect the best available talent with the best available career opportunity
2. To impart quality education at reasonable price.
To use all such training methods that would create ever smiling professionals Gurukull web
technologies Pvt. Ltd. is authorized to provide training of some of the big IT companies such
as:- is the leading provider of vendor-neutral certifications in the world. We offer 14
certification and certificate exams in PC support, networking, servers, convergence, training,
Linux, security, IT sales, green IT and more. CompTIA has been delivering certification exams
for more than 15 years and is committed to continually improving the service we provide to
the industry.

In addition to professional certifications, CompTIA supports and leads the global IT industry
through education, advocacy and philanthropy initiatives.
Our vision of the IT landscape is shaped by more than 25 years of global perspective and more
than 2,000 members and 1,000 business partners. We are driven by our members and led by
an elected board of industry professionals. Trainings convey worthy and considerable rewards
to students, IT professionals and the organizations that employ them. The Microsoft training
encourage and prepare for the certification exams which are designed to provide the needed
recognition one needs to excel in ones career and provide employers with validation of your
skills. Acquiring Microsoft trainings helps provide you with relevant skills that can lead you to a
fulfilling career. Is the worldwide leader in networking that transforms how people connect,
communicate and collaborate? Cisco provides globally recognized IT certification programs
available through Cisco Certifications. The Cisco training courses thus bring considerable and
valuable rewards to network professionals, their managers and the organizations that employ
trained IT professionals. Cisco credentials are considered as highest level of accreditation
worldwide.

IT professionals trained in Red Hat technologies find themselves high in demand in the
technology industry. Red Hat training is challenging but rewarding, it prepares individuals for
the certification program and prove their capabilities in setting up and administering an actual
Red Hat Linux server for network services and security. That's why Red Hat, Inc. wants to make
it easy for certificate holders to provide (P.T.O) Verification of their accomplishments to
current or prospective employers, to clients, or to their employer's clients. Industry analysts
and experts agree that training on Oracle technologies are among the most sought after
badges of credibility for expertise in the Information Technology marketplace. The training
prepares the IT professionals for the Oracle Certifications. IT professionals can distinguish
themselves from their peers or competition and earn valuable job security by earning Oracle
trainings. Oracle training is a valuable, industry-recognized credential that signifies in-depth
knowledge and skill in Oracle technologies.

MANAGEMENT OF GURUKULL TECHNOLOGY PVT LTD.

BOARD OF DIRECTORS
SUVIDH MITTAL
AVINASH SINGLA
ADVISER
PANKAJ
NIDHI BANSAL
CHIEF FINANCIAL OFFICER
SHAVI GOYAL,MOHIT KUMAR
COMPANY SECRETARY
SANJEEV SHARMA
SANDEEP

OBJECTIVES OF THE COMPANY

Objectives
are
the
way
of
achieving
motives
for
profit
or
socialservices. Main objectives given in the MEMORANDUM OFASSOCIATION are as follows:
Improving work culture among employees.
Introduce new product and create new market.
Increasing Productivity of work force.
Customer service and customer satisfaction.
Improve the advertising effectiveness.
Continuous innovation.
To ensure that enlarge proportion of its sales is directed towards the rural and urban areas.
To maximize the profits of the company.

STRUCTURE OF THE FINANCE DEPARTMENT IN THE COMPANY

VICE PRESIDENT

G.M. FINANCE

MGR.ACC.

MGR.FINANCE
ASS.MGR.

DY.MGR.ACC.

ACCOUNTING POLICY OF THE COMPANY

DEPRECIATION :
Method as per the rates specified in Schedule-XIV of thecompanies act 1956. On
addition/disposal depreciation has been provided on pro-rata basis with reference to the
month of addition/disposal.
INVESTMENT:
Investments are stated at cost.
VALUATION OF INVENTORY :
Inventories are valued at the lower of cost and net realizable value except
waste/scrap which is valued at net realizable value. The cost is computed on weighted average
basis. Finished goods and process stock include cost of conversion and other costs incurred in
bringing the inventories to their present location and condition. Obsolslete, defective and inservices stocks are duly Provide for.

