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Report on Weighted Average Cost of Capital of Rupali Bank Ltd.

Submitted to
Mrs. Shakila Yasmin
Institute of Business Administration
University of Dhaka

Submitted by
Aminul Islam
MBA 53D (Roll ZR07)
Institute of Business Administration
University of Dhaka

November 22, 2015


Mrs. Shakila Yasmin
Assistant Professor
Institute of Business Administration
University of Dhaka
Subject : Submission of report for the course Financial Theory and Practice
Dear Madam
It is my great pleasure to submit the report which was prepared for your course F501 Financial
Theories and Practices on Weighted Average Cost of Capital of Rupali Bank Ltd.
Ive completed the report through putting the theories and techniques Ive learnt throughout the
course Financial Theories and Practices. I sincerely hope that I was able to fulfill the course
requirement successfully through submission of the report. I have put my best efforts to complete
the report by maintaining the standards and guidelines. I hope that you will accept my report and
that it will meet your level of expectation.
I appreciate this opportunity to work under you. I am eagerly waiting for your feedback on the
overall report.
Sincerely
Aminul Islam
ZR 07, MBA 53D
Institute of Business Administration
University of Dhaka

Acknowledgement
I want to express my deep gratitude to Mrs. Shakila Yasmin, Assistant Professor and the faculty
of the course Financial Theory and Practice at Institute of Business Administration for giving
me the deep insight about the contents of the report. I have the understanding on the contents of
the report because of her proper instructions. I would like to acknowledge that the contents that
Ive learned throughout the course have helped me to complete this report successfully.

Table of Contents
Executive Summary
Introductory Remarks

Objective of the Study

Methodology

Limitations in the Study

Company Profile Dhaka Bank Ltd.

Calculation of Weighted Average Cost of Capital(WACC)

Findings and Recommendation of the Report

References

Appendix Excel of Closing price and DSEX index

Executive Summary

Introductory Remarks
Investing decision in the stock market is associated with lot of complexities. Cost of capital is a
very important concept in financial decision making. It is the rate of return which has to be
earned on investments to satisfy the investors who are making investments in the company in the
form of shares, debentures and loans. Many companies are financed by a mixture of securities
including common stock, preferred stock, or other securities. These securities are associated with
different sort of risks. Thats why investors tend to look for different rate of return.
Consequently, companys cost of capital depends on the expected return from all the securities
that the company has issued. Weighted Average Cost of Capital (WACC) helps a manager to
evaluate average risk investment. Most importantly, it can be used as a benchmark.

Objective of the Study


This report has tried to measure risk and understand the relationship between risk and cost of
capital. It has also tried to use Capital Asset Pricing Model to estimate the expected return on a
companys common stock. The ultimate objective of this study is to calculate Weighted Average
Cost of Capital (WACC) which is the weighted average of cost of debt and cost of equity.

Methodology

Data used in this report were taken solely from secondary sources such as companys official
website, Dhaka Stock Exchanges official website. Companys 3rd Quarter Financial
Statement of 2015 presents all the latest data of the company. Companys annual report of
2014 provides a deep insight of the companys performance in recent years.

There are some admissible limitations in the study. This report used last six years closing price
of the stock due to time constraints. It would have been better to use more data in this regards.
Another limitation is the unwillingness of the company to share some sensitive data. Apart from
these, there were assumptions on calculating various different variables.

Company Profile Rupali Bank Ltd.


Rupali Bank Ltd. was constituted with the merger of 3 (three) erstwhile commercial banks i.e.
Muslim Commercial Bank Ltd., Australasia Bank Ltd. and Standard Bank Ltd. operated in the then
Pakistan on March 26, 1972 under the Bangladesh Banks (Nationalization) Order 1972 (P.O. No.
26 of 1972), with all their assets, benefits, rights, powers, authorities, privileges, liabilities,
borrowings and obligations. Rupali Bank worked as a nationalized commercial bank till
December13, 1986. Rupali Bank Ltd. emerged as the largest Public Limited Banking Company of
the country on December 14, 1986.

