2.6 S.kalaiselvi Cost of Component Analysis

APJRBM
Volume 2, Issue 1 (JANUARY 2011)
ISSN 2229-4104
COST OF COMPONENT ANALYSIS A STUDY IN INDIAN

SOFTWARE INDUSTRY
Dr (Mrs.) D.Kamalaveni
M.Com., Ph.D., PGDCA
Reader in Commerce,
Vellalar College for Women,
Erode-12.
E-mail id:kamal.mohanan@yahoo.co.in
Dr.(Mrs.)S.KALAISELVI
M.Com., M.Phil., PGDCA., Ph.D., M.B.A.
Asst. Professor & Head,
Department of Commerce with Computer Applications,
Vellalar College for Women,
Erode-12.
E-Mail id:cutekalai_2003@yahoo.co.in
Abstract
The cost of a particular source of finance is the minimum return expected by its suppliers.
The expected return depends on the degree of risk assumed by the suppliers. A high degree of
risk is assumed by shareholders than debt holders. Debt is a cheaper source of fund than
equity capital and preference capital because the interest payment on debt is fixed. Thus, a
company borrows capital in order to maximize the profits for its shareholders and it would
continue to use this source of finance until the incremental return on it is higher than its
incremental cost. Measuring the cost of various sources of funds is a complex subject. In
deciding the capital structure of a company, it is very necessary to consider the cost of each
source of capital to calculate the overall weighted average cost of capital, which in turn can
be used to compare against earnings so as to maximize the wealth of shareholders.
In this decade, Information Technology has emerged as the leader for economic growth of
India because each development in computer technology has presented new opportunities for
business. This paper deals with the cost of component analysis in Indian software industry.
Sri Krishna International Research & Educational Consortium

http://www.skirec.com
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INTRODUCTION
The financial decisions affect the market value of a firm. Generally, the objective of financial
decisions is to maximize the market price of shares and to minimize the cost of capital which
leads to increase in earnings per share and return on capital employed.
The cost of a particular source of finance is the minimum return expected by its suppliers.
The expected return depends on the degree of risk assumed by the suppliers. A high degree of
risk is assumed by shareholders than debt holders. Debt is a cheaper source of fund than
equity capital and preference capital because the interest payment on debt is fixed. Thus, a
company borrows capital in order to maximize the profits for its shareholders and it would
continue to use this source of finance until the incremental return on it is higher than its
incremental cost.
Measuring the cost of various sources of funds is a complex subject. In deciding the capital
structure of a company, it is very necessary to consider the cost of each source of capital to
calculate the overall weighted average cost of capital, which in turn can be used to compare
against earnings so as to maximize the wealth of shareholders.
A firms cost of capital may be defined. The rate that must be earned on net proceeds to
provide the cost elements of the burden at the time they are due.
Significance Of Cost Of Capital
The cost of capital is used for evaluating the investment projects.

It helps to determine the financial structure of a firm
It can be used to evaluate the overall financial performance of a firm.
Indian Software Industry

The Indian IT industry has not only been among the fastest growing industries globally, it has
played a key role in transforming India from a largely inward looking economy to an
emerging knowledge power that is today perceived as being one of the most dynamic and
entrepreneurial in the world.
In this decade, Information Technology has emerged as the leader for economic growth of
India because each development in computer technology has presented new opportunities for
business. With many Indian businesses having their competitive edge in the global market by
using IT as a key enabler, a NASSCOM study has found that about 35 percent of the
organizations have moved to a level where almost all processes have been automated. The
NASSCOM IT User Survey, which covered 300 organizations has reported that 85 percent of
the organizations believe that they have been able to derive benefits out of the IT
implementation. Assessing the impact of IT implementation on the company productivity, the
survey said 80 percent of the respondents felt that they have been able to trace productivity
enhancements within their organizations.

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Research Objectives
The study is focused on the following specific objectives.
To analyse the debt and equity component of capital structure
To study the significant variation in averages of cost of debt of different subgroups.
To discuss the perceptible and distinctive difference in cost of equity among
sub-groups of sampled companies.
To study the significant variation in WACC among the sub-groups of sampled
companies.
Sample Selection
The data used in this study relate to those software companies listed in the Bombay Stock
Exchange (BSE) for which the data are available in the Capitaline database. The analysis is
confined to the BSE listed Indian software companies only.
Capitaline database contained data relating to 465 BSE listed software companies. Stratified
sampling technique was used and hence the total population was sub-divided into three
standard sub-groups namely Large (Turnover greater than Rs.900 Crores), Small-Medium
(Turnover less than Rs.900 Crores) and Converts (diversified companies), in such a way that
each strata was more homogeneous than the total population. Accordingly, it was found that
there were 10 Large, 407 Small-Medium and 48 Converts. For selection of sample companies
in each stratum, companies for which data were available for minimum of eight years were
identified. The researcher selected all those companies from each stratum which fulfilled the
above condition. Thus the final sample consisted of 102 software companies.
Further it could be observed that the total sample of 102 software companies fall into
following trading groups in BSE: 16 A group companies, 5 Z group companies, 8 S
group companies, 28 T group companies, 17 B1 group companies, 22 B2 group
companies and 6 TS group companies.
Period Of The Study

The data collected for the study pertains to a period of ten years from 1996-97 to 2005-06.
Sources Of Data
The study is based on the secondary data collected from the Capitaline and EBSCO
databases. The data for the sample companies as obtained from Capitaline are supplemented
with the information from various financial dailies, business magazines, reports, websites etc.
For the purpose of computing EVA, Beta value from Capitaline database has been
considered. Risk free rate of return can be taken either as Interest Rate of Government Bonds
or Average Cost of time deposits of Scheduled Commercial Banks in India. In this study,
average cost of time deposits of Scheduled Commercial Banks in India is taken as risk free
rate of return and it has been collected from The Indian Banker.