LITERATURE REVIEW
The most recent Australian capital budgeting surveys were by McMahon (1981), Lillian (1984),
and Freeman and Hobbes (1991). These surveys reveal a growing popularity for DCF 3
techniques and reliance on WACC as the discount rate. For example, Freeman and Hobbes
(1991)
found
that
75%and 72% of respondents used NPV and IRR techniques respectively.However methods such
as the payback period, accounting rate of return or discounted payback were still used by a
substantial
number
of
companies.Similar to McMahon (1981), Freeman and Hobbes found that 62% of respondent
companies used WACC to calculate the hurdle rate used in the capital budgeting process.
However, 39% of respondents said they relied on the cost of borrowing to determine hurdle
rates. A more recent survey that included Australian companies in the sample, among
companies
from
six Asia
Pacific
countries,
was
undertaken
by
Kestrel et al (1999). This survey confirmed the popularity of DCF methods in Australia. It was
also found that 73% of companies surveyed used CAPM, subject not included in previous
surveys in Australia. The rate of CAP usage was significantly higher than the
usage in the other Asia Pacificcountries surveyed, which included Hong Kong, Indonesia, Malay
sia,

Philippines and Singapore. Numerous capital budgeting surveys have been conducted in US,
UK,
and
Canada.
Graham
and
Harvey
(2001)
carried
out
acomprehensive survey in the US covering the cost of capital, capital budgeting, and capital
structure. Similar to the Australian results of Freeman and Hobbes (1991), the IRR and NPV
were found to be the most frequently used capital budgeting techniques. Other techniques
such
as
the
payback period were less popular but were still being used by a majority of companies. Despite
being advocated by academics as a method that could supplement, or replace DCF methods,
real
option
techniques
were
relativelyunpopular, they ranked eighth among twelve techniques considered byGraham andH
arvey. Even so, 27% of respondents reported using realoptions techniques. Graham and Harvey
found
that
CAPM
was
the
most popular method of estimating the cost of equity with 73% of respondentsrelying mainly
on the Camps far, however, there is limited survey evidence on the use of real options. A
notable exception being Graham and Harveys (2001) result that real options techniques were
being used by a minority of companies in the US. Accordingly it is worthwhile to examine the

use of real options in Australia, particularly as Australia has a large natural resource sector. 2
See Berkley et.al (2000) p.119 and Ch. 21. 5 In overseas surveys, the CAPM was found to be the
most popular method used in the estimation of the cost of capital. The only investigation of the
usage of the CAPM in Australia was Kestrel (1999) which suggests extensive use of the CAPM.
In
light
of
academic
criticism
of the CAPM (Fama and French, 1992), it is of particular interest to seewhether this criticism
has had an impact on practice. Another area where there is little systematic evidence about
practice
is
how,
if
at
all,
companiesadjust project evaluations for the effect of imputation tax credits. Thedividend
imputation tax system was introduced in Australia in 1987, but it was not until Officers (1994)
paper that there was a substantial theoretical analysis of how imputation might be
incorporated
into
capital
budgeting practice. In particular, how the cost of capital might be adjusted toaccommodate
the effect of imputation tax credits. Other theoretical papers have followed, for example,
Monk house (1996) and most recently Dempsey and Parrington (2004). However, we are aware
of no study about how practitioners have dealt with imputation credits in capital budgeting.

OBJECTIVES OF THE STUDY

Every firm wants to earn maximum profit with minimum cost. This objective may be fulfilling
when cost of capital is less than rate of return. Main objective of cost of capital is to know cost
of various source of finance. Select that finance source which has less cost of capital
or minimum payment of interest on that amount. By me help of cost of capital we evaluate the
finance performance of any company. The actual profitability of the project is compared to
the projected overall cost of capital and the actual cost of capital of fundraised to finance the
project if the actual profitability of the project is more than the projected and actual cost of
capital, the performance may be satisfactory. Help to determinant of capital mix in capital
structure decision. We know portion of debentures and equity capital in capital structure and
evaluated the cost of both portion and select among that source which have minimum cost
with profitability.

RESEARCH METHDOLOGY
All the information for the project collected from the finance department. Various
books and journals were also being concerned while preparing report.
SOURCE OF DATA COLLECTION:
1. Secondary Data:
Secondary data comprises of annual report. Ledger and past report.
ANNUAL REPORT:
Company has provide the annual report from 2006-2007 to 2008-2009. By the help of which,
I had prepared my report.
QUESTIONNING:
Actually no particulars questionnaire was prepared. Questions related to problems and data
tallied with FM, CA & Accountant of the company.
ANALYSIS:
Analysis of various types dare made during the study by using standard formulas.
SAMPLE SIZE:
Not concerned sample in this project report.

