CORPORATE FINANCE

PROJECT REPORT

TOPIC-: COMPARATIVE ANALYSIS ON THE BASES OF CONCEPTS OF CORPORATE FINANCE ( COST OF CAPITAL OF DEBT, COST OF CAPITAL OF EQUITY, WACC, CAPITAL STRUCTURE , DIVIDEND POLICY AND CORPORATE GOVERNANCE)

SUBMITTED TO-: MS. SANDHYA PRAKASH

SUBMITTED BY-: ANUJA SAXENA PGP-20101046 Email id: anuja.saxena.pgp12@iilm.edu

Contents 1.Introduction 2.Corporate governance 3.Cost of capital of debt 4.Cost of capita of equity 5.WACC 6.Capital structure 7.Dividend policy

INTRODUCTION: To perform the comparative analysis, we have taken two companies of the same industry. We have taken TATA MOTORS and Mahindra and Mahindra. The factual figures have been taken from the annual report of both the companies of the year 2010-2011.

CORPORATE GOVERNANCE-:

MAHINDRA AND MAHINDRA They believe that good corporate governance is the foundation for shareholder returns, operational performance, attracting employees, clients, and partners, and creating a positive impact on the lives and businesses they touch. Their commitment to corporate governance has earned them a Level 1 rating for Governance and Value Creation from CRISIL, India's leading ratings, research, risk and policy advisory company, for three years running. Their Board of Directors provide the leadership that helps Mahindra & Mahindra contribute positively to the stakeholders prosperity, from shareholders to employees to customers to community members. Bringing together extensive experience and achievement across many industries, the Board of Directors helps guide Mahindra & Mahindra with a broad and deep collective wisdom.

TATA MOTORS As part of the Tata group, the Companys philosophy on Corporate Governance is founded upon a rich legacy of fair, ethical and transparent governance practices, many of which were in place even before they were mandated by adopting highest standards of professionalism, honesty, integrity and ethical behaviour. As a global organisation the Corporate Governance practices followed by the Company and its subsidiaries are compatible with international standards and best practices. Through the Governance mechanism in the Company, the Board along with its Committees undertake its duciary responsibilities to all its stakeholders by ensuring transparency, fairly and independence in its decision making. The Corporate Governance philosophy has been further strengthened with the implementation, a few years ago, by the Company of the Tata Business Excellence Model as a means to drive excellence, the Balanced Scorecard methodology for tracking progress on long term strategic objectives and the Tata Code of Conduct which articulates the values, ethics and business principles and serves as a guide to the Company, its directors and employees and an appropriate mechanism to report any concern pertaining to non-adherence to the said Code and addressing the same is also in place. The Company is in full compliance with the requirements of Corporate Governance under Clause 49 of the Listing Agreement with the Indian Stock Exchanges (the Listing Agreement). The Companys Depositary Programme is listed on the New York Stock Exchange and the Company also complies with

US regulations as applicable to Foreign Private Issuers (non-US listed companies) which cast upon the Board of Directors and the Audit Committee, onerous responsibilities to improve the Companys operating efficiencies. Risk management and internal control functions have been geared up to meet the progressive governance standards. As a good corporate governance practice, the Company has voluntarily undertaken an Audit by M/s Parikh & Associates, Practicing Company Secretaries, of the secretarial records and documents for the period under review in respect of compliance with the Companies Act, 1956, listing agreement with the Indian stock exchanges and the applicable regulations and guidelines issued by Securities and Exchange Board of India.

COST OF CAPITAL OF DEBT-: Cost of debt= (interest/debt)*100 For TATA motors-Interest= 1143.99 Debt= 15898.75 Cost of debt= (1143.99/15898.75)*100 = 7.2 For Mahindra and Mahindra Interest= 70.86 Debt= 2405.29 Cost of debt= (70.86/2405.29)*100 = 2.95 COMPARITIVE ANALYSIS: As we can see that the cost of debt of Tata motors is much higher than the Mahindra and Mahindra. And the loan amount of Tata motors is much higher than the Mahindra and Mahindra. So we can see that Tata motors is paying a big amount as interest to its creditors and that also on high interest rate comparatively. COST OF EQUITY-: Cost of equity= [D/P] +G Where D= dividend paid P= price of book value of share G= growth rate

Now, Growth Rate= retention ratio* return on equity And Retention ratio on equity = (PAT-preference dividend)/equity share holder fund And Equity share holder fund= equity capital+reserves and surplus-P+L (if debt balance)

