Hi all!
I was just going through investment appraisal techniques. I found out that Geared company's WACC
| Yasaswi Co. (Geared Company) | ||||||
| Cost of Capital | Amount | Weights | ||||
| Term loan | 10% | 0 | 0 | |||
| Debenture | 9% | 200 | 0.5 | |||
| Preference Capital | 12% | 0 | 0 | |||
| Equity Capital | 13% | 200 | 0.5 | |||
| Retained Earnings | 13% | 0 | 0 | |||
| 400 | 1 | |||||
| WACC | 11% | |||||
| IRR | 149% | |||||
| Debt | 200 | |||||
| Equity | 200 | |||||
| Capital Gearing | 50% | |||||
is higher due to their costs of capitals than an ungeared company like below:
| Yasaswi Co. (Ungeared Company) | ||||||
| Cost of Capital | Amount | Weights | ||||
| Term loan | 10% | 100 | 0.01 | |||
| Debenture | 9% | 100 | 0.970001 | |||
| Preference Capital | 12% | 100 | 0.01 | |||
| Equity Capital | 13% | 100 | 0.01 | |||
| Retained Earnings | 13% | 0 | 0 | |||
| 400 | 1.000001 | |||||
| WACC | 9% | |||||
| IRR | 149% | |||||
| Debt | 300 | |||||
| Equity | 100 | |||||
| Capital Gearing | 75% | |||||
Lower WACC can be vice-versa between them as well as it depends upon your capital costs. The IRR here is 149% in both the scenarios as its based on Outflows and Inflows.
Some workings here:
| Year | CF | DF @ 10% | DCF | DF @ 15% | DCF | RATE | 10% | 15% |
| 0 | -100 | 1 | -100 | 1 | -100 | |||
| 1 | 200 | 0.90909091 | 181.818182 | 0.86956522 | 173.913043 | |||
| 2 | 100 | 0.82644628 | 82.6446281 | 0.75614367 | 75.6143667 | |||
| 3 | 50 | 0.7513148 | 37.56574 | 0.65751623 | 32.8758116 | |||
| 4 | 10 | 0.68301346 | 6.83013455 | 0.57175325 | 5.71753246 | |||
| NPV | ₹ 208.86 | ₹ 188.12 | ₹ 208.86 | ₹ 188.12 | ||||
| IRR @ 10% & 15% | 149% | 149% | 149% | 149% |
I have done manual appraisal using formulas and used EXCEL ones and all tally! I somehow believe that Gearing wont be necessary if someone can get their FCFF & FCFE projections correct! Thats an another issue at hand for me right now. We'll find out soon!!
Txs
CAclubindia