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Results And Discussion

The cost of capital constitutes an integral part of investment decisions. A company uses more
than one type of capital. The composite capital lies between the least and the most expensive
funds.
The formula used for analysis are:Cost of Debt, Kd
Cost of equity (ke)
Interest & Financial Ch arg es

x 100
Total Debt
= Rf + bi (Rm-Rf)
Weighted Average Cost of Capital (WACC) =
Proportion of debt to capital employed x K
d +
100
K e x Proportion of Equity to Total Capital Employed
100
Table No.1 puts forward the synoptic description of Cost of Equity, Cost of Debt and WACC.
It is obvious from Table No.1 that, the cost of debt has declined over the years while the cost
of equity has exhibited wide variations. An attempt has been made to study the average cost
of debt for the different sub- groups of the companies by applying ANOVA.
The averages of cost of debt capital of the sample companies varied from year to year. In
order to verify whether there is any significant variation in the averages of cost of debt of
different sub groups, the following hypothesis has been framed and tested.
H0: There is no significant variation in averages of cost of debt of different sub-groups.
According to Table No.2, the calculated F value is 0.884 as against the table value of 3.07.
Since the calculated value being lesser than the table value, it can be concluded that there is
no significant difference in average cost of debt capital of different sub groups.
Estimation of cost of equity is the most complex task. Several approaches are available to
estimate the cost of equity. Capital Asset Pricing Model (CAPM) approach has been
attempted as it considers the risk factor. The parameters of CAPM are risk free rate of return
(rf), market rate of return (Km) and beta co-efficient (b).
Table No.1 reveals that the minimum average cost of equity is 10.13% and the maximum is
52.74%. Since the cost of equity of sampled companies showed wide variations, an attempt is
made to study the average cost of equity capital for different sub-groups.
The average cost of equity capital in Large, Small-Medium and Converts groups are found to
be 20.85%, 17.58% and 13.91% respectively (Table No.5). To check whether cost of equity
capital differs significantly in various groups of sampled companies, the ANOVA technique
is used.
H0: There is no perceptible and distinctive difference in cost of equity among sub-groups of
sampled companies.

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It is obvious from Table No.3 that F ratio value is 0.488. The calculated value being less
than the table value of 3.07, at 5% level of significance, it can be concluded that among the
sampled companies distinctive cost of equity does not vary significantly from group to group.
The computation of overall cost of capital involves weights to specific costs and multiplying
these costs by their relative weights. The overall cost of capital of sampled companies
showed very wide variations and hence an attempt was made to study the average cost of
capital for the different sub groups of the sampled companies.
ANOVA has been performed to ensure whether there is any pertinent and significant
variation in WACC among sampled companies.
H0: There is no significant variation in WACC among the sub groups of sampled companies.
It is clear from the Table No.4 that the calculated F value is 0.631 as against the table value
of 3.07 at 5% level of significance. Since the calculated value of WACC is less than its table
value, it is concluded that the WACC among different sub groups does not show any
distinctive variation.
On the whole, it can be concluded that overall cost of capital does not differ significantly
from one sub-group to another sub-group of sampled companies.
The Cost of Debt, Cost of Equity and WACC for the whole sample and also for different subgroups are summarized in Table No.5:
Average cost of debt as well as the cost of equity were the highest for biggies followed by
Small-medium segment. Converts enjoyed low cost debt and equity and hence their WACC
was the lowest compared to other sub-groups.
Table No.6 evinces the trend of certain select capital structure oriented variables. Optimal
capital structure can be obtained with the proper mix of debt and equity. The Debt equity
ratio was 0.217 during 1996-97, which decreased to 0.131 during 2005-06. The ratio was
found to be below the standard norm of 2:1 during the entire study period. This indicates an
unfavourable position to the shareholders since a very low debt equity ratio was observed
deducing that firms have not been able to use low-cost outsiders funds to magnify their
earnings.
Return On Capital Employed was found to have decreased from 11.308 during 1996-97 to
8.857 during 2005-06. Decreasing trend in the debt-equity ratios exhibits less financial risk.
Turnover which has the direct impact on profitability was found to be high during 2005-06
when compared to 1996-97. An increasing trend is noticed with respect to EBIT also.
Fluctuating trend is identified with respect to total debt. It ranges from Rs.6.431 Crores to
Rs.18.131 Crores. EBIT to Capital Employed showed a decrease from 0.130 during 1996-97
to 0.106 during 2005-06.
Correlation matrix has been constructed and analysed with regard to Debt-Equity and
Turnover, Total Debt and EBIT, Debt-Equity and ROCE and finally EBIT to Capital
Employed and Debt-Equity (whole sample analysis).