For TATA motors Interest= 1143.99 Debt= 15898.75 Equity= 20009 PAT= 1811.82 Retention= 25.12 Dividend= 20 Book value= 315 a) Retention ratio on equity= (1811.82-0)/20009 = 0.091 b) Growth rate= .2512*.091= .023 c) Cost of equity= (20/315)+.023 =.0865*100=8.65 For Mahindra and Mahindra Interest= 70.86 Debt= 2405.29 Equity= 10279.42 PAT= 2662.10 Retention= 69.0 Dividend= 11.50 Book value= 175. 04 a) Retention on equity= (2662.10-0)/10279.42= .2589

b) Growth rate= 0.69*0.2589= 0. 178641 c) Cost of equity= (11.5/175.04)+ 0.178641= 0.2443*100= 24.43 COMPARITIVE ANALYSIS: as we can see that cost of equity of Mahindra and Mahindra is much higher than cost of equity of TaTa motors it is because m&m is retaining a big amount if money as reserves due to that growth rate is high and also price of M&M share is much less than TATA motors and they pay dividend more as percentage of share capital.

Cost of debt equity TATA motors Mahindra and Mahindra

cost of

7.2 2.95

8.65 24.43

This shows that TATA motors are paying more interest than Mahindra and Mahindra.

WACC (weighted average cost of capital)-: The weighted average cost of capital is the rate that a company is expected to pay on average to all its security holders to finance its assets. Hence it is the minimum return that a company must earn on an existing asset base to satisfy its creditors and investors. WACC= [(total equity/(total equity+ total debt))*cost of equity]+ [(total debt/( total equity+ total debt))*cost of equity]

WACC for TATA motors--Cost of equity (%)= 8.65 Total equity= 634.65 Cost of debt= 7.2 Total debt= 15898.75 Corporate tax= 30% WACC= 5.18

WACC for Mahindra and Mahindra---

Cost of equity (%) = 24.43 Total equity= 10279.42 Cost of debt= 2.95 Total debt= 2405.29 Corporate tax= 30% WACC= 20.19 COMARITIVE ANALYSIS WACC of Mahindra and Mahindra is far more than TATA motors which indicates a decrease in the valuation of the firm and comparatively a higher risk. WACC is high of M&M is high because their cost of equity is very high.

CAPITAL STRUCTURE-: A companys proportion of short of long term debt is considered while analyzing capital structure. When people refer to capital structure they are most likely referring to a firms debt to equity ratio which provides insight into how a company is usually a company more heavily financed by debt posing greater risk, as the firm is relatively highly levered. So here we show debt to equity ratio of---

0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 debt equity TATA M&M

TATA motors---

Debt= 15898.75 Equity= 20009 Debt to equity ratio= 15898.75/ 20009= .79

Mahindra and Mahindra--Debt= 2405.29 Equity= 1027.42 Debt to equity ratio= 2405.29/1027.42= .23 COMPARITIVE ANALYSIS: the ideal debt to equity ratio is 2:1. Here as we can see that in both the companys debt is less as in percentage of equity. But if we compare these two TATA motors is more levered.

DIVIDEND POLICY-: For TATA motors-Dividend per share= 20% Earnings per share= 28.55 Dividend payout ratio= ( 20/28.55)*100 = 70% (for year 2010-11) year 2006-07 2007-08 2008-09 2009-10 2010-11 Dividend per share 15.00 15.00 12.50 15.00 20.00 Earnings per share 49.65 52.63 19.48 39.26 28.55 Dividend payout ratio (%) 30.21 28.15 64.16 38.20 70.00

For Mahindra and Mahindra--Dividend per share= 31% Earnings per share= 45.33 Dividend payout ratio= (11/45.33)* 100= 30.15% (for the year 2010-11) year Dividend per share Earnings per share Dividend payout

2006-07 2007-08 2008-09 2009-10 2010-11

11.50 11.50 10.00 9.50 11.50

44.88 46.15 30.69 36.89 45.33

ratio (%) 30.39 29.10 37.29 29.87 30.15

COMPARITIVE ANALYSIS: both the companies are paying the same amount of dividend with or with very less variation. In TATA motors they are paying between 12 to 20 per share and in M&M it is 9.50 to 11.50.

35 30 25 20 Dividend per share 15 10 5 0 2006-07 2007-08 2008-09 2009-10 2010-11 Dividend per share

REFERENCES

1. Annual report Tata motors (2010-11) 2. Annual report Mahindra and Mahindra (2010-11) 3. Money control.com