WEIGHTED AVERAGE COST OF

CAPITAL
WACC CALCULATION FOR CIC HOLDINGS


AUGUST 5, 2014
GROUP 8

ABEYRATHNA D.K.M.R.P 100007E
DAYANANDA H.G.D.S 100077P
HATHTHOTUWA S.L.G 100182H
MAHESH M.A.D 100327J
THARAKA M.L.A.D 100532H

INTRODUCTION
WACC (Weighted Average Cost of Capital)
When some professional stock analysts go for analyze particular company to stock bargain
the one of best model for determine bargain is worth or not is the WACC (Weighted Average
Cost of Capital). When the cost of capital is rises in a particular company or business it will
be difficult to run profitably.
While do some business there may be burrow money from bank as a debt or there may be
selling pieces of business by offering an stock or equity.
With time both of those alternatives gain some cost. For the equity portion there will form
dividend payment and shareholders will expect some capital gain. And for the debt there will
generated interest which should pay to the particular bank. The average of costs of these two
factors of capital which weighted with the proportion of those factors of the company which
funded on itself is called weighted average cost of capital.
Which represent by the following formula.

( )

Where,
W
d
- Proportion of debt financing
r
d
- Cost of debt capital
W
e
- Proportion of equity financing
r
e
- Cost of equity capital
t - Tax rate
Cost of Debt
The interest rate which should pay by particular company for burrowed amount is simply
called the cost of debt. While the cost of debt is rising in the company then it will be risky
business and likewise when cost of debt is falling the business can considered as stable.


Cost of Equity
As example take if one invested in company he or she expect some return for the stock
dividends. This expected return can simply considered as cost of equity. To calculate cost
equity needs risk free rate of return, or the safest investment around 10 year Treasury note.
But all companies have risks for their equity because of its industry, from its management
team and other factors. Therefore investor expect the rate above the risk free rate. This called
the estimated equity risk premium.
Following equation will gave the equity.

)
Where,
R
e
- Cost of equity
Equity risk premium
R
m
Return from market
R
f
- Risk-free interest rate of a 10-year Treasury bond
Finally, when the stock is volatile, the investor demand high return because of expecting high
stability. Therefore the beta value which measure its own relative volatility may contribute
much more when calculating its cost of equity.
For our report we got details from CIC (Chemical Industries Colombo) Holdings PLC. CIC
holdings PLC was incorporated in 1964. CIC Holdings PLC have business in Agriculture and
livestock, Home care, Healthcare and personal care, Industrial materials, nutrition and food.
CIC Holdings PLC have following shareholders. Chemanex PLC, CIC Agri Businesses
(Private) Limited, CIC Feeds (Private) Limited, Link Natural Products (Private) Limited,
CISCO Specialty Packaging (Private) Limited, CIC Crop guard (Private) Limited, Crop
Management Services (Private) Limited, Colombo Industrial Agencies Limited, CIC Life
sciences Limited & Akzo Nobel Paints Lanka (Private) Limited
From their annual report extracted below data about their financial highlights.



COST OF DEBT
The cost of debt is a part of the weighted average cost of capital(WACC) and it also a
parameter to find the cost of capital of a given company or project. The cost of debt can be
calculated in either before or after tax returns. Therefore cost of debt equals to the
multiplication of interest rate of the debt with one minus the tax rate of the company.
() () ( ())
The interest rate of the debt by the company can be modeled as the risk free plus a risk
premium.

CIC holding PLC audited their financial statements of CLC Holding PLC and company
subsidiaries at the end of the March every year. Following cost of capital calculation is based
on the year 2013 annual financial statement. Therefore, there has been used a year 2013
annual report of the CIC holding.
Weighted Rate for Cost of Debt
According to the annual report of the CIC holding, total capital has been made by long term
borrowing, ordinary shear and Non-voting shear. Total capital is given as Rs. 1026920000.
Long term borrowing is affected to the cost of debt of the company. Long term loans are
given as Rs. 18470000 in the year 2013.
To determine the weighted rate for cost of debt, following calculation can be done.