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Appendix-I, Table No.1.2 exhibits an inverse relationship between Debt-Equity and

Turnover. There exists positive relationship between Total Debt and EBIT in all the 10 years
of the study (Appendix-I, Table No.1.3) and a high positive association is noticed during the
first five years of the study period. The association between Debt-Equity and ROCE was
found to be low positive during seven out of ten years of the study period as per Appendix-I,
Table No.1.4 and the first two years exhibited a negative relationship. A high positive
correlation was found during the year 2005-06 with a coefficient of 0.778.
Inverse relationship was observed in seven years of the study with regard to EBIT to capital
employed and Debt-Equity ratio presented in Appendix-I, Table No.1.5. During the
remaining years of the study, a very low positive association was found.
Recommendations
Barring multinational companies, most companies in India till recently paid lip service to the
goal of shareholder wealth maximization. They showed sporadic concern for the
shareholders, mainly when they approached the capital market for raising capital. The higher
corporate needs for funds and the greater dependence on the capital market have induced
firms to become more friendly with shareholders. Institutional investors tend to be more
discerning and have the muscle and motivation to nudge companies to pursue shareholder
friendly policies. With the abolition of wealth tax on equity shares and other financial assets,
there is now an incentive to enhance share prices. An attempt is made here to sketch a few
recommendations emanating from the findings of the study to the software companies for
effectively competing in the global arena.
Cost Of Capital
Cost of capital of a company is the minimum expected rate that a company requires to meet
its obligations and sustain itself in the market. In designing the financial policy i.e., the
proportion of debt and equity in the capital structure, the firm aims at minimizing the overall
cost of capital. The empirical analysis revealed that the cost of debt stood at 0.44% and
0.35% among the large and small-medium group of companies. The overall cost of capital
also remained high in these two groups viz, 19.77% and 17.14% respectively. It is suggested
that the companies belonging to large and small-medium groups should redesign their capital
structure in order to reduce the cost of debt as well as WACC. The companies can have a
large portion of debt in its structure, as debt is much cheaper than equity. While augmenting
the debt capital, the companies have to keep in mind the standard norm of debt equity ratio.
Debt-Equity ratio is the simple measure of the balance between the finance provided by
equity share holders and that desired from external borrowings. It provides the best start for
the assessment of capital structure. Debt-Equity ratio (Average) in the study showed
fluctuation ranging between 0.083 during 1999-2000 and 0.217 during (1996-97) and was
found to be below the standard norm of 2:1 in all the years under study. This shows that the
select software companies are low geared. The companies may try to have more low cost
borrowed capital which will enable to have wide operations.
When an investor is investing in shares, he is taking higher risk and expects a high return
because there is an uncertainty with regard to dividend which he may or may not receive.

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There is an uncertainty with regard to the movement in share price. If the company does not
perform, the investor may not even get his money back. The cost of capital plays a role in
deciding upon the dividend policy of the firm. In the present study, wide fluctuation is being
noticed regarding the behaviour of cost of capital and hence the software companies are
suggested to follow appropriate dividend policies with a view to maximize the wealth of the
shareholders as well as the company as a whole.
Conclusion
The analysis revealed that statistically there was no significant difference among various subgroups with regard to cost of debt capital. Distinctive patterns were found to exist with
respect to cost of equity and it varied from group to group. WACC among different subgroups did not show any distinctive variation. Debt-equity ratio was found to be far below the
standard norm in all the years under study. It establishes the fact that the share holders do not
enjoy the advantages of trading on equity.
Year wise averages of EBIT and Turnover showed an upward swing. Inverse relationship was
found between debt equity & turnover and between EBIT to capital employed & debt-equity
in majority of the years. Positive relationship was observed with respect to total debt & EBIT
and debt-equity & ROCE. Such a positive relationship favours the proposition that the use of
debt upto an optimal level could boost earnings related variables.
REFERENCES
The Hindu, Business Line, April 14, 2006, P.No:4
Bhalla.
V.K.,
Financial
Management
4th
Revised
and
Enlarged
Edition,
New Delhi-110002 (India).
and
policy,
Text
and
cases,
ANMOL
Publications
Pvt
Ltd,
Falguni C. Shastri, Capital Structure of Indian Corporate sector, Book Enclave, Jaipur, India,
2005.
Bacidore J. Boquist J. Milbourn T and Thakor A, The Search for the Best Financial
Performance Measure, Financial Analysts Journal, May / June 1997.
Clinton, B.D. and S.Chen, Do New performance measures measure up?, Management
Accounting, Oct 1998, pp. 38-43.
Edger, Norton, Factors Affecting Capital Structure Decisions, The Financial Review, 26(3)
1991, pp. 431-446.
Edwards. B, Survey: The Place To Be, The Economist, November 13, 2004, Vol. 373, No.
8401, p.8.
Gupta, O.P. and Sehgal Sanjay, An Empirical Testing of Capital
Pricing Model in India, Finance India, December, 1993, vol. VII No.4, pp.863-874.

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John C. Groth, Ronald C. Anderson, The cost of capital: Perspectives for Managers,
Management Decision 35/6, 1997, pp.474-482.
Jordan, J., Lowe, J. and Taylor, P. Strategy and financial policy in UK
small firms, Journal of Business Finance and Accounting 25(1), 1998, pp.1-27.
Matthew, Billet T., and Ryngaert, Mike, Capital Structure, Asset Structure and Equity
Takeover Premiums in Cash Tender Offers, Journal of Corporation Finance, Volume 3, No.2,
April 1997, pp.145-165.
Mohnot, Rajesh, Mohnot Abstract of Doctoral Dissertation, Capitalization and Capital
Structure in Indian Industries, Finance India, Vol. XLV No.2, June 2000, pp.546-551.
www.eva.com
www.indiainfoline.com
www.capitaline.com
www.bseindia.com
www.investopedia.com
www.iba.org.in.
www.valuebased management.net
www.icraindia.com