PROJECT REPORT ON COST OF CAPITAL

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 earnings and equity share capital.
A decision to invest a particular project depends upon the cost of capital of the firm or the
cut off rate which is minimu7m 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 . Infect, 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 maximisation 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 for investment in order to increase
the value of firm in market place.`
Conclusion of meaning of cost of capital
Cost of capital is not a cost as such
It is minimum rate of return
If included three components risk involves in every investment
The expected normal rate of return at zero risk level ,example investment in banks .
The premium of business risk
The premium for financial risk on account of pattern of capital structure.
Significance of the cost of capital
It is very important concept of financial management. It play acrucial 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 criterion in capital budgeting.
As a determinant of capital mix in capital structure.
Evaluate the performance of firm.
Other decision: Dividend policy

 Capitalization of profit
Making right issue and working capital.
Leasing decision.

PROBLEM IN DETERMINATING OF
COST OF CAPITAL
Determination of cost of capital of a firm is not a easy
t a s k because of both conceptual problem as well as uncertainties of proposedinvestment and
the pattern of financing.
Conceptual controversies regarding the relationship between cost of capital and the capital
structure.
Histories cost and future cost.
Problem in computation of cost of capital.
Problem in computation of retained earnings.
Problem in assigning weights.
COMPUTATION OF COST OF CAPITAL
Computation of overall cost of capital of a firm involves:
COMPUTATION OF COST OF CAPITAL
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 earnings.
Cost of debt. Capital.
Cost of preference share capital
Cost of equity share capital.
Cost of retained earnings.
COMPUTATION OF WEIGHTED AVERAGE COST OF CAPITAL
Weighted average cost of capital is average cost of various sources of financing.
Weighted average cost of capital is known as composite cost of capital, overall cost of capital
or average cost of capital

COST OF DEBT .CAPITALCOST OF DEBENTURE CAPITAL

MEANING OF 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 earns 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 holder receives interest on his debt. at fix rate asmentioned 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 capital.

I=Interest
P=Proceeds at par.
Np=Net proceeds.
N=Number of year in which debt. is to be red
(For the year2006-07, 2007-08)

(GRASIM HAVE DIFFERENT TYPES & QUANTITY DEBT.)

XVII Series non-convertible debt.

1.Cost of debt

=14.75%

XXXI Series non-convertible debt.

2. Cost of debt

=8.85%

XXIX Series non-convertible debt.

3. Cost of debt

=9.70%

XXIX Series non-convertible debt.

4. Cost of debt

=13.5%

XXIII Series non-convertible debt.

5. Cost of debt

XXVI Series non-convertible debt.

=12.6%

6. Cost of debt

=10.75%

XXVIISeries non-convertible debt.

7. Cost of debt

=10.10%

XXVIIISeries non-convertible debt.

8. Cost of debt

=14.5%

XIXXXVIIISeries non-convertible debt.

9.Cost of debt

=11.25%

Conclusion : XXXI series non convertible debenture have less cost than other series debentures.
AFTER TAX COST OF DEBT. :
kda=kdb(1-t) or I/NP(I-t)
kda=After tax cost of debt
T=Rate of Interest
(Note : Tax rate 35%)
XIII Series non-convertible debt.
1.

(1-35%) =9.5875 or 9.59

XIX Series non-convertible debt

1.

(1-35%) =9.425 or 9.43%

XIX Series non-convertible debt

3.

(1-35%) =8.75%

XIX Series non-convertible debt

4..

(1-35%) =8.19%

XXVIISeries non-convertible debt

5..

(1-35%) =6.99%

XXVIISeries non-convertible debt

6.. (1-35)=7.31%
XXVIIISeries non-convertible

7.

(1-35%) =6.56%

XXVIISeries non-convertible debt

8.

(1-35%) =6.30%

XXXISeries non-convertible debt

8.
(1-35%) =5.75%
(For the year2006-07)
XVIII Series non convertible debt
(redeemable at par in three annual instalments)
1.kdb

=14.75%

XIX Series non convertible debt.

(Redeemable at par in three annual installments)
2.kdb

=14.5%

XXVIISeries non convertible debt.

3.kdb

=10.75%

XXVIIISeries non convertible debt.

