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Financial Management – I

Abrassives

Submitted to: Prof. Reena Nayyar

-Submitted by Group 1
Elvis Abraham – 17PGDM148
Aakarsh Tomar – 17PGDM123
Akarsh Agarwal – 17PGDMxxx
Raunaq Choubey – 17PGDMxxx
Ankit Bhansali – 17PGDMxxx
Siddharth Nautiyal – 17PGDMxxx

CONTENT
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Grindwell Norton Ltd.

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Grindwell Norton (GNO), a company listed on the Bombay and National Stock Exchanges,
pioneered the manufacture of grinding wheels in India in 1941. Today, GNO’s businesses
include: Abrasives, Silicon Carbide, High Performance Refractories, Performance Plastics and
ADFORS. The Saint-Gobain Delegation (Country Head) office, and INDEC (the captive India IT
Development Centre for the Saint-Gobain Group globally) are also part of GNO. GNO’s
subsidiary, Saint-Gobain Ceramic Materials Bhutan Pvt. Ltd., manufactures Silicon Carbide. GNO
is part of the Saint-Gobain Group. The Group currently holds 51.66% of the equity capital of
GNO.

The businesses of the Saint-Gobain Group in India are housed in two large entities, Grindwell
Norton Limited (GNO), a publicly traded company, and Saint-Gobain India Pvt. Ltd. (SGI).

GNO’s subsidiary, Saint-Gobain Ceramic Materials Bhutan Pvt. Ltd., manufactures Silicon
Carbide. GNO holds 70% of the equity of this Company.

GNO’s Abrasives Business, markets and manufactures a full range of Bonded A brasives, Coated
Abrasives (including Non-Woven Abrasives), Thin Wheels and Super Abrasives at its plants near
Mumbai, Bangalore, Nagpur and Himachal Pradesh.

2013

1. Beta:

Beta of the stock = 0.12

2. Cost of Debt:

The company has been borrowing from HDFC Bank at a rate of 10%. Hence, the post-tax cost of debt
(tax rate = 33%) is 7%

3. Cost of Preference Shares:

The company does not issue preference shares.

4. Cost of Equity:

Risk Free Rate from return on 364 Day Treasury Bill in 2013: 8%

Average Rate of Return of Sensex in 2013: 9.3%

Using Capital Asset Pricing Model:

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Cost of equity: 8.15%

5. Weighted Average Cost of Capital:

WACC = x Re + x Rd x (1 – Tc)
Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm’s equity
D = market value of the firm’s debt
V=E+D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate

WACC: 7%

6. Operating Leverage:

Degree of Operating Leverage: Contribution/EBIT = 3.83

7. Financial Leverage:

Degree of Financial Leverage: EBIT/EBT = 1

2014

1. Beta:

Beta of the stock = 0.84

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2. Cost of Debt:

The company has been borrowing from HDFC Bank at a rate of 10%. Hence, the post-tax cost of debt
(tax rate = 33%) is 7%

3. Cost of Preference Shares:

The company does not issue preference shares.

4. Cost of Equity:

Risk Free Rate from return on 364 Day Treasury Bill in 2013: 8.5%

Average Rate of Return of Sensex in 2013: 27.07%

Using Capital Asset Pricing Model:

Cost of equity: 24.12%

5. Weighted Average Cost of Capital:

WACC = x Re + x Rd x (1 – Tc)
Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm’s equity
D = market value of the firm’s debt
V=E+D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate

WACC:13%

6. Operating Leverage:

Degree of Operating Leverage: Contribution/EBIT = 4.44

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7. Financial Leverage:

Degree of Financial Leverage: EBIT/EBT = 1

2015

1. Beta:

Beta of the stock = 0.31

2. Cost of Debt:

The company has been borrowing from HDFC Bank at a rate of 10%. Hence, the post-tax cost of debt
(tax rate = 33%) is 7%

3. Cost of Preference Shares:

The company does not issue preference shares.

4. Cost of Equity:

Risk Free Rate from return on 364 Day Treasury Bill in 2013: 7.5%

Average Rate of Return of Sensex in 2013: -3.89%

Using Capital Asset Pricing Model:

Cost of equity: 3.97%

5. Weighted Average Cost of Capital:

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WACC = x Re + x Rd x (1 – Tc)
Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm’s equity
D = market value of the firm’s debt
V=E+D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate

WACC: 6%

6. Operating Leverage:

Degree of Operating Leverage: Contribution/EBIT = 4.25

7. Financial Leverage:

Degree of Financial Leverage: EBIT/EBT = 1

2016

1. Beta:

Beta of the stock = 0.41

2. Cost of Debt:

The company has been borrowing from HDFC Bank at a rate of 10%. Hence, the post-tax cost of debt
(tax rate = 33%) is 7%

3. Cost of Preference Shares:

The company does not issue preference shares.

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4. Cost of Equity:

Risk Free Rate from return on 364 Day Treasury Bill in 2013: 6.75%

Average Rate of Return of Sensex in 2013: 3%

Using Capital Asset Pricing Model:

Cost of equity: 5.16%

5. Weighted Average Cost of Capital:

WACC = x Re + x Rd x (1 – Tc)
Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm’s equity
D = market value of the firm’s debt
V=E+D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate

WACC: 6%

6. Operating Leverage:

Degree of Operating Leverage: Contribution/EBIT = 4.02

7. Financial Leverage:

Degree of Financial Leverage: EBIT/EBT = 1

2017

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1. Beta:

Beta of the stock = 0.77

2. Cost of Debt:

The company has been borrowing from HDFC Bank at a rate of 10%. Hence, the post-tax cost of debt
(tax rate = 33%) is 7%

3. Cost of Preference Shares:

The company does not issue preference shares.

4. Cost of Equity:

Risk Free Rate from return on 364 Day Treasury Bill in 2013: 6.25%

Average Rate of Return of Sensex in 2013: 25%

Using Capital Asset Pricing Model:

Cost of equity: 20.82%

5. Weighted Average Cost of Capital:

WACC = x Re + x Rd x (1 – Tc)
Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm’s equity
D = market value of the firm’s debt
V=E+D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate

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WACC: 19%

6. Operating Leverage:

Degree of Operating Leverage: Contribution/EBIT = 4

7. Financial Leverage:

Degree of Financial Leverage: EBIT/EBT = 1.01

Year-Wise Trends

Beta
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
2013 2014 2015 2016

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Kd, Ke and WACC
30%

25%

20%

15%

10%

5%

0%
2013 2014 2015 2016 2017

Kd (Post-Tax) Ke WACC

Degree of Operating and Financial Leverage


5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
2013 2014 2015 2016 2017

Operating Leverage Financial Leverage

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