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Table No. 1
Yearly Average Of Cost Of Equity, Cost Of Debt And Wacc
(in percentage)
Years
2005- 2004- 2003- 2002- 200106

05
04
03
02
Cost of
0.18 0.09 0.11 0.23
Debt
Cost of
37.82 32.83 11.06 52.74
Equity
WACC 34.87 27.95 10.75 50.25
200001
1999- 1998- 1997- 199600

99
98
97
0.23
0.33
0.74
0.34
0.83
-9.42
46.64
-8.61
15.89
-7.31
42.78
-3.75
16.33
0.21
4.99
5.44
10.13
-8.68
Table No. 2
Cost Of Debt Of Sub-Groups Anova
Source of variance
d.f
SS
MS
F ratio
Between Groups
within groups
Total
2
99
101
1.085
60.790
61.875
0.542557
0.614042
0.884
Sig. level
at 5%
NS
Table No. 3
Cost of Equity of sub-groups ANOVA
Source of
variance
Between Groups
within groups
Total
d.f
SS
MS
F ratio
2
99
101
282.261
28630.629
28912.890
141.1304
289.1983
0.488
Sig. level
at 5%
NS
Table No. 4
Wacc Among Sub-Groups Anova
Source of
variance
Between Groups
within groups
Total
d.f
SS
MS
F ratio
2
99
101
338.756
26573.754
26912.511
169.378
268.422
0.631
Sig. level
at 5%
NS

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Table No. 5
Group-Wise Average Cost Of Debt (Kd), Cost Of Equity (Ke) & Wacc (Ko)
(in percentage)
Group
Large
Small Medium
Converts
Cost of Debt
0.44
0.35
0.09
Cost of Equity
20.85
17.58
13.91
WACC
19.77
17.14
12.69
Table No. 6
Year Wise Average Of Select Variables For The Whole Sample
Years
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
19992000
1998-99
1997-98
1996-97
Debt
Equity
(Ratio)
0.131
0.156
0.123
0.110
0.095
0.084
8.857
-15.136
-2.107
-16.826
-8.607
3.690
Turnover
(Rs. in
Cr.)
399.74
255.44
188.16
156.83
131.22
118.54
EBIT
(Rs. in
Cr.)
104.013
64.714
45.652
37.841
35.382
37.573
Total
Debt (Rs.
in Cr.)
18.131
12.765
11.319
9.977
6.431
7.675
0.083
12.713
83.88
21.295
8.777
0.149
0.171
0.216
0.217
0.788
4.128
11.308
58.47
46.95
40.79
11.694
6.908
6.659
11.329
13.025
12.145
-0.024
0.099
0.130
ROCE
(%)
EBIT to
CE (Ratio)
0.106
-0.112
0.027
0.039
-0.019
0.087
Appendix I
Table No. 1.1
10 Year Average Of Cost Of Debt, Cost Of Equity And WACC Of Sampled
Companies Under Various Sub Groups
Name of the
Company
DIGITALEQP
HP
I-FLEX
INFOSYS
SATYAM
TECHM
WIPRO
ABACUS
ABMANO
ACESOFT
Cost of Debt
Average ACGR
1.44
-37.01
1.23
-17.9
0
0
0
0
0.28
4.48
0
0
0.15
-12.55
0.17
-6.73
0.11
0
0.01
0
Cost of Equity
Average ACGR
18.99
-4.85
16.79
9.08
19.38
-4.36
24.32
10.34
21.73
11.15
22.49
11.39
22.24
11.31
10.36
-5.03
15.06
-220.61
16.41
8.87
WACC
Average ACGR
19.99
-6.02
19.38
-4.36
24.32
10.34
22.02
12.11
12.69
10.93
22.49
11.39
17.48
7.46
11.8
-2.71
14.82
-220.43
16.2
8.87

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AFTEK LTD
ASIANCE
AVANTELQ
AZTECH
B2BSOFT
BLUESTINFO
BRELS
CALIFSOF
CGVAK
CONTECH
CRANES
CRESSAN
CSSOFT
CYBERTE
DATASOFT
DYNACON
ESERVE
EUROSOFT
EZCOM
FINTECH
FRONTINF
GENESYS
GEOMETRIC
GOLDTECH
GTL
HEXAWERE
HINDTMT
INFDS
INFOTECENT
INSOE
INTELVIS
INTRAINF
ITMICRO
JETKINGQ
JINDONL
KASHYAP
KEDIN
KLG
KPITCUMM
LEENEE
MARRSOF
MAGNUM
MANGASOF
MASTEK
MELSTAR
MICROTECH
MIDPOINT

