1. Calculate WACC of the company at current debt level.2. Calculate expected price of BCL`s share in year 2020. 3. Find out the optimal level of debt for the company, using minimum WACC analysis. 4. Calculate Degree of operating leverage of BCL for year 2020. CASEBharat Consumers Limited has been in business for over 5 decades and has always placed equal focus onserving both consumers as well as shareholders. Over the years the company has built a diversifiedportfolio of powerful brands, number of them being household names. The company requires from youestimates on its cost of capital for evaluating its acquisitions, investment decisions and the performanceof its business. In addition to that the company also aim to setup a target capital structure and dividendpay-out policy (if residual policy is followed). Following are the exhibits reflecting important informationto address the problem-at-handExhibit – 1The company considers, at present level, cost of debt as the effective rate of interest applicable to an'AAA' rated company. It thinks that considering the trends over years, this rate is 9.5 percent in currentyear. The risk-free rate is assumed as the yield on long-term government bonds, which the companyregards as about 8 percent. BCL regards the market-return is equal to about 11 percent. The companyuses CAPM to calculate its cost of equity. The alternative method is the constant growth model. BCL has30% Debt and 70% Equity in its capital structure. At current level of debt, it's beta is 0.708.Exhibit – 2Year20162017201820192020EPS10.1010.5812.4617.5618.95DPS1515.7516.5417.3618.23Price307.4322.8338.8355.73MCap (in 10 Lakhs)5207614588601007910280Exhibit – 32017201820192020Gross Sales (in Crores)20285228002562628802PBIT2730335043745587PAT2153259933144320 Exhibit – 4Debt LevelCost of Debt (2020)BCL's beta20%0.70030%9.50.70840%100.72050%110.8* Tax rate for the current year 2020 is 30%

1. Formulation of WACC: Computation of WACC: Step 3 2. Formulation of expected share price:…

1. Calculate WACC of the company at current debt level. 2. Calculate expected price of BCL`s share in year 2020. 3. Find out the optimal level of debt for the company, using minimum WACC analysis. 4. Calculate Degree of operating leverage of BCL for year 2020.

1. Calculate WACC of the company at current debt level. 2. Calculate expected price of BCL`s share in year 2020. 3. Find out the optimal level of debt for the company, using minimum WACC analysis. 4. Calculate Degree of operating leverage of BCL for year 2020.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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