COST OF
DEBT






According to the annual report data, interest rate can be determined as following,

Cost of debt can be calculated by relation between interest rate, tax rate with cost of debt. Tax
rate of the year 2013 in the company was mention as 12%.

( )
( )
Therefore weighted cost of debt can be determined by multiplying the Weighted Rate for
Cost of Debt with cost of debt.




WEIGHTED COST OF EQUITY
Cost of equity means that a shareholder's required rate of return on an investment. It is the
rate of return that could have been earned by putting the same money into a different
investment with equal risk.
Cost of equity is a key component of stock valuation. Because an investor expects his or
her equity investment to grow by at least the cost of equity, cost of equity can be used as the
discount rate used to calculate an equity investment's fair value.
Method which can use to calculate Cost of Equity
CAPM method (Capital Asset Prizing Model)
Discount Cash Flow Approach
Debt Policy
CAPM method
Cost OF Equity
Market Premium 4%
Risk Free Return 13%
Beta 1.1

Cost Of Equity = 13% + 1.1 x 4%
= 17.4%




Weighted Rate of Cost of Equity =

= 76.9%
Weighted Cost of Equity = Weighted Rate for Cost of Equity x Cost of Equity
= 76.9% x 17.4%
= 13.38%
Non-Voting share
Weighted Rate of Cost of Non-Voting Shares

Weighted Cost of Non-voting shares
= Weighted Rate for Cost of non-voting shares x Cost of non-voting shares
=21.3% x 17.4%
= 3.71%
Weighted Cost of Equity
= Weighted Cost of Equity Cost of Equity+ Weighted Cost of Equity non-voting shares
=13.38%+3.71%
=17.09%











Weighted Average Cost of Capital (WACC)
Weighted average cost of capital is defined as the overall cost of capital funding sources in
the company. A company can raise its money from three sources Equity, Debt and preference
shares. The total cost of capital is defined as the weighted average of each of these costs.
A company derives its assets by either Equity, Debt or preference shares or both. There are
costs associated with raising capital and WACC is an average picture to indicate the cost of
financing a companys asset base. WACC gives expression of the overall requited return on
the companys investment. It is useful for investors to get idea if projects or investments or
purchases are beneficial to undertake. As well as WACC is important to get idea if the
company can afford capital or to indicate which sources of capital will be more or less
beneficial than others. It is also explained the minimum return of the company can make to
repay capital providers.

Conclusion
The Company must pay for debtors when they have profit or not. Therefore normally
weighted cost of debt is lower than weighted cost of equity. The company pay for
shareholders only if they have profit. But they do not know what the dividend of shareholders
is.
In CIC Company weighted cost of debt is lower than weighted cost of equity. In this case we
can get figure about cost of capital in the company. When company is having profit they must
pay dividend for their shareholders according to a ratio. But company does not know that
ratio before finalize their account. But they have not profit they do not want pay for
shareholders but must pay for debtors.
REFERENCES
1. Steps to Calculate Weighted Average Cost of Debt,
http://www.svtuition.org/2010/04/steps-to-calculate-weighted-average.html
2. Weighted Average Cost Of Capital WACC,
http://www.investopedia.com/terms/w/wacc.asp
3. Cost of Debt, www.readyratios.com/reference/analysis/cost_of_debt.html
4. Calculating the Weighted Average Cost of Capital (WACC)for a Company,
http://business.fullerton.edu/finance/mstohs/CalculateWACC.htm
5. The Cost of Debt, https://www.boundless.com/finance/introduction-to-the-cost-of-
capital/valuing-different-costs/the-cost-of-debt/
6. http://www.cse.lk/company_info.do
7. http://www.asiasecurities.net/files/research_papers/1342677108CIC_4QFY12.pdf
8. http://www.investinganswers.com/financial-dictionary/stock-valuation/cost-equity-
2476