0.1
0.4
0.31
0.47
0.31
0.07
0
0.04
0.15
0.14
0.17
0.11
0.03
0.21
0
0
0.17
0.3
0.04
0.43
0.08
0.15
0.27
0.11
0.18
0.18
0.34
0.71
0.12
5.01
0.07
0.26
0
0.05
0.11
0.01
0.01
0
0.32
0.16
0
0.09
0.22
3.79
0.3
0.22
0.13
0.16
-246.2
-27.85
-23.48
40.61
24.78
-100
0
-24.19
-3.86
2.34
13.27
-21.37
0
10.64
0
0
4.95
-13.32
-100
-19.44
-100
-23.86
-30.53
-100
-2.18
4.29
23.15
-20.12
-100
19.99
0
0
0
0
-100
0
0
0
-13.79
-12.18
0
-100
4.78
-100
6.4
-15.26
-1.63
-100
172.93
24.65
25.22
21.37
17.94
9.81
23.52
15.77
18.44
24.41
7.15
12.98
-1.68
17.16
14
17.42
10.45
9.53
26.84
7.87
18.44
8.4
11.59
21.48
11.59
-1.46
12.78
24.65
10.39
19.58
16.41
21.5
17.79
10.61
10.2
9.85
10.88
11.82
22.32
14.13
11.58
25.38
12.78
2.08
19.96
14.25
27.32
26.81
191.21
11.96
12.34
-4.37
-214.8
1.69
-4.37
9.7
9.91
-4.36
-8.22
6.25
-4.35
-214.09
7.18
9.42
2.9
-5.05
13.7
-4.18
9.91
-0.6
4.64
11.07
4.64
-3.79
7.09
11.96
13.99
10.39
8.87
11.08
10.88
-5.01
2.44
-5.03
24.88
5.85
10.59
7.29
3.45
12.34
7.09
-209.8
10.54
7.39
12.54
12.44
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164.24
23.54
25.73
21.19
19.07
10.22
23.51
12.96
18.27
22.63
8.33
11.47
0.54
16.71
14.03
16.64
10.95
11.59
25.34
8.01
18.19
9.97
14.17
21.32
12.19
2.75
12.68
23.44
8.89
20.91
16.29
21.65
17.78
10.27
11.16
9.59
10.65
11.81
23.78
14.08
11.58
13.36
7.35
20.09
17.78
14.82
28.69
22.09
19.27
10.76
9.56
-1.04
-225.55
2.08
-4.38
6.57
9.63
-5.28
-8.09
-2.24
-17.17
-215.44
7.17
9.42
2.15
-6.43
13.64
-4.89
8.93
-6.46
-8.26
11.67
2.57
-174.82
36.27
9.58
-17.95
9.69
8.91
11.12
10.91
-7.8
4.38
-5.03
26.2
5.99
10.25
3.06
3.45
7.2
-209
10.18
10.14
1.64
17.22
6.79

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ORIENTINFO
OTCO
PALSOFT
PENTASOFTTE
PIOTECH
PSI
RAMINFO
RAMCOSYS
ROLTA
SANRASOF
SILVERLINE
SINDUVA
SOFTSOL
SONATA
SVAMSOFT
TELEDATA
TERASOFT
TWINSOFT
VIRTUALS
VISUALSOFT
VJIL
ZENSAR
CHOKSHIN
CORCOMP
DANLAW
ENCORE
ICSAIND
IECSOF
INFOTREK
LCCINFO
MASCONGLO
MILLENCY
NETVISTA
OMEGAIN
SRGINFO
SYNLOG
TRILLENT
VAKRANG
1.21
4.76
0.19
0.81
0.07
0.13
0.79
0
0.4
0.19
0
0.12
0.28
0.16
0.11
0.18
0.17
0
0
0.07
0.35
0.1
0.1
0.14
0.06
0.02
0.16
0.19
0
0
0.06
0.37
0.08
0.12
0.21
0.06
0.11
0
0
0.05
0.04
0.12
0.13
0.04
-1.1
-31.05
-100
-100
0
-7.77
12.33
0
-100
-41.12
0
-18.77
7.05
0
-100
-100
-31.84
0
0
-100
-100
-24.21
0
-100
-31.13
-100
-1.74
-16.97
0
0
0
0
8.13
-2.4
-11.49
0
0
0
0
0
-100
-28.47
-100
-10.29
18.22
23.51
14.76
17.68
15.9
21.73
21.73
7.2
-10.22
17.42
10.45
16.55
13.85
17.81
23.81
13.32
16.15
27.13
9.98
21.23
16.34
14.1
21.23
10.7
7.49
20.85
18.31
21.1
9.81
7.42
18.69
17.81
19.07
9.3
16.92
14.04
22.06
11.25
12.14
8.45
13.83
14.88
6.48
20.47
8.94
11.67
7.78
9.55
8.56
11.15
11.15
-11.31
28.9
9.42
2.9
8.47
5.08
-3.41
12.63
8.58
8.72
13.75
6.25
10.99
10.08
11.65
10.99
3.33
-8.5
10.86
9.85
10.95
1.69
-7.92
-4.37
9.77
10.18
0.53
9.15
-4.37
-219
-4.99
4.92
-2.57
7.03
7.93
-5.3
10.72
ISSN 2229-4104
19.14
27.19
21.24
17.92
15.45
18.51
21.72
7.2
-10.56
15.95
10.45
11.26
14.56
14.01
21.52
13.63
12.83
26.13
12.72
22.09
16.44
12.74
19.52
10.55
-15.49
20.91
17.13
24.51
9.79
0.3
18.67
11.39
18.49
9.48
17.05
14.1
19.42
12.53
9.55
8.45
13.76
14.83
8.08
17.19
11.97
7.17
9.22
9.29
8.9
9.34
13.15
-11.31
42.46
6.21
2.9
-8.56
3.15
-9.85
13.78
8.66
4.12
12.64
6.25
11.82
9.74
10.04
11.45
-5.24
-240.52
11.39
8.79
1.69
1.69
-204.12
-4.41
-168.33
10.25
0.82
8.6
-4.37
-218.04
-4.99
8.15
-2.57
7.75
3.84
-11.55
25.73