Capital Structure of Rupali bank Ltd. : Capital structure is the each source of financing in
total market value. Rupali Bank Ltds capital structure includes two classes of securities
Equity and Debt.
Beta calculation : Beta is a very important tool to measure risk. It is the volatility of a security in
comparison to the market as a whole. It measures systematic risk which is the risk inherent in the
whole financial system. . Beta coefficient is an important input in capital asset pricing model to
calculate required rate of return on a stock. It is the slope of the security market line.
In this report beta is calculated using regression analysis with the help of Excel. Beta coefficient
is calculated as covariance of a stock's return with market returns divided by variance of market
return which is provided in Appendix.

Analyzing last 6 years closing price, this report calculated the beta coefficient of Rupali Bank
Ltd. as 0.826725. A beta of greater less than 1 indicates that the security's price will be less
volatile than the market. That means Rupali Banks stock price is less volatile than the market.

Cost of Equity(Re) : Cost of equity refers to a required rate of return of shareholder on


an equity investment. There are different methods to calculate cost of equity. This report
has used Capital Asset Pricing Model to calculate cost of equity of Rupali Bank Ltd.
CAPM is the theory of the relationship between risk and return which states that the
expected risk premium on any security equals its beta times the market risk premium.
Market risk premium is the difference between market return and return on risk free Tbills(rf).
The risk free 5 year Shanchay Patra is regarded as the risk free investment. It is now 11.25%.

This report has calculated the market return (rm) by using Excel. Using data of DSEX index of
last 6 years, the average annual market return is 12.94% ( provided in Appendix).
Therefore the market risk premium (rm rf)

(0.1294 - 0.1125) = 0.0169. From the

previous calculation we know that the beta () is 0.826725.


Now the expected rate of return or,
Cost of Equity = Risk Free Rate + Beta Coefficient (Market Rate of Return Risk Free Rate).
Re =r f + ( r m r f )
After putting all the data into this formula,
The expected rate of return,
Re =0.1125 + ( 0.12940.1125 ) 0.826725=0.1265

So the cost of equity of Rupali Bank Ltd is 12.65%..


Cost of Debt (Rd) : Generally the cost of debt(Rd) is the market interest rate demanded by debt
holders. It is the rate that the company would pay on new debt issued to finance its investment
projects. Rupali Bank has liabilities such as borrowings from other banks along with deposits
and other accounts. The tax rate is 40%. . Since the interest on debt is tax deductible, so it has
to be multiplied by (1 tax rate) while calculating weighted average cost of capital.

WACC Calculation: Weighted Average Cost of Capital (WACC) is a calculation of a companys


cost of capital in which each category of capital is proportionately weighted. The cost of capital
of a company is usually calculated as a weighted average of the after tax cost of debt interest and
the cost of equity.
WACC=

( VE ) R +( VD ) R (1T )
e

Here, Re is the cost of equity and Rd is the cost of debt.


V = E + D = total market value of the firms financing (equity and debt)
E/V = percentage of financing that is equity

D/V = percentage of financing that is debt.


E= Market Value of the companys equity and D = MV of the companys debt.
Tc is the corporate tax rate.
V= E + D = Tk.(13483648226 + 287125475611) = Tk.300609123837.
So, E/V= 0.049. and D/V= 0.9551.

WACC=( 0.049 ) 0.1265+ ( 0.9551 ) 0.0571 ( 10.40 ) =3.84

Findings and Recommendation of the Report


This report finds that, comparatively Rupali Bank Ltd has less volatile stock. It is not very
sensitive in response to the market volatility. Thus risk averse investor can invest in the stock
of Rupali Bank Ltd.

References
Richard A. Brealey, Stewart C. Myers and Alan J. Marcus : Fundamentals on Corporate Finance
(7th Edition, 2012), McGraw Hill/Irwin, New York, NY10020.
Dhaka Bank Limited, Annual Report of 2014, Dhaka.
Dhaka Bank Limited, HalfYearly Report of 2015,Dhaka.
Official Website of Dhaka Stock Exchange.(www.dsebd.com)
Official Website of Bangladesh Bank.(www.bb.org.bd)
Official Website of Bangladesh Bureau of Statistics(www.bbs.gov.bd)
Official Website of Department of National Savings.(www.nationalsavings.gov.bd)

Appendix

Date
18-032015
19-032015
22-032015
23-03-

Stocks Prices (Adjusted


Close) Dhaka Bank
DSEX
17.
4442.815
1
44
17.
4468.021
7
71
18.
4533.212
2
17.
5
17.