4.kdb

=11.25%

XXVIIISeries non convertible debt.

5.kdb

=10.10%

XXIXSeries non convertible debt.

5.kdb

=9.70%

AFTER TAX COST OF DEBT

Kda
kdb

= kdb (1-t)
= tax rate

XVIII Series non convertible debt

Kda = 14.75(1-35%) = 9.59%
XIX Series non convertible debt.

Kda = 14.5(1-35%) = 9.43 %

XXVI Series non convertible debt.
Kda = 11.25(1-35%) = 6.99%

XXVIISeries non convertible debt.

Kda = 10.10(1-35%) = 7.31%
XXVIIIKSeries non convertible debt.
Kda = 10.10(1-35%) = 6.56%
XXIXeries non convertible debt.
Kda = 9.75(1-35%) = 6.30%

COST OF DEBENTURE REDEEMABLE IN INSTALMENT

Financial Institutions generally required principal to be amortized 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 in each period instead of a lum sum at maturity and hence cash
flows each period include interest and principal. The amount of intrest goes on decreasing
each period as it calculated on the outstanding amount of debt.
Formula
Vd

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.
(For the year 2006-07, 2007-08)
XIII Series non convertible debt.
(redeemable at par in three equal annual installments)
1. 45 =
XVI

=12%

Series non-convertible debt

(redeemable at par in three equal annual installments)

2.

50 =

=12.2%

XVII(redeemable at par in three equal annual installments)

3.

85 =

=12.2%

XVII Series non convertible debt

(redeemable at par in three equal annual of 35%,35%and30%respectively)
IV. 530==

=12.28%

XXVI Series non convertible debt

(Redeemable at par in three equal annual Installments)
IV. 240=

=12.73%

XXIII series non convertible debt

(redeemable at par in three equal annual of 33%,33%and34%respectively)
IV. 390=

=12.52%

XXVSeries non convertible debt

(Redeemable at par in three equal annual Installments)
120.59=

=12.56%

XIII series non convertible debts have less cost than other debt
Company only pays intrest@12%p.a

COST OF
EQUITY SHARE CAPITALMEANING OF EQUITY SHARE CAPITAL

Equity
share
are
those
share
which
are
paid
dividend
only
when profit left after the preference share holders. There will be no fixed rate of interest. If co
mpanies not earn sufficient profit equity share holders willreceived nothing. Equity share
holders have voting rights.
KINDS OF SHARE CAPITAL:
(1)Authorized or registered share capital.
(2)Issued share capital.
(3)Subscribed share capital.
(4)Called up share capital.
(5)Paid up share capital
COST OF EQUITY SHARE CAPITAL :
The cost of equity share 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 share capital as the shareholders are
not paid dividend at a fixed rate every year. Payment of dividend is not a legal binding. It may
or may not be paid. But it does not mean that equity share capital is cost free Capital. Equity
share holders are the owner of the company. Equity share is the part of capital of company.

THERE ARE FOUR METHOD OF COMPUTATION OF COST OFEQUITY 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 RATIOMETHOD :

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:
K e=
or
D= Expected dividend per share
NP=Net proceeds
MP=Market price per share.
(Note:All the figures in crores)

(For the year2006-07)

Earning per share ==

Ke=

=9.01Rs.per share

=1.72%

(For the year2007-08)

Earnings per share ==

Ke=

=11.25Rs.per share

=2.14%

CONCLUSION :
Every year earning per share increase in 2006-07 EPS 9.01 Rs. and in2007-08 EPS is 11.24 Rs.
Cost of equity share also increase.

LIMITATIONS OF THIS METHOD :

It does not consider future earning or retained earnings.
It does not consider capital gain.
This method suitable only when company has stable earning andstable 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 dividendand the growth rate.
Formula :
Ke

+G

D =Dividend.
Ke=Cost of equity capital
NP=Net proceeds per price
G = Growth rate.
(Gurukull have not issued share on discount,premium)

Ke=Cost of equity capital

MP = Market price of share
G = Growth rate.

