Valuing Bonds and Stocks at Banga Knitwear

About the Company

Banga Knitwear is private limited company in Ludhiana. The founder, Mr$.$ Maninder Singh, started this

company in $2009$ with dream of creating world class garment company. Over the years, company has

expanded its product lines. Initially, they only produced woollen knitwear but now their basket includes

Men's T$-$shirts, Men's Shirts, Men's Jacket, Men's Sweatshirts, Men's Track Pant, Ladies wear. They

not only manufacture but are wholesaler as well as exporter for all their product lines.

Expansion of Company

Banga Knitwear has received an order on Children sportswear in Europe. Though company does not

produce this product line at present but Mr$.$ Maninder Singh is very keen to explore this opportunity.

He has called his CA to discuss this. Mr$.$ Vinod Aggarwal, CA of company, is renowned in Ludhiana.

He examined the financial statements of Banga Knitwear. The total revenue in the last year was INR

$50$ crores with investment in Plant & Machinery for INR $8$ crores. This year company had Earnings per

share of INR $2076.$ The company is medium scale company and has been taking all the advantages of

SME sector throughout. Mr$.$ Vinod Aggarwal suggested that Banga Knitwear may require another INR

$10$ crores for its new product line.

For this, they need to explore various financing opportunities. It could be either debt or equity or

combination of both. They can raise funds from SBI as term loan, or raise bonds in Debt market or

company can itself listed in SME stock exchange. The company is planning an average coupon rate of

$8\mathrm{.}5\%$ for maturity period of $7$ years. Based on its past credit history, company is expected to obtain

AAA or A credit rating. The risk premium for A credit rating in market is $1\%.$ The interest rate for SBI

term loan for same period will be $12\mathrm{.}5\%.$

Questions

Q$1.$ Calculate cost of capital for each alternative.

Q$2.$ Calculate WACC for the company if it considers, all equity, $50-50,20-80,$ all debt as proportion of

debtequity. The tax rate applicable to company is $20\%.$

Q$3.$ Suggest the appropriate choice of financing for Banga Knitwear.

Exhibit $1$: Market Price Data: The monthly high and low price of Shares Traded on NSE $($Emerge$)$

Exhibit $2$: Comparative Company Analysis

Beta $52-$week average share

price

P$/$E

Iris Clothings Limited $0\mathrm{.}18111\mathrm{.}6536\mathrm{.}45$

Globe Textiles $($India$)$

Limited

$0\mathrm{.}2332\mathrm{.}5545\mathrm{.}87$

Libas Designs Limited $0\mathrm{.}1554\mathrm{.}8540\mathrm{.}85$

Jet Knitwears Limited $0\mathrm{.}2048\mathrm{.}0042\mathrm{.}56$

Exhibit $3$: Bond Market rates

T$-$bill$-3$ months $6\mathrm{.}56\%$

AAA Corporate Bond$-1$ year $8\mathrm{.}47\%$

AAA Corporate Bond$-2$ year $8\mathrm{.}54\%$

AAA Corporate Bond$-4$ year $8\mathrm{.}65\%$

AAA Corporate Bond $8$ year $8\mathrm{.}73\%$

AAA corporate Bond $12$ year $8\mathrm{.}63\%$