Elaborate on the significance of weighted average cost of capital (WACC) in Corporate Finance. Why is WACC used as hurdle rate for investment appraisal projects?





Part A


25 Marks

Part B

Attempt 3 out of 4

75 Marks


PART A: Question 1 is compulsory

a.      Elaborate on the significance of weighted average cost of capital (WACC) in Corporate Finance. Why is WACC used as hurdle rate for investment appraisal projects? (8 marks)

b.      Consider the following financial statements of NSE India listed Bharti Airtel Ltd. (NSE Ticker: BHARTIARTL) for FY2018-19.


Profit & Loss Statement


Total Revenue


Purchase Of Stock-In Trade


Operating And Direct Expenses


Employee Benefit Expenses


Finance Costs


Depreciation And Amortisation Expenses


Other Expenses


Total Expenses


Exceptional Items


Profit/Loss Before Tax


Total Tax Expenses


Profit/Loss For The Period







Consolidated Balance Sheet


Consolidated Balance Sheet


Non-current assets




Intangible assets


Shareholders' funds


Tangible Assets


Non-controlling interests


Other non-current assets


Total Equity


Total Non-current assets


Non-current liabilities


Current assets


Long-term borrowings




Other non-current liabilities


Trade and other receivables


Total Non-current liabilities


Cash and cash equivalents


Current liabilities


Other current assets


Short-term borrowings


Total Current assets


Trade and other payables


Other non-current liabilities


Total Current liabilities



Using the information provided in the financial statements,

i.                    Compute the cost of debt, Kd. (2 marks)

ii.                   Compute the cost of equity, Ke if the beta of the company is 0.91, Rf in India is 6% and market risk premium in India is 4%. (2 marks)

iii.                 Compute the capital structure of the company. (2 marks)

iv.                 Compute the overall WACC of the business. Assume tax rate as 25%. (4 marks)

v.                   What can you comment about the health of the business using your computations? If say the average industry WACC is 10%, how would you interpret this company’s WACC based on your computation? (7 marks)


PART B: Attempt any 3 out of the following 4 questions

Q2. For Bharti Airtel Ltd. (financial data mentioned above), also compute the following market multiples.

i.                    P/Book ratio (3 marks)

ii.                   P/E ratio (3 marks)

iii.                 EV/EBITDA (3 marks)

iv.                 EV/Sales (3 marks)

Additional data for computing multiples:

Share price on 29 Mar‘19

₹305.6 per share

No. of shares outstanding

545.325 Cr

Also answer the following.

v.                   Why do we use market multiples for business valuation? How are they different from accounting ratios you have studied in a previous subject? (5 marks)

vi.                 Would P/E ratio be a meaningful estimate of the market multiple in case of Bharti Airtel? Why/why not? (4 marks)

vii.               What is the significance of EV/EBITDA multiple for company valuation? (4 marks)


Q3. Compute the Enterprise Value of a business using the discounted cash flow (DCF) model with the following financials.

a.      Forecast period for projecting the financials: 5 years with FY2019 being the current year.

b.      Revenues for FY2019: ₹50m, growing at 10% p.a. for the forecast period.

c.       Expenses to be taken as 50% of revenues.

d.      Company has ₹80m of fixed assets which depreciate at 25% p.a. Assume depreciation to remain the same during the forecast period.

e.      Change in Working capital during FY2019 is ₹10m. Additional working capital required during forecast period for each year to be same as FY2019 working capital.

f.        WACC for the business: 15%, terminal growth rate: 3% p.a.

g.      Tax rate at 30%.

Compute the following (i to iii):

i.                    Operating cash flows for the forecast period. (7 marks)

ii.                   Terminal cash flows for the forecast period. (5 marks)

iii.                 Enterprise Value (EV) of the business using the DCF model. (8 marks)

iv.                 What does the EV that you have computed above represent? How would a finance manager interpret this value of EV if it is a case of valuing a business for a takeover by another business? (5 marks)


Q4. A 10-year Government of India bond (G-Sec) with Face Value of ₹1000 was issued at a coupon of 6.5%, paid semi-annually. The bond has been trading in the secondary market and seven years are left till maturity.

        i.            Compute the price of the bond if the current yield-to-maturity (YTM) of the bond is 6%. (3 marks)

       ii.            Compute the price of the bond if the current yield-to-maturity (YTM) of the bond is 7%. (3 marks)

     iii.            Compute the price of the bond if the current yield-to-maturity (YTM) of the bond is 6.5%. (3 marks)

     iv.            Compute the price of the bond in the above three cases if only one year was left till maturity. (4 marks)

       v.            What would be the price of the bond right before the final coupon payment? (2 marks)

     vi.            What would be the price of the bond right after the final coupon payment? (2 marks)

   vii.            Draw the graph of the Bond Yields v. Price of the bond based on the above information. What do you observe about relation between Bond Yields and Price of the bond? Analyze the results you have obtained. (8 marks)


Q5. Explain the following concepts as they relate to corporate finance (up to 1000 words each, appropriate referencing required):

i.        Explain the three forms of efficient markets as stated in the Efficient market hypothesis (EMH). What type of investment strategies would work best if the markets are actually efficient? (15 marks)

ii.       Explain with suitable examples from the business world, the role of Corporate Governance in efficient working of a business. You may take reference from agency theory in drawing up your analysis. (10 marks)


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