Determining WACC for a Diversification project

Piramal Enterprises Ltd.is into Pharma, Financial services and Realty. It plans to
diversify by acquiring the Cement operations of Lafarge. The Cement unit will be
owned by a newly created subsidiary and operated as a separate entity. Let us
call it Piramal Cement Ltd.
Pirmal wants to ascertain the WACC of Piramal Cement if it raises 20% of its
financing as Debt.
Assume Debt is riskless. Debt will cost 9.0% and tax rate is 35%. Risk free rate is
the 10 year yield on GOI bond. Risk premium may be assumed to be 10%.
The steps to be taken by you are as follows:
1 Identify three or four companies with Cement as their pure plays which are
listed on NSE.
2. Take the Nifty index for last three years and the share prices of these
companies on those dates as Nifty (say from 1st Oct.2014 to 30th Sept.2016).This
will involve about 750 rows in MS-Excel since one year will have about 250
working days.
3. Work out the beta of these cement companies using the daily rate of return.
You may use LINEST function or COVAR & VAR or SLOPE functions etc in MS-Excel
for Cement company Vis--vis NIFTY.(Sample file attached).
4. Unlever the beta for each company taking non-current liabilities as Debt
based on 31st March 2016 annual report. You may assume the 31 st March position
holds good for today.
5. Work out the average beta for cement industry (unlevered) and lever it for
Piramal Cement.
6. Work out the levered beta for Piramal Cement.
7. Work out WACC for Piramal Cement Ltd. as your final answer.
Your MS-Excel should have 3 worksheets: (i) NSE and Cement companies data to
arrive at their betas. (ii) Unlevering their betas, averaging the pure plays and
levering of Piramal Cement equity beta. (iii) WACC working for Piramal Cement.
Deadline for submission: 5 PM on Friday 14th Oct. 2016.
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