-102-
APJRBM
ISSN 2229-4104
Table 1.2
Correlation Matrix Debt Equity and Turnover(Whole Sample)

X06
X05
X04
X03
X02
X01
X00
X99
X98
X06
X05
X04
X03
X02
X01
X00
X99
X98
X97
1
.934(**)
.703(**)
0.213
.277(*)
.333(**)
.541(**)
.231(*)
0.199
.495(**)
1
.995(**)
.948(**)
.962(**)
.978(**)
.647(**)
0.041
0.03
0.027
1
.971(**)
.927(**)
.952(**)
.592(**)
0.07
0.059
0.059
1
.944(**)
.965(**)
.509(**)
0.079
0.065
0.047
1
.995(**)
.769(**)
.217(*)
0.191
0.141
1
.876(**)
0.202
0.168
0.122
1
.760(**)
.719(**)
.660(**)
1
.985(**)
.905(**)
1
.917(**)
Y06
-0.048
-0.057
-0.059
-0.036
-0.048
-0.062
-0.061
-0.046
-0.05
Y05
-0.048
-0.033
-0.035
-0.033
-0.037
-0.038
-0.049
-0.046
-0.05
Y04
-0.049
-0.035
-0.037
-0.037
-0.046
-0.045
-0.056
-0.051
-0.053
Y03
-0.05
-0.036
-0.036
-0.031
-0.043
-0.048
-0.053
-0.054
-0.056
Y02
-0.048
-0.035
-0.032
-0.02
-0.036
-0.048
-0.043
-0.056
-0.057
Y01
-0.054
-0.04
-0.042
-0.041
-0.05
-0.051
-0.066
-0.053
-0.054
Y00
Y99
-0.041
-0.048
-0.018
-0.039
0.006
-0.041
0.059
-0.039
-0.002
-0.049
-0.061
-0.05
-0.032
-0.063
-0.06
-0.058
-0.059
-0.06
Y98
-0.052
-0.041
-0.047
-0.05
-0.058
-0.053
-0.077
-0.062
-0.06
-0.052
-0.053
-0.06
-0.058
-0.058
-0.055
-0.036
-0.041
-0.043
Y97
** Correlation is significant at the 0.01 level (2-tailed).
* Correlation is significant at the 0.05 level (2-tailed).
X Debt Equity;
X97
1
0.053
0.052
0.054
0.057
0.058
0.055
0.057
-0.06
0.063
0.055
Y06
Y05
Y04
Y03
Y02
Y01
Y00
Y99
Y98
Y97
1
.999(**)
.994(**)
.995(**)
.993(**)
.993(**)
.998(**)
.985(**)
.984(**)
.988(**)
.994(**)
.967(**)
.962(**)
.958(**)
.968(**)
.985(**)
.907(**)
.886(**)
.888(**)
.860(**)
.881(**)
.850(**)
.896(**)
.859(**)
.929(**)
.887(**)
.969(**)
.929(**)
1
.970(**)
.822(**)
.796(**)
.773(**)
.779(**)
.810(**)
.861(**)
.912(**)
.979(**)
.772(**)
.747(**)
.730(**)
.737(**)
.774(**)
.829(**)
.897(**)
.964(**)
.993(**)
Y - Turnover

-103-
APJRBM
ISSN 2229-4104
Table 1.3
Correlation Matrix Total Debt and EBIT (Whole Sample)

X06
X05
X04
X03
1
X06
.537(**)
1
X05
.386(**)
.868(**)
1
X04
.255(*)
.831(**)
.951(**)
1
X03
.371(**)
.711(**)
.799(**)
.938(**)
X02
0.111
.505(**)
.636(**)
.702(**)
X01
0
.240(*)
.480(**)
.440(**)
X00
0.037
.234(*)
.535(**)
.425(**)
X99
0.089
.293(**)
.605(**)
.453(**)
X98
0.195
.257(*)
.593(**)
.433(**)
X97
0.077
0.172
0.129
Y06
0.028
0.033
0.177
0.132
Y05
0.089
0.029
0.085
0.138
Y04
0.172
0.025
0.105
.201(*)
Y03
0.168
0.042
0.128
.274(**)
.248(*)
Y02
0.052
0.18
.388(**)
.326(**)
Y01
0.059
.247(*)
.478(**)
.414(**)
Y00
0.006
.216(*)
.426(**)
.377(**)
Y99
0.07
.258(*)
.480(**)
.424(**)
Y98
0.058
.235(*)
.492(**)
.409(**)
Y97
X Total Debt;
X02
X01
X00
1
.378(**)
.227(*)
.255(*)
.315(**)
.334(**)
0.039
0.046
0.054
0.052
0.123
.263(*)
.333(**)
.232(*)
.247(*)
.278(**)
1
.832(**)
.651(**)
.491(**)
.368(**)
.340(**)
.286(**)
.319(**)
.284(**)
.427(**)
.492(**)
.488(**)
.506(**)
.463(**)
.412(**)
1
.854(**)
.687(**)
.534(**)
.426(**)
.353(**)
.353(**)
.290(**)
.398(**)
.611(**)
.577(**)
.559(**)
.451(**)
.467(**)
X99
1
.953(**)
.872(**)
.660(**)
.601(**)
.495(**)
.477(**)
.577(**)
.774(**)
.752(**)
.691(**)
.708(**)
.760(**)
X98
X97
Y06
Y05
Y04
Y03
Y02
Y01
Y00
Y99
Y98
1
.970(**)
.656(**)
.618(**)
.460(**)
.475(**)
.548(**)
.739(**)
.764(**)
.695(**)
.760(**)
.833(**)
1
.585(**)
.570(**)
.440(**)
.473(**)
.530(**)
.689(**)
.730(**)
.641(**)
.760(**)
.840(**)
1
.994(**)
.993(**)
.973(**)
.990(**)
.976(**)
.947(**)
.903(**)
.827(**)
.775(**)
1
.994(**)
.978(**)
.982(**)
.957(**)
.930(**)
.869(**)
.791(**)
.754(**)
1
.983(**)
.985(**)
.917(**)
.850(**)
.842(**)
.764(**)
.701(**)
1
.979(**)
.908(**)
.845(**)
.850(**)
.801(**)
.736(**)
1
.946(**)
.883(**)
.874(**)
.837(**)
.774(**)
1
.961(**)
.905(**)
.843(**)
.815(**)
1
.930(**)
.876(**)
.842(**)
1
.925(**)
.888(**)
1
.961(**)
Y - EBIT