72
4506.557
16
4493.404
96
4509.302
59
4509.281

31-032015
01-04-

8
17.
8
18.
2
17.
4
18

2015
02-042015
05-04-

17.
6
17.

7
4472.137
67
4431.109

2015
06-042015
07-04-

4
17.
2
17.

84
4397.258
43
4345.031

2015
08-042015
09-04-

4
17.
8
17.

66
4347.138
62
4345.894

2015
12-042015
13-04-

7
18

29
4305.266
46
4291.625

2015
24-032015
25-032015
30-032015

2015
15-042015
16-042015
19-042015
20-042015
22-042015
23-042015
26-042015
27-04-

18.
2
19.
5
19.
9
19.
7
19.
4
15.
9
15.
1
14.

85
4530.483
14
4513.10

03
4360.496
82
4373.339
41
4373.656
84
4308.448
31
4252.946
66
4192.207

5
15

44
4094.479
83
4118.486

2015
29-042015
30-04-

14.
9
15

96
4099.205
48
4047.286

2015
04-052015
05-05-

14.
8
14.

11
3959.737
76
4014.370

2015
06-052015
07-05-

5
14.
7
15.

8
4089.884
49
4122.324

2015
11-052015
12-05-

4
17.
5
17

08
4349.220
24
4326.612

2015
13-052015

16.
7

52
4342.662
38

% Returns
Dhaka Bank

DSE
X

0.03508771
93
0.028248587

0.005673490
232
0.014590575

-57
0.038461538
0.017142857

- 93
0.0058800593
-

14

0.0029184584
0.003537991
822
0.000004599380
0.022471910
85
-11
0.004701699
0

0.043956043
0.034482758
-62

-895
0.0038353834
-

0.022222222
0.011363636
-

0.0090778547
0.0091740981
-

0.011494252
0.011627906
98
0.022988505

0.0076394878
0.01187712
0.0004849124

- 75
0.0056179775
0.016949152

-621
0.00028624115
-

54
0.011111111
11
0.071428571

0.0093485545
0.003168544
0.016047951

43
42
0.020512820
0.002945212
56
-51
0.00007258297
0.010050251
842
0.01522842
- 0.18041237

0.014909384
- 0.01288205

0.050314465
0.039735099
0.034482758

0.014281679
0.023311730
0.005863291

- 62
0.0066666666
0.006711409

797
0.004681690
-

396
0.013333333
-

0.012665715
0.021631371
0.01379713

0.020270270
0.013793103
45
0.047619047

59
0.018810840
79
0.007931664

62
0.13636363
- 64

104
0.055040835
- 12

0.028571428
0.017647058

0.0051981087
0.003709567
225

14-052015
17-05-

16.
6
16.

4314.889
7
4315.996

2015
18-052015
19-05-

5
17

55
4407.428
99
4459.285

2015
20-052015
21-052015
25-052015
26-052015
27-052015
28-052015
31-052015
01-062015
02-062015
04-062015
07-062015
08-062015
09-062015
10-062015
11-062015
14-062015
15-062015
16-062015
17-062015
18-062015
21-062015
22-062015
23-062015
24-062015
25-062015
28-062015
29-062015
30-062015
02-072015
05-072015
06-072015
07-072015
08-072015

17.
2
17.
3
17.
9
18.
7
19
19
18.
6
18.
6
18.
7
18.
8
18.
6
18.
8
18.
5
18.
2
18.
6
18.
3
18
18
18.
4
18.
6
18.
7
18.
6
18.
7
18.
1
17.
7
17.
4
17.
1
17.
3
17.
4
17.
3
17.
4
17.
3
17.
2
17.
2

96
4455.572
81
4483.282
09
4615.018
86
4627.165
96
4616.120
26
4544.708
74
4586.951
09
4623.630
92
4586.846
42
4591.427
63
4617.702
27
4542.271
38
4513.975
84
4556.688
82
4515.135
51
4453.367
98
4477.558
63
4506.716
51
4527.418
6
4519.850
56
4511.466
89
4503.986
2
4489.457
75
4455.282
88
4455.282
88
4502.220
43
4531.988
5
4583.109
91
4572.586
1
4536.001
39
4526.718
73
4565.245
65
4579.729
97

