Peer Cpmpany For Comparison Central Bank of India Analyses

PEER CPMPANY FOR COMPARISON
CENTRAL BANK OF INDIA
ANALYSES
Both the banks have issued more equity shares in the past five years but as
compared to Punjab and national bank central bank of India has raised more
money from equity share capital . From 2012-2014 the central bank of India
have issued preference share also with the equity share but in the last two
years the company has redeemed the preference shares and is currently
issuing debentures and equity shares only but Punjab and national bank has
issued preference shares in last five years . When it comes to debt
component then Punjab and national bank has continuously increased the
weight age of debt component in capital structure whereas central bank of
India has decreased the weight age of debt in capital structure in last five
years.
Risk involved
When it comes to comparing both company for investment then it can be

analyzed that investment in Punjab and national bank is more risky then in
central bank of India because Punjab and national bank is having more debt
in the capital structure and can be predicted to be risky in terms of payment
of return.
Cost of Capital Concept
The cost of capital is the opportunity cost of using funds to invest in new projects. This is
appropriate because the cost of capital is that rate of return on the firms total investment which
earns the required rates of return of all the sources of financing. Furthermore if the firm earns the
investors required rate of return on all its sources of financing, including that of the common
shareholders, then the value of its common stock will not be changed by the investment. By the
same reasoning, if the firm earns a rate of return higher than the cost of capital then the excess
return will lead to an increase in the value of the firms common stock and consequently, an
increase in shareholders wealth. Thus the logic of using cost of capital as the hurdle rate for new
capital investment can be summarized as follows:-
Investment Rate of return Shareholders wealth
IIR<Cost of Capital -----------------------------Decreases
IIR=Cost of Capital------------------------------No change
IIR>Cost of Capital------------------------------Increases
Comparison of Cost of Capital of Punjab National Bank and Central Bank of India (for
last five years)
1. In march 2012, the cost of capital of Punjab National Bank is 5.53 and if we compare it with
the Central Bank of India it is 6.69. So with this comparison we can say that the cost of
capital of Central Bank of India is more than that of Punjab National Bank. There are many
reasons for more cost of capital one of which we can say that if the financing requirements of
the company increases it increases the cost of capital of that company.
2. In March 2013, Cost of capital of PNB was 6.27 and that of CBI was 6.60. In this time period
also the cost of capital of CBI is more than that of PNB.
3. In march 2014, cost of capital of PNB was 5.42 and that of CBI was 6.84.
4. In march 2015, Cost of capital of PNB was 5.44 and that of CBI was 6.81.
5. In march 2016, cost of capital of PNB was 5.24 and that of CBI was 6.83.
Analysis:-
So, We are comparing the cost of capital of Punjab National Bank with cost of capital of its
competitor Central Bank of India. If we see the figures of cost of capital of both the companies
we can see that the cost of capital of Punjab National Bank was increasing from the year 2012
but it starts declining from 2014 but if we compare it with Central Bank of India then the cost of
capital is increasing year by year. There may be, as the companys requirements become larger,
the weighted average cost of capital increases for several reasons. For instance, as more
securities are issued, additional floatation cost, or the cost incurred by the company from issuing
securities, affect the percentage cost of funds to the company.
There may be another reason also for the increase in cost of capital of the company that when the
company approaches the market for the market for large amount of capital relative to the
companys size, the investors required rate of return may rise. Suppliers of capital become
hesitant to grant large sums without evidence of management capability to absorb this capital in
the business. Also, as the size of the issue increases there is greater difficulty in placing it in the
market without reducing the price of the security, which also increases the companys cost of
capital.
If the cost of capital of Central Bank of India is increasing, it may be the reason that the company
is investing in high risky projects which increases the risk of the investors and it requires high
rate of return which increases the cost of capital to the company.
From this analysis we can say that Punjab National Bank is having less cost of capital as
compared to Central Bank of India. Punjab National Bank is more efficient in controlling its cost
of capital as we can see it is decreasing from 2013 onwards. But in case of Central Bank of India
it is increasing year by year.

Peer Cpmpany For Comparison Central Bank of India Analyses

Uploaded by

Copyright:

Available Formats

Peer Cpmpany For Comparison Central Bank of India Analyses

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Peer Cpmpany For Comparison Central Bank of India Analyses

Uploaded by

Copyright:

Available Formats

PEER CPMPANY FOR COMPARISON

CENTRAL BANK OF INDIA

When it comes to comparing both company for investment then it can be

Cost of Capital Concept

Investment Rate of return Shareholders wealth

IIR<Cost of Capital -----------------------------Decreases

IIR=Cost of Capital------------------------------No change

You might also like