Course Code: F501

Course Name: Financial Theory and Practices

Report on

Weighted Average Cost of Capital (WACC) of

HeidelbergCement Bangladesh Limited

Prepared For:

Mrs. Shakila Yasmin

Assistant Professor

Institute of Business Administration

University of Dhaka

Prepared By:

Rashid Muntasir

ID No. ZR 42

MBA 53rd Batch

Institute of Business Administration

University of Dhaka

Date of Submission:

November 22, 2015

Letter of Transmittal

November 22, 2015

Mrs. Shakila Yasmin

Assistant Professor

Institute of Business Administration

University of Dhaka

Subject: Submission of report titled “Weighted Average Cost of Capital (WACC) of

HeidelbergCement Bangladesh Limited”.

Madam

It gives me immense pleasure to submit my report on “Weighted Average Cost of Capital

(WACC) of HeidelbergCement Bangladesh Limited”. This report was assigned to me as a

partial requirement of the Financial Theory and Practices (F501) course in 2nd

semester.

This report gave me an opportunity to apply my theoretical expertise, sharpen my views,

ideas, and communication skills, and bridge them with the real world of practical experience,

which will be a good head start for my future professional career.

I have tried sincerely to comprehend and translate my knowledge in writing this report. I

enjoyed this project work and gladly attend any of your calls to clarify on my point, if

necessary. I hope you would find the report in appropriate manner.

Sincerely yours

______________________

Rashid Muntasir

ID No. ZR 42

MBA 53rd

Batch

Institute of Business Administration

University of Dhaka

Acknowledgement

I am thankful and grateful to almighty Allah who has given me the strength and ability to

complete the report on “Weighted Average Cost of Capital (WACC) of HeidelbergCement

Bangladesh Limited”. I am also grateful to my Course Teacher Mrs. Shakila Yasmin to

prepare this very important report. She has given all sorts of help required to complete this. I

am again grateful to those who have given me necessary information and documents.

I also do sincerely declare that this report has been submitted, in partial fulfillment of the

requirement for the Financial Theory and Practices (F5401) course. This report is written in

my own language. Though I studied and followed some books and websites, no part of this

report consists of materials, copied or plagiarized from published or unpublished work of

other writers and that all materials borrowed and reproduced from other published or

unpublished sources have either been put under quotation or duly acknowledged with full

reference in appropriate places. I understand that the report may be cancelled if subsequently

it is discovered that this report is not my primeval work that it consists of materials copied or

plagiarized or borrowed without proper acknowledgement.

I, at last, express special thanks from the bottom of my heart to all who have helped me

directly & indirectly to complete this report.

Executive Summary

Cement industry of Bangladesh is in its growth stage. The industry is developing day by day.

HeidelbergCement Bangladesh Limited is one of the major producers of quality cement in

Bangladesh. This company is listed in DSE and CSE as an "A" category stock. As per the

course requirement, I had to find Weighted Average Cost of Capital (WACC) of a company

and I have chosen HeidelbergCement Bangladesh Limited for this purpose.

I have collected price data of last seven years and from the data, I have conducted regression

analysis to find the appropriate Beta (β) for this stock which is .79. Through the Capital Asset

Pricing Model (CAPM), this Beta has been used to find the cost of equity, RE = 11.52%.Then

dividing the amount of interest paid last year by total interest accruing debt, I found the cost

of debt to be RD = 10.13%.

After using Market Value as weight for Equity and Book Value as weight for Debt and

multiplying them with respective required return, I have found the Weighted Average Cost of

Capital (WACC) which is 11.04%.

After the considering all this factors, I have concluded that the stock is less volatile than

overall market. That means the share is preferred by the risk adverse investors.