-104-
Y97
APJRBM
ISSN 2229-4104
Table 1.4
Correlation Matrix Debt Equity and ROCE (Whole Sample)

X06
X05
X04
X03
1
X06
.934(**)
1
X05
.703(**)
.995(**)
1
X04
0.213
.948(**)
.971(**)
1
X03
.277(*)
.962(**)
.927(**)
.944(**)
X02
.333(**)
.978(**)
.952(**)
.965(**)
X01
.541(**)
.647(**)
.592(**)
.509(**)
X00
.231(*)
0.041
0.07
0.079
X99
0.199
0.03
0.059
0.065
X98
.495(**)
0.027
0.059
0.047
X97
.661(**)
.380(**)
-0.036
Y06
.778(**)
-0.128
0.032
0.048
Y05
0.021
-0.091
0.106
0.089
Y04
0.096
0.013
0.05
0.038
Y03
0.008
-0.18
0.013
0.014
0.021
Y02
0.019
.232(*)
.228(*)
.226(*)
Y01
0.065
0.147
0.168
0.187
Y00
-.457(**)
-0.027
-0.017
0.016
Y99
-0.029
-0.013
-0.014
-0.008
Y98
-0.162
-0.06
-0.072
-0.055
Y97
X Debt Equity;
X02
X01
X00
X99
X98
X97
Y06
Y05
Y04
1
.995(**)
.769(**)
.217(*)
0.191
0.141
-0.046
0.044
0.087
0.027
0.011
0.191
0.07
0.013
-0.021
-0.068
1
.876(**)
0.202
0.168
0.122
-0.048
0.045
0.094
0.053
0.011
0.196
-0.041
0.004
-0.024
-0.072
1
.760(**)
.719(**)
.660(**)
.246(*)
-0.143
0.006
0.001
0.018
-0.047
0.106
-0.018
-0.048
-.228(*)
1
.985(**)
.905(**)
-0.031
-0.025
-0.002
0.035
0.023
-0.019
0.022
0.008
-0.094
-.307(**)
1
.917(**)
-0.021
-0.026
0.014
0.034
0.025
-0.015
0.006
0.01
-0.106
-.285(**)
1
0.031
-0.013
0.019
0.033
0.023
-0.015
0.085
0.003
-0.086
-.469(**)
1
-0.092
0.126
0.014
-.257(*)
.452(**)
.354(**)
-.363(**)
0.031
0.083
1
0.115
0.062
-0.003
0.075
0.099
.208(*)
0.05
0.118
1
.337(**)
0.128
0.168
.234(*)
0.051
-0.035
0.11
Y03
1
-0.067
0.037
-0.038
-0.032
-0.062
-0.036
Y02
1
0.083
0.054
0.046
0.168
0.107
Y - ROCE

-105-
Y01
Y00
1
.620(**)
0.066
0.115
0.068
1
.222(*)
.210(*)
0.049
Y99
1
0.067
0.159
Y98
1
.231(*)
Y97
APJRBM
ISSN 2229-4104
Table 1.5
Correlation Matrix EBIT to Capital Employed and Debt Equity (Whole Sample)
X06
X05
X04
X03
X02
X01
X00
X99
X98
X97
Y06
Y05
Y04
Y03
Y02
Y01
Y00
Y99
Y98
Y97
X06
X05
X04
X03
X02
1
0.076
1
.331(**)
.288(**)
1
0.077
.354(**)
.547(**)
1
.687(**)
0.031
0.193
-.241(*)
1
-0.153
0.18
.368(**)
.248(*)
.378(**)
-0.027
.282(**)
.379(**)
.205(*)
0.125
0.215
0.022
0.061
0.012
0.057
0.184
0.162
0.197
0.102
0.183
0.15
0.202
.345(**)
.264(*)
0.048
-0.066
-0.127
-0.038
-0.196
-.281(*)
-.282(*)
-.267(*)
-0.124
0.001
-0.062
-0.2
-0.052
-0.146
0.001
-.266(**)
-0.095
-0.038
-.257(**)
0.012
-0.196
-0.121
-0.043
-.252(*)
-0.171
0.005
-0.137
-0.047
-.269(**)
-0.134
0.004
-0.125
-0.144
-0.038
-0.081
0.016
-0.062
-0.03
-0.033
0.001
0.021
-0.031
-0.03
-0.015
0.001
0.023
-0.012
-0.016
-0.011
-0.011
0.016
X EBIT to Capital Employed;
X01
X00
X99
X98
X97
Y06
Y05
Y04
Y03
Y02
Y01
Y00
Y99
Y98
Y97
1
.599(**)
0.1
.404(**)
.257(*)
0.001
-0.083
-0.085
-0.086
-0.112
-0.112
-0.109
-0.043
-0.036
-0.049
1
0.149
.494(**)
.452(**)
0.054
0.124
0.15
0.172
0.06
-0.035
0.07
0
-0.017
0.064
1
0.157
0.159
-.587(**)
-0.022
-0.012
0.025
0.023
0.013
-0.006
0.024
0.022
0.012
1
.635(**)
-0.084
-0.066
-0.065
-0.05
-0.074
-0.078
-0.115
-0.12
-0.129
-0.127
1
-0.12
-0.085
-0.089
-0.083
-0.096
-0.095
-0.166
-0.172
-0.168
-.234(*)
1
.934(**)
.703(**)
0.213
.277(*)
.333(**)
.541(**)
.231(*)
0.199
.495(**)
1
.995(**)
.948(**)
.962(**)
.978(**)
.647(**)
0.041
0.03
0.027
1
.971(**)
.927(**)
.952(**)
.592(**)
0.07
0.059
0.059
1
.944(**)
.965(**)
.509(**)
0.079
0.065
0.047
1
.995(**)
.769(**)
.217(*)
0.191
0.141
1
.876(**)
0.202
0.168
0.122
1
.760(**)
.719(**)
.660(**)
1
.985(**)
.905(**)
1
.917(**)
Y Debt Equity

