WACC (WEIGHTED AVERAGE COST OF CAPITAL)

31st March 2011.

Particulars Equity share capital Debt Retain Earnings Total Book value 289.37 325.15 4,620.85 5235.37 Weights 0.05527212 0.0621064 0.882621476 1 Cost 20.37 0.36 10.75 Weighted Cost 1.1258930844 0.02235830 5 9.488180867 10.63643227

The weighted average cost of capital for Bajaj Auto using CAPM approach and book value weights comes out to be 10.64%.

Total Debt
A company uses various kinds of debt to finance its operations which can be broadly classified into Secured and Unsecured Loans. In case of Bajaj Auto, we can see from the balance sheet that: Secured Loans = Rs. 23.53 crores Unsecured Loans = Rs. 301.62 crores Adding the above two, we get a total of Rs. 325.15 crores.

Interest on Debt
The interest paid on 31stMarch, 2011 is Rs.1.69crores.This will be used for computation of cost of debt.

Tax rate
Tax rate (t) taken for computation of cost of debt is 30% for the year 2011

Calculation of Cost of Debt

The formula for calculating cost of debt is:

Kd =

Interest on Debt ( 1 - t ) Total Debt

K d = 1.69 (1-0.30)/ 325.15

= 1.183/325.15 = 0.00363832 or 0.36 %

Risk Free Rate of Return

The Risk Free return (Rf) for computation of Cost of equity is taken as Return on 364 day Treasury Bills issued by Indian Government. This data is taken from: http://www.rbi.org.in/home.aspx - official site of RBI. Rf = 8.51%

Cost of Equity
The capital asset pricing model (CAPM) is used to determine an appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's nondiversifiable risk. The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity beta () in the financial industry, as well as the expected return of the market and the expected return of risk-free asset. We have calculated the Beta using the daily stock price of Bajaj Auto for the last one year. Change in the value of stock price and change in the value of sensex on a daily basis is taken into consideration. A normal way to assess the relationship of the asset with the market is to perform a

regression analysis of the returns of the market taken as an independent variable and security returns as a dependent variable. We have obtained the following value of Beta:
()= 0.71

Market Rate of Return - R m

The Market Return is calculated as percentage change in sensex in a year. We have obtained the following market rate of return: Rm =28.21 %

COST OF EQUITY
Cost of equity = R f + () (Rm -Rf) = 8.51+ *0.71 (28.21-8.51) = 8.51+11.857 Thus Cost of equity (Ke) = 20.37 %