Table of Contents 1│Introduction ........................................................................................................................................ 1

1.1 Origin ............................................................................................................................................ 1

1.2 Objectives ..................................................................................................................................... 1

1.3 Scope ............................................................................................................................................. 1

1.4 Methodology ................................................................................................................................. 1

1.5 Limitations .................................................................................................................................... 1

2│Company Profile ................................................................................................................................ 2

3│ Calculation of Weighted Average Cost of Capital (WACC) of HeidelbergCement Bangladesh

Limited .................................................................................................................................................... 3

3.1 Capital Structure ........................................................................................................................... 3

3.2 Cost of Equity, RE ......................................................................................................................... 4

3.3 Cost of Debt, RD ............................................................................................................................ 5

3.4 WACC .......................................................................................................................................... 5

4│Findings .............................................................................................................................................. 7

5│References .......................................................................................................................................... 8

6│Appendix ............................................................................................................................................ 9

Page | 1

1│Introduction

1.1 Origin

As a partial requirement of MBA program, I am required to study the Financial Theory and

Practices (F501) course. In the classroom, I get the opportunity to know the theoretical part of

the subject. However, without practical orientation, it is somewhat difficult to grasp the core

concept. Valuation of stock, which requires determining the appropriate Weighted Average

Cost of Capital (WACC), is entirely based on practical situation. So, in order to enhance the

understanding of the core concept, I was required to prepare a report on practical situation to

understand how to implement and practice the theoretical part in real life situation.

1.2 Objectives

To measure the risk of a stock using Regression Analysis

To understand the relationship between risk and required rate of return

To determine the appropriate Weighted Average Cost of Capital (WACC) based on

the risk level

1.3 Scope

This report can give an approximate Weighted Average Cost of Capital (WACC) to be

applicable for the stock of HeidelbergCement Bangladesh Limited. This information can be

used in further valuation of this particular stock.

1.4 Methodology

The report in this study is an inductive one.

Two different types of systems have been selected here based on convenience. The report is

based on both primary and secondary information.

1.5 Limitations

Time Constraint

Lack of Experience

Confidentiality of Information

Page | 2

2│Company Profile

HeidelbergCement Bangladesh Limited is one of the largest producers of quality cement in

Bangladesh. HeidelbergCement Bangladesh Limited is a member of Heidelberg Cement

Group, Germany. The group has 136 years of experience in producing cement and is

operating in more than 40 countries. In Bangladesh, it represents two reputed brands, “Ruby

Cement” and “Scan Cement”. In 1998, Heidelberg Cement Group established its presence in

Bangladesh by setting up a floating terminal with onboard packing facilities in the port of

Chittagong and by distributing the cement to the key markets of Dhaka and Chittagong. In

1999, the group further strengthened its position in Bangladesh and built Greenfield

manufacturing plant near Dhaka namely „Scan Cement International Limited” with an

installed capacity of 0.750 million tons per year. In 2000, Heidelberg Cement Group bought a

minority position at Chittagong based company “Chittagong Cement Clinker Grinding Co.

Limited (CCCGCL)” quickly followed by the acquisition of a controlling stake. The plant in

Chittagong has an installed capacity of 0.7 million tons per year. In 2003, the two companies

were amalgamated and the company‟s name was changed to HeidelbergCement Bangladesh

Limited. Since 2004, the company has diversified its product range by introducing Portland

Composite Cement (PCC) in to the market. The company also produces other types of

cement namely Ordinary Portland Cement (OPC).

Page | 3

3│ Calculation of Weighted Average Cost of Capital (WACC) of

HeidelbergCement Bangladesh Limited

3.1 Capital Structure

The capital structure is how a firm finances its overall operations and growth by using

different sources of funds. Debt comes in the form of bond issues or long-term notes payable,

while equity is classified as common stock, preferred stock or retained earnings.

HeidelbergCement Bangladesh Limited uses both debt and equity to meet its financing needs.

But it heavily relies on equity financing which is evident from the following pie-chart:

For equity financing, it only uses common stock and retained earnings rather than using

preferred stock.

In case of debt financing, it heavily relies on short term debt financing.

Source of Fund

Equity

Debt

Debt Financing

Short Term

Long Term

Page | 4

So, to calculate the WACC of the stock, we have to determine required return for both equity

and debt financing and then, we have to apply their relative weight to derive the WACC.