-106-
APJRBM
ISSN 2229-4104
TOTAL DEBT WHOLE SAMPLE

20
18.131
18
16
Rs in Crores
14
13.025
12.765
12.145
11.329
11.319
12
9.977
10
8.777
7.675
6.431
6
4
2
0
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-2000
1998-99
1997-98
1996-97
YEARS

-107-
APJRBM
ISSN 2229-4104
COST OF EQUITY - SEGMENT WISE

Large
Small-Medium
Converts
100
80
AVERAGE
60
40
20
0
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
1996-97
-20
-40
YEARS

-108-
APJRBM
ISSN 2229-4104
WEIGHTED AVERAGE COST OF CAPITAL - SEGMENT WISE

100
Large
Small-Medium
Converts
80
AVERAGE
60
40
20
0
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
1996-97
-20
-40
YEARS

-109-

2.6 S.kalaiselvi Cost of Component Analysis

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2.6 S.kalaiselvi Cost of Component Analysis

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APJRBM

Volume 2, Issue 1 (JANUARY 2011)

COST OF COMPONENT ANALYSIS A STUDY IN INDIAN

Sri Krishna International Research & Educational Consortium

Volume 2, Issue 1 (JANUARY 2011)

Significance Of Cost Of Capital

The cost of capital is used for evaluating the investment projects.

Indian Software Industry

Sri Krishna International Research & Educational Consortium

Volume 2, Issue 1 (JANUARY 2011)

Period Of The Study

Sri Krishna International Research & Educational Consortium

Volume 2, Issue 1 (JANUARY 2011)

Results And Discussion

Interest & Financial Ch arg es

Weighted Average Cost of Capital (WACC) =

Proportion of debt to capital employed x K

Sri Krishna International Research & Educational Consortium

Volume 2, Issue 1 (JANUARY 2011)

Sri Krishna International Research & Educational Consortium

Volume 2, Issue 1 (JANUARY 2011)

Appendix-I, Table No.1.2 exhibits an inverse relationship between Debt-Equity and

Sri Krishna International Research & Educational Consortium

Volume 2, Issue 1 (JANUARY 2011)

Sri Krishna International Research & Educational Consortium

Volume 2, Issue 1 (JANUARY 2011)

Sri Krishna International Research & Educational Consortium

Volume 2, Issue 1 (JANUARY 2011)

2005- 2004- 2003- 2002- 200106

1999- 1998- 1997- 199600

Sri Krishna International Research & Educational Consortium

Volume 2, Issue 1 (JANUARY 2011)

Sri Krishna International Research & Educational Consortium

Volume 2, Issue 1 (JANUARY 2011)

Sri Krishna International Research & Educational Consortium

Volume 2, Issue 1 (JANUARY 2011)

Sri Krishna International Research & Educational Consortium

Volume 2, Issue 1 (JANUARY 2011)

Correlation Matrix Debt Equity and Turnover(Whole Sample)

Sri Krishna International Research & Educational Consortium

Volume 2, Issue 1 (JANUARY 2011)

Correlation Matrix Total Debt and EBIT (Whole Sample)

Sri Krishna International Research & Educational Consortium

Volume 2, Issue 1 (JANUARY 2011)

Correlation Matrix Debt Equity and ROCE (Whole Sample)

Sri Krishna International Research & Educational Consortium

Volume 2, Issue 1 (JANUARY 2011)

X EBIT to Capital Employed;

Sri Krishna International Research & Educational Consortium

Volume 2, Issue 1 (JANUARY 2011)

TOTAL DEBT WHOLE SAMPLE

Sri Krishna International Research & Educational Consortium

Volume 2, Issue 1 (JANUARY 2011)

COST OF EQUITY - SEGMENT WISE

Sri Krishna International Research & Educational Consortium

Volume 2, Issue 1 (JANUARY 2011)

WEIGHTED AVERAGE COST OF CAPITAL - SEGMENT WISE

Sri Krishna International Research & Educational Consortium

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