Firm Analysis Oberoi Hotels (EIH)

Step 1 Calculation of Beta: Collecting the past 5 year weekly share price data of the company
and running a regression between the market return and the stock return, we find the levered
Beta of the company. Beta (Levered) = 0.7036
Step 2 Calculate Cost of Equity: Using the equation below and plugging the values we get
R(Stock) = Rf*(1-Beta) + Beta*Rm where Rf = 7.5% & Rm-Rf = 10%
Cost of Equity (COE) = 14.536%
Step 3 Calculate Cost of Debt: R(Bond) = Rf + Spread of the Corporate Bond
The spread of the bond can be calculated via Interest Coverage Ratio and Rating Mapped to the
spread of the bond through A Damodar Table depending on the market capitalization.
The Interest Coverage Ratio is calculated to be 5.941 using the formula EBIT/Interest. This
value is used to find the Rating and the spread for the corporate bond which is 1.75%.
Cost of Debt = 7.5% + 1.75% = 9.25% at the current D/E ratio of the company.
Step 4 Calculate the Cost of Capital: At the tax rate of 30%, Cost of capital can be calculated
using the WACC formula at the current D/E ratio
WACC = COD*(1-Tax)*D/(D+E) + COE*E/(E+D)
WACC = 13.80%
Step 5 Unlevered Beta: The asset Beta is calculated using the equation connecting levered and
un-levered beta at the current D/E ratio.
Beta (Un-levered) = 0.7566
Step 6 WACC at various D/E: The next step is to identify the optimum D/E ratio at which the
firm has the least WACC and good rating based on A Damodar Table. Various scenarios have
been identified ranging from 0% to 100% Debt to find the best possible D/V ratio for optimum
WACC. The results are illustrated in the following graph. From the graph, it is seen that the
optimum value of Debt/Value occurs at 20% where the WACC is 14.617%

EPS

WACC

Step 7 EPS EBIT analysis: A scenario has been generated at various Debt Ratios to find the
optimum EPS value for the company and the results are plotted below. The graph above shows
that the maximum value occurs at 0% where the EPS touches values around Rs 2.02. This shows
that the optimum D/V ratio lie around 0%.
Step 8 Rating Comparison
Debt
ratio
Likel
y
credit
rating

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

AAA

A+

BB+

B-

CC

CC

This table shows the likely ratings of the company based on interest coverage ratio for various
D/V ratio and shows a decline in ratings below investment grade at ratio > 20%.
Step 9 Consolidated Results
Based on the 3 analysis of WACC, EPS and ratings, we see that maintaining a debt/value ratio in
the range of 0-10% is optimum. Even though 20% is suggested by the WACC analysis, the credit
ratings drop to BB+ which might have a significant role in market sentiments which cannot be
captured quantitatively in EPS and WACC analysis. Hence keeping a D/V of 20% is riskier for
the firm in terms of ratings. Hence an ideal Debt ratio of 0% to 10% is found optimum based on
all 3 analysis results.