3.2 Cost of Equity, RE

The cost of equity is the return (often expressed as a rate of return) a firm theoretically pays

to its equity investors, i.e., shareholders, to compensate for the risk they undertake by

investing their capital.

To determine the Cost of Equity, Capital Asset Pricing Model (CAPM) is widely used.

According to this model,

𝑅𝐸 = 𝑅𝑓 + 𝛽 (𝑅𝑀 − 𝑅𝑓)

Here,

RE = Cost of Equity

RM = Market Return

Rf = Risk-free Return

β = Measure of Risk

Now,

1. For risk-free rate, I have used 364-day T-bill rate to match the investment horizon

which is 3.76%.

2. I have used average market return over the last 7 years to incorporate both the bullish

and bearish trend. Average return has been calculated monthly and then annualized. I

have found it to be 13.53%.

Cost of Equity, RE

Cost of Debt, RD

WACC

Page | 5

3. Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in

comparison to the market as a whole. Beta is calculated by dividing the covariance of

stock return and market return by the variance of market return.

a. I have used monthly price data of last seven years.

b. Beta has been found to be .79 which means the stock is less volatile then the

market.

After putting this information in the above equation, I have found the cost of equity to be

11.52 %.

3.3 Cost of Debt, RD

To calculate cost of debt, I have used total interest paid last year and divided it by those

liabilities which accrue interest. These liabilities include:

Quasi Equity Loan

ADP Loan

Gratuity

Short Term Loan

There are other liabilities which do not require interest payment such as trade credit, unpaid

dividend, deferred tax etc. These liabilities are not included in this calculation.

After the calculation, I found cost of debt to be 10.13%.

3.4 WACC

Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each

category of capital is proportionately weighted.

All sources of capital, including common stock, preferred stock, bonds and any other long-term debt,

are included in a WACC calculation. A firm‟s WACC increases as the beta and rate of return on

equity increase, as an increase in WACC denotes a decrease in valuation and an increase in risk.

To calculate WACC, multiply the cost of each capital component by itsweight and take the sum of the

results. The method for calculating WACC can be expressed in the following formula:

𝑊𝐴𝐶𝐶 = 𝐷

𝑉∗ 𝑅𝐷 1 − 𝑇𝐶 +

𝐸

𝑉∗ 𝑅𝐸

Page | 6

Here,

V = Total Value of Firm where V = D + E

D = Book Value of Debt

E = Market Value of Equity

Tc = Corporate Tax Rate

Now,

1. Market Value of Equity has been found by multiplying no. of outstanding shares with Market

Price of the share.

2. Book Value of Debt has been used because of lack of market data.

3. Corporate tax rate is 35%.

Using this information, we find the WACC to be 11.04%.

Page | 7

4│Findings

This stock has a Beta of .79 which is less than 1. That means this stock is less volatile then

overall market. So, it is a less risky stock and can be an ideal choice for risk adverse

investors.

Most of its needs of fund have been met up by equity. Debt has been used minimally. Most of

its liabilities are non-interest accruing.