(For the year2006-07)

Ke=

=+12%=13.72%

(For the year2007-08)

Ke =

=12%=13.72%

(For the year2008-09)

Ke =

=12%=14.14%

Earning Yield Method:

Ke =

(For the year2006-07)

Earning per share =
Earning per share = =Rs.9.01 Rs.per share.
Ke =

=1.72%

(For the year2007-08)

Ke =

=1.72%

(For the year2008-09)

EPS = 103/9.16=11.25Rs.Per Share.
Ke =

=2.1

USE OF THIS METHOD:

Earnings 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
Its
three
method
have
some
drawbacks
regarding
future
dividendand earning. It is not possible to estimate future dividend .
Earning correctly, both of these depend upon the many uncertain factors. This method
removes all drawbacks of 1st three methods. In this method calculate actual average rate of
return realized in the past, dividend received in past along with the gain realized at the time of
sale of shares should be considered.

COST OF
PREFERENCE CAPITAl COST OF PREFERENCE CAPITAL :
A fixed rate of dividend 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 affecting the fund raising capacity of the firm. Hence dividend is usually paid regularly on
preference share except when there are no profits to pay dividends.
Formula of Calculation cost of Preference Capital:
kp=
kp= Cost of Preference capital
D =

Prefrence Share Capital

(Preference shares are issued at premium or discount of floatation cost are incurred
to issue preference shares)

kp=
NP = Net Proceeds
Sometimes
Redeemable
preference
share
are
issued
can be redeemed or cancelled on maturity date. The cost of redeemable preference
capital can be calculated following formula

kpr =
kpr = Cost of Redeemable preference share

which
share

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.)

COST OF RETAINED EARNING MEANING OF RETAINED EARNING

Retained earnings those earning which is not distribute among shareholders. Company
retained earnings for the contingency works; main purpose of retained earnings is for
smoothing running the business in future and fulfills their needs.

kr =

+G

After Tax
kr =

+G.(1-t) . (1-b)

B
= Cost of Purchasing new securties or brokerage costs.
or
kr = ke(1-t) . (1-b)
(For the year 2006-07)
kr =

13.72%(1-.35)(1-0)=8.92%

(For the year 2007-08)

kr =

13.72%(1-.35)(1-0)=8.92%

(For the year 2008-09)

kr =

14.14%(1-.35)(1-0)=9.19%

(Gurukull Technology have not issued on discount or premium)

COMPUTATION OF WEIGHTED AVERAGE CAPITAL MEANING OF WEIGHTED AVERAGE

COST OF CAPITAL
It is also known as composite cost of capital in this method weights are provided to specific
cost of capital in proportion of various sources of fund source the weights may be given either
by using the book value or market value of source. If there are differences between both then
difference weighted average cost of capital.
`

LIMITATIONS:
It is difficult to determine the market value because frequent fluctuations.
Kw

= Weight, proportion of specific source of finance

= Cost of specific source of finance

LIMITATIONS OF STUDY
The study was conducted in limited area. I concern only annual report of Grasim
Industries Limited.
The time of study was less.
Employees felt unnecessary burden.
Scope of study was very wide

FINDINGS
&
SUGGESTIONS

Companys gross profit is good.

Company must increase its exports as it has become more effective.
Company should make their profitability investment policies which gave more profits.
Company should give prefer to low rate loans such as bank loan. Not be issued high rate
of debentures.
Company should be issued preference shares.
Company should not be distributed all amount along shareholderssome part of profit
made reserve or keep for contingency.
As far as cost of equity share capital is concerned I had found its satisfactory, but
company should try to keep low rate of debentures.

CONCLUSIONS
Cost of capital is a long term decision. It is very important task for any company because more
capital of company involved in long term decision. A company takes wrong decision regarding
long term decision. Company should bear more loss on that type decision.
After Cost of Capital with Grasim Industries Limited theconclusion that the firm is
going successfully running.
The earnings per share of Grasim Industries Limited increase. In2006-07 EPS was 27
Rs. and in 2008-09 EPS is 59 Rs.
The cost of debentures is less than cost of equity capital. In 2008-09cost of different
types debt. B/w 12% to 12.73% (red. in installments) and cost of equity capital is 14.14%
in 2008-09.
The dividend per share also increasing. In 2007-08 DPS was 8 Rs. and in 2008-09
dividend per share 10 Rs.
Number of debentures also increasing. In 2007-08 debentures was1263.53 crores Rs.
now it is 1398.54 Crores Rs.
Last five years equity share capital same. No

BIBLIOGRAPHY
Books:
Gupta Sashik
Chandra Prasanna
Khan M.Y. & Jain P.k.
Websites:www.google.com
www.wiki.com
www.Gurukull.co.in