Table 9.1.1 Year 2011 2012 2013 Market Capitalization (INR million ) 6145.90 8860 10079.3 Dividend per share 6.5 7.5 18.5 Market Price per share 284.6 409.9 466.1 Table 9.1.2: (million) HUL'S Financial 2011 2012 2013 Gross sales 202,854.4 228,003.20 266.797.60 PBIT 27,304.40 33,502.84 43,744.95 Interest 2.40 1.24 250.15 21,532.50 25,992.00 3,314.35 Share capital 2,181.70 2,159.50 2,162.50 Reserve & Surplus 23,653.50 24,435.70 24,577.70 Loan Funds 17,043.1 14,711.1 560.94 PAT Cost of Capital Assumptions at HUL The company considers cost of its 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 per cent in 2013. The risk-free rate is assumed as the yield on long-tern government bonds, which the company regards as about 8 per cent. HUL regards the market-risk premium to be equal to about 3 per cent. The company uses CAPM to calculate its cost of equity. HUL's beta is 0.708. Tax rate is 30%. Please answer the following Questions and Show necessary calculations. (State your assumptions if any) 1. Calculate HUL's cost of equity by using CAPM model. Do you agree with company's assumptions regarding estimates of risk free rate and the market premium? 2. Between the dividend-growth model and CAPM, which method do you recommend for HUL and why? 3. What is HUL's after tax cost of capital based on book value of equity and market value of equity? Table 9.1.1 Year 2011 2012 2013 Market Capitalization (INR million ) 6145.90 8860 10079.3 Dividend per share 6.5 7.5 18.5 Market Price per share 284.6 409.9 466.1 Table 9.1.2: (million) HUL'S Financial 2011 2012 2013 Gross sales 202,854.4 228,003.20 266.797.60 PBIT 27,304.40 33,502.84 43,744.95 Interest 2.40 1.24 250.15 21,532.50 25,992.00 3,314.35 Share capital 2,181.70 2,159.50 2,162.50 Reserve & Surplus 23,653.50 24,435.70 24,577.70 Loan Funds 17,043.1 14,711.1 560.94 PAT Cost of Capital Assumptions at HUL The company considers cost of its 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 per cent in 2013. The risk-free rate is assumed as the yield on long-tern government bonds, which the company regards as about 8 per cent. HUL regards the market-risk premium to be equal to about 3 per cent. The company uses CAPM to calculate its cost of equity. HUL's beta is 0.708. Tax rate is 30%. Please answer the following Questions and Show necessary calculations. (State your assumptions if any) 1. Calculate HUL's cost of equity by using CAPM model. Do you agree with company's assumptions regarding estimates of risk free rate and the market premium? 2. Between the dividend-growth model and CAPM, which method do you recommend for HUL and why? 3. What is HUL's after tax cost of capital based on book value of equity and market value of equity