0.0059880239
-

0.0063953118
0.000256518

0.0060240963
0.03030303
03
0.011764705

724
0.021184548
91
0.011765809

88
0.005813953
488
0.034682080

- 53
0.00083267815
0.006219016

92
0.044692737
43
0.016042780

315
0.029384002
02
0.002632080

75

0.021052631
0
0.005376344
086
0.005347593
583
0.010638297
0.010752688
-17
0.015957446
0.016216216
0.021978021
-98
0.016129032
0.016393442
0
0.022222222
22
0.010869565
22
0.005376344
-086
0.0053475935
0.005376344
086
- 0.03208556
0.022099447
0.016949152
0.017241379
0.011695906

-251
0.0023871415
0.015470030
0.009294842
072
0.007996560
-085
0.0079557604
0.0009987711
775
0.005722542
555
- 0.016335156
0.0062293812
0.009462385
-603
0.0091191897
0.013680105
0.005431989
925
0.006512004
065
0.004593608
-219
0.0016716015
0.0018548555
0.0016581502
0.0032256870
0.007612248
0
0.010535256
97
0.006611864

43
0.005780346
-821

182
0.011280127
- 92

0.0057471264
0.005780346
-821

0.0022962159
0.0080008794
-

0.0057471264
0.0057803468
0

0.0020464411
0.008511003
731
0.003172736
17

09-072015
12-07-

17.
2
17.

4599.913
64
4615.198

2015
13-072015
14-07-

2
17.
1
17.

03
4628.850
08
4656.138

0.004407174
688
0.003322755

2015
21-072015
22-07-

5
17.
8
17.

59
4731.316
75
4741.979

0.0058139534
0.023391812

859
0.002958063
752
0.005895310

2015
23-072015
26-07-

9
18.
1
18.

81
4808.395
16
4786.493

87
0.017142857
14
0.005617977

828
0.016146031
43
0.002253719

2015
27-072015
28-07-

7
18.
7
18.

53
4775.278
26
4797.171

528
0.011173184
36
0.033149171

327
0.014005827
- 24

2015
29-072015
30-07-

8
18.
5
18.

65
4777.904
05
4792.306

2015
02-082015
03-08-

8
18.
8
19.

59
4802.022
67
4862.552

2015
04-082015
05-08-

8
19.
7
19.

21
4871.815
08
4873.961

2015
06-082015
09-08-

5
19.
8
19.

14
4864.450
45
4844.358

2015
10-082015
11-08-

5
19.
5
19.

86
4815.637
45
4791.474

2015
12-082015
13-08-

5
19.
7
19.

27
4821.624
37
4808.871

2015
16-082015
17-08-

5
19.
3
19.

21
4783.80
9
4768.011

2015
18-082015
19-08-

6
19.
9
19.

79
4809.271
24
4816.977

2015
20-082015
23-08-

6
19.
9
20.

55
4840.159
14
4831.715

2015
24-082015
25-08-

1
19.
6
19.

2
4793.998
52
4792.935

2015
26-082015
27-08-

6
19.
6
19.

73
4805.655
75
4812.823

2015

Stock Beta

09

27

0.005347593
583
0.015957446
0.016216216
22
0

0.0045548731
0.0023431077
0.004584735
-969
0.0040164499
0.003014405
448
0.002027432
89
0.012605009

0.053191489
- 36
0.0050505050
-

21
0.001904939
957
0.0004405052

0.010152284
0.015384615
-38

254
0.0019513265
-

0.015151515
0
0

0.0041302897
0.0059288361
-

0.010256410
-26

0.0050176493
0.006292447
-439

0.010152284
0.010256410
0.015544041

0.0026449924
- 0.005211661

45
0.015306122
-45

0.0033022242
0.008653386
74
0.001602386

0.015075376
0.015306122
45
0.010050251

228
0.004812476
-238

-26
0.024875621
0

0.0017445583
- 0.0078060643

0.00022169176
0.002653909
987

COVARIANCE.P(E8:E108,F8:F108)/VAR.P(F8:F108
)Method 1 1.8235565
83
SLOPE(E8:E108,F8:F108)
Method 2 1.8235565
83

Chart on Stock Return vs Market Return