Reference no: EM13952984
CASE STUDY 1:
GPSC is a fast growing profitable company. The company is situated in Western India. Its sales are expected to grow about three times from 360 million in 2009 to Rs.1,100 in 2010. The company is considering of commissioning a 35 km. pipeline between two areas to carry gas to a state electricity board. The project would cost Rs.250 million. The pipeline will have a capacity of 2.5 MMSCM. The company will enter into a contract with the state electricity board (SEB) to supply gas. The revenue from the sale to SEB is expected to be Rs.120 million per annum. The pipeline will also be used for transportation of LNG to other users in the area. This is expected to bring additional revenue of 80 million per annum. The company management considers the useful life of the pipeline to be 20 years. The financial manager estimates cash profit to sales ratio of 20% p.a. for the first 12 years of the projects operations and 17% p.a. for the remaining life of the project. The project has no salvage value. The project being in a backward area is exempt from paying any taxes. The company requires a rate of return of 15% from the project.
Questions:
Q1. What is the project's payback and return on investment (ROI)?
Q2. Compute project's NPV and IRR?
Q3. Should the project be accepted? Why?
CASE STUDY 2:
Hindustan Unilever Limited (HUL) was known as Hindustan Lever Limited (HLL) until 18 May, 2007. The company was set up in 1933. It completed 75 years of operations in India on 17 October, 2007. It is an important subsidiary of Unilever. Unilever has a large number of subsidiary and associate companies in more than 100 countries. HUL's business areas include home and personal care, foods and beverages, industrial, agricultural and other products. It is one of the largest producers of soaps and detergents in India. The company has grown organically as well as through acquisitions.
HUL places equal focus on serving both the employees and shareholders, and it is committed to add value to both. Over years, the company has built diversified portfolio of powerful brands, a number of them being household names.
The company requires the cost of capital estimates for evaluating its acquisitions, investment decisions and the performance of its businesses and for determining the value added to shareholders. It needs to develop a methodology of calculating cost of equity and debt and determine the weighted average cost of capital.
HUL's Performance
Table 1.1 contains a summary of HUL's EPS, DPS, share price and market capitalization. The company has been paying dividends regularly. HUL's shares have enjoyed high price in the stock market. The company's share price has increased from Rs.138.35 in 1997 to Rs.213.90 in 2007. The company's sales and assets have shown significant growth and company's profitability has also increased over years (Table 1.2). The company is conservatively financed. (Table 1.2)
Table 1.1: HUL : EPS, DPS and Share Price
|
Year
|
1997
|
1998
|
1999
|
2000
|
2001
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
|
DPS (Rs)
|
1.70
|
2.20
|
2.90
|
3.50
|
5.00
|
5.16
|
5.50
|
5.00
|
5.00
|
6.00
|
9.00
|
|
EPS (Rs.)
|
2.81
|
3.67
|
4.86
|
5.95
|
7.46
|
8.04
|
8.05
|
5.44
|
6.40
|
8.41
|
8.73
|
|
Share Price (Rs.)
|
138.35
|
166.36
|
225.00
|
206.35
|
223.65
|
181.75
|
204.70
|
143.50
|
197.25
|
216.55
|
213.90
|
|
MCap.Rs. (billion)
|
275.55
|
365.25
|
495.13
|
454.09
|
492.31
|
400.08
|
450.59
|
315.87
|
434.19
|
477.88
|
465.75
|
Table 1.2: HUL's Financial Performance
(Rs. Million)
|
|
2005
|
2006
|
2007
|
|
Net Sales
|
110,606
|
121,034
|
137,178
|
|
Total Income
|
112,130
|
122,949
|
139,426
|
|
PBDIT
|
15,958
|
18,395
|
21,105
|
|
Interest Expense
|
192
|
107
|
255
|
|
PBT
|
16,045
|
18,617
|
21,845
|
|
PAT (Before exceptional items)
|
13,545
|
15,397
|
17,691
|
|
Net Profit
|
14,081
|
18,554
|
19,255
|
|
Share Capital
|
2,201
|
2,207
|
2,177
|
|
Reserves and Surplus
|
20,855
|
25,028
|
12,215
|
|
Loan Funds
|
569
|
736
|
885
|
The company considers cost of its debt as the effective rate of interest applicable to an 'AAA' rated company. It thinks that considering the trends over years, this rate is 9.5% in 2007. The risk-free rate is assumed as the yield on long-term government bonds, which the company regards as about 8%. HUL regards the market risk premium to be equal to 11%. The company uses CAPM to calculate its cost of equity. The alternative model is constant growth model. The beta is estimated to be 0.78.
Questions:
Q1. Calculate HUL's cost of equity using the dividend growth model.
Q2. Calculate HUL's cost of equity using the capital asset pricing model.
Q3. Between the dividend growth model and CAPM, which method do you recommend and why?
Q4. What is HUL's before tax and after tax weighted average cost of capital (WACC)?
|
Create income tax nexus
: You currently are organized and operate only in State A. activities probably create income tax nexus with State B
|
|
Is association between hypertension and hyperglycemia
: A multiphasic health examination was administered to 1000 employees of a pharmaceutical firm. 50% of these employees had elevated diastolic blood pressure and 45% had hypoglycemia. A total of 37% of employees had both elevated diastolic blood pres..
|
|
The challenges that the global organization
: Examines Google's tremendous success as well as the challenges that the global organization faces in recruiting and retaining talented, in-demand employees. In addition to maintaining a skilled and committed workforce, Google also strives to recruit ..
|
|
Examining the link between online social network activity
: Article for review: "Security in the 21st Century: Examining the Link Between Online Social Network Activity, Privacy, and Interpersonal Victimization by Henson, Reyns, and Fisher" published in 2011 in the Criminal Justice Review that examines soc..
|
|
Calculate hul cost of equity
: Calculate HUL's cost of equity using the dividend growth model. Calculate HUL's cost of equity using the capital asset pricing model. Between the dividend growth model and CAPM, which method do you recommend and why?
|
|
Do you think dr eberhardts study on race
: Do you think Dr. Eberhardt's study on race and the criminal justice system is an accurate account of the criminal justice system in the United States? Why or why not
|
|
How might an individual multicultural identities affect
: What stressors during middle adulthood might contribute to such a crisis? How might an individual's multicultural identities affect the stressors experienced during middle adulthood
|
|
Annual sales tax collections and new car
: City government has collected the following data on annual sales tax collections and new car registrations:Annual Sales Tax Collections(in millions)1.01.41.92.01.82.12.3New Car Registrations(in thousands)10121516141720
|
|
Were the survival rates for the two types of hospitals same
: A hospital accrediting agency reported that the survival rate for patients who had coronary bypass surgery in tertiary care centers was 93%. A sample of community hospitals had an average survival rate of 88%. Were the survival rates for the two t..
|