1. FROZEN FOOD
PRODUCTS: COST OF
CAPITAL
MAYANK RAJPUT MBA08107
MAYANK SINGH MBA08108
NAMAN JAIN MBA08121
NISHANT KUMAR MBA08130
2. Summary of
Key Facts and
Key Issues
MARIA D'SOUZA PLANNED TO EXPAND HER BUSINESS
BY INTRODUCING A NEW PRODUCT LINE OF FROZEN
FOODS TO DOUBLE THE BUSINESS POTENTIAL OF HER
COMPANY
ANALYSING THE COST OF CAPITAL,RISKINESS,AND
UNLEVERED COST OF EQUITY FOR SIMILAR COMPANIES
OPERATING IN THE SAME INDUSTRY LIKE ADVANTA,
BRITANNIA ETC.
GIVEN RATES IN CASE:
Growth rate – 5%
Return on the bonds – 8%
Risk-
free return – 8%
Market risk premium – 8%
Tax – 30%
Cost of debenture – 8%
3. ANALYSIS OF
KEY
FINANCIAL
ASPECTS
For Advanta- 0.5427 /{1+ (1-0.3)5738.3/3744.2} =0.26
Similarly For Britannia – 0.25
For Glaxo – 0.0959
For Jubilant – 0.9856
For Kwality – 0.15
For Rei – 0.25
For Venky – 0.55
For Zydus – 0.5372
The average of the all this beta =0.3848
Avg unlevered β =0.3848
New levered β =0.3848 * {1+(1
-0.3) *1
/3} =0.47
Levered β =0.47
Cost of Capital Cost of equity =Risk free return +(levered
beta * market risk premium) =8 +0.47*8 =
1
1
.76 %
Cost of equity =1
1
.76%
Cost of debenture =8 (1
-0.3) =5.6
Cost of debenture =5.6
4. WACC
CALCULATION
WACCrate is calculated which is
valued at 1
0.22%.This indicate
that the company will require to
pay 1
0.22% to its investors for
their financing.
5. Maria is recommended to consider the project if the project investment is not more than $16512.23 at
which the company could expand into new markets without any loss of funds and an NPV of 0. The
company is recommended to expand its product line as the expansion could increase the consumer base
of the company and could bring potential amount of revenues for the company in the future.
The project has a positive NPV at the investment level of less than $16512.23,it could lead to an
increase in the overall firm’s value and could enable the firm to be a strong player in the market with
efficient financial metrics.
