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ABOUT THE COMPANY

ITC Limited or ITC is an Indian conglomerate headquartered in Kolkata, West Bengal. Its
diversified business includes five segments:

Fast Moving Consumer Goods (FMCG),


Hotels
Paperboards & Packaging
Agri Business
Information Technology.

Established in 1910 as the Imperial Tobacco Company of India Limited, the company was
renamed as the Indian Tobacco Company Limited in 1970 and further to I.T.C. Limited in
1974. The periods in the name were removed in September 2001 for the company to be
renamed as ITC Ltd. The company completed 100 years in 2010 and as of 2012-13, had an
annual turnover of US$8.31 billion and a market capitalisation of US$45 billion. It employs
over 25,000 people at more than 60 locations across India and is part of Forbes 2000 list.

SEGMENT WISE REVENUE SPLIT UP

SEGMENT WISE REVENUE SPILT UP- YTD Q3 2014/2015

[Reference used: http://www.itcportal.com/about-itc/shareholder-value/ITCCorporate-Presentation.pdf]

3. Risks and Cost of Capital and analysis


From your calculations: what is the cost of equity of the company?
Todays environment provides investors with a good number of investment
opportunities. They are financial assets and non-financial assets. Before investing
in any of the assets or securities, investors tries to know the risk attached with
the asset and return that can be expected from it. They try to know the risk and
return of the select asset or security on which they are planning to invest. They
will be ready to invest on risky assets when it appears to pay premium for
accepting the risk. Therefore, investors demand a higher expected return for
investments in riskier securities. In an emerging equity markets around the
globe, the large and in some cases-extraordinary return performance shown by
these markets and the necessity for investors to base their portfolio selection on
a scientific bases and attempting to evaluate the exposure to risk over many
different assets, Sharpe [1964] 1 , Lintner [1965]2 and Mossin [1966]3 have
developed the Capital Asset Pricing Model. The CAPM model is based on the idea
that the highly expected stocks returns will always be accompanied with high
levels of risks. The CAPM model predicts that the component of the expected
return exceeding the risk-free rate will be linearly related to the characteristic
risk which is in this case measured by the assets beta.

The general idea behind CAPM is that investors need to be compensated in two
ways: time value of money and risk. The time value of money is represented by
the risk-free (rf) rate in the formula and compensates the investors for placing
money in any investment over a period of time. The other half of the formula
represents risk and calculates the amount of compensation the investor needs
for taking on additional risk. This is calculated by taking a risk measure (beta)
that compares the returns of the asset to the market over a period of time and to
the market premium (Rm-rf).
rf = risk free rate 8.82% taken from investing.com website over a 5 year
period(2010-2014)
Beta of security = Using Capitaline and Reuters past 5 years adjusted stock
value, 0.48
And Rm which is market capital return, = 13.69% S&P 500 Index
Ra= Rf + B (Rm-Rf)
Total cost of equity = 11.1524%
The CAPM model is valid within a special set of assumptions. They are (Bodie,
Kane, and Marcu, 2005)5 :

All the investors are risk averse; they will maximize the expected utility at
the end of period wealth.
That is referred to as homogenous expectations (beliefs) about asset returns.
All the investors use the same information at the same time on expected
return and covariance matrix of stock return to form the optimal risky
portfolio.
A fixed risk-free rate exists, and allows the investors to borrow or lend
unlimited amounts to the same interest rate.
There are a definite number of stocks and their quantities are fixed within the
one period world.
All stocks are perfectly divisible and priced in a perfectly competitive market.
There are no market imperfections (there are no taxes, regulations, or trading
costs). These assumptions are all hard to fulfill in reality, but as a financial
theory, it may still describe reality in a reasonably way.

From your calculations: what is the cost of debt of the company?


A company will use various bonds, loans and other forms of debt, so this
measure is useful for giving an idea as to the overall rate being paid by the
company to use debt financing. The measure can also give investors an idea as

to the riskiness of the company compared to others, because riskier companies


generally have a higher cost of debt. The gives the effective rate that a
company pays on its current debt. This can be measured in either before- or
after-tax returns; however, because interest expense is deductible, the after-tax
cost is seen most often. This is one part of the company's capital structure, which
also includes the cost of equity
Cost of debt= Kd (1-t), where kd is debt interest rate and t is annualized tax rate
Put the calculation and tables from the excel here
Cost of debt = 16.92% (1-0.313)
= 11.62%
What is the equity value per share? How does it compare with that of
historical market value of share?
Equity Value and Per Share Value
The conventional way of getting from equity value to per share value is to divide
the equity value by the number of shares outstanding. This approach assumes,
however, that common stock is the only equity claim on the firm.

Copy the contents of Excel here


Market value: The price an asset would fetch in the marketplace. Market value
is also commonly used to refer to the market capitalization of a publicly-traded
company, and is obtained by multiplying the number of its outstanding shares by
the current share price. Market value is most often the number analysts,
newspapers and investors refer to when they mention the value of the business.
Copy the market share price over 5 years here

Working Capital
Comment on relative efficiency of working capital management.
How has the companys WCM fared with respect to benchmark?
What are the challenges in the existing position of working capital for
the company and how has it impacted the company profitability?
What improvements in WCM can bring about positive financial impact?
Calculate/estimate the positive change resulting from your suggestions.