Page | 8

5│References

1. Richard A. Brealey, Stewart C. Myers and Alan J. Marcus : Fundamentals on

Corporate Finance (7th Edition, 2012), McGraw Hill/Irwin, New York, NY-10020

2. HeidelbergCement Bangladesh Limited, Annual Report 2014

3. www.dsebd.org

4. www.stockbangladesh.com

5. www.heidelbergcementbd.com

Page | 9

6│Appendix

Table 1: Calculation of Return

Date Month End DSEX DSEX Return Month End

HeidelBCem

HeidelBCem

Return

31.08.2015 4768.67 -0.0049 602.90 -0.0511

30.07.2015 4792.31 0.0456 635.40 0.1142

30.06.2015 4583.10 -0.0008 570.30 0.1264

31.05.2015 4586.95 0.1333 506.30 0.0928

30.04.2015 4047.29 -0.1067 463.30 0.0289

31.03.2015 4530.48 -0.0489 450.30 -0.1069

26.02.2015 4763.22 0.0083 504.20 0.0267

29.01.2015 4724.05 -0.0290 491.10 -0.0166

30.12.2014 4864.96 0.0200 499.40 0.0126

30.11.2014 4769.43 -0.0781 493.20 -0.0524

30.10.2014 5173.23 0.0195 520.50 -0.0205

30.09.2014 5074.31 0.1154 531.40 0.0759

31.08.2014 4549.52 0.0276 493.90 -0.0382

24.07.2014 4427.16 -0.0119 513.50 0.0098

30.06.2014 4480.62 0.0113 508.50 -0.0274

29.05.2014 4430.48 -0.0299 522.80 -0.1140

30.04.2014 4566.86 0.0088 590.10 0.3987

31.03.2014 4526.94 -0.0469 421.90 -0.0570

27.02.2014 4749.87 -0.0007 447.40 0.0552

30.01.2014 4753.17 0.1141 424.00 0.1137

30.12.2013 4266.55 0.0085 380.70 -0.0055

28.11.2013 4230.73 0.0663 382.80 0.0366

31.10.2013 3967.73 0.0076 369.30 -0.0240

30.09.2013 3937.68 -0.0460 378.40 -0.0906

29.08.2013 4127.48 0.0430 416.10 0.3527

31.07.2013 3957.20 -0.0359 307.60 -0.0818

30.06.2013 4104.65 0.0584 335.00 0.2403

30.05.2013 3878.07 0.1277 270.10 0.1657

30.04.2013 3438.90 -0.0421 231.70 -0.0228

Page | 10

31.03.2013 3590.05 -0.0965 237.10 -0.0350

28.02.2013 3973.28 -0.0458 245.70 -0.0608

31.01.2013 4163.83 -0.0132 261.60 -0.0117

30.12.2012 4219.31 0.0021 264.70 -0.0105

29.11.2012 4210.58 -0.0630 267.50 -0.0223

31.10.2012 4493.92 -0.0111 273.60 0.0190

30.09.2012 4544.41 0.0219 268.50 0.0121

30.08.2012 4446.87 0.0692 265.30 0.0685

30.07.2012 4159.17 -0.0905 248.30 0.0402

28.06.2012 4572.88 -0.0341 238.70 0.0170

31.05.2012 4734.33 -0.0715 234.70 0.0942

30.04.2012 5098.90 0.0218 214.50 0.0127

29.03.2012 4990.32 0.0628 211.80 0.0974

29.02.2012 4695.41 0.1303 193.00 0.1427

31.01.2012 4153.96 -0.2099 168.90 -0.3400

29.12.2011 5257.61 -0.0021 255.90 0.0120

30.11.2011 5268.55 0.0461 2528.75 -0.0293

31.10.2011 5036.50 -0.1478 2605.00 -0.1317

29.09.2011 5910.20 -0.0486 3000.00 -0.0128

25.08.2011 6212.00 -0.0383 3038.75 0.0034

31.07.2011 6459.62 0.0560 3028.50 -0.0038

30.06.2011 6117.23 0.0623 3040.00 -0.0042

31.05.2011 5758.26 -0.0484 3052.75 -0.0005

28.04.2011 6050.85 -0.0474 3054.25 -0.0591

31.03.2011 6352.10 0.2208 3246.25 0.2464

28.02.2011 5203.08 -0.3048 2604.50 -0.2468

31.01.2011 7484.23 -0.0972 3457.75 -0.0551

30.12.2010 8290.41 -0.0363 3659.25 -0.0556

30.11.2010 8602.44 0.0811 3874.50 0.0573

31.10.2010 7957.12 0.1211 3664.50 -0.0466

30.09.2010 7097.38 0.0660 3843.75 0.1198

31.08.2010 6657.97 0.0497 3432.50 -0.0245

29.07.2010 6342.76 0.0307 3518.75 0.1229

Page | 11

30.06.2010 6153.68 0.0075 3133.50 0.1194

31.05.2010 6107.81 0.0801 2799.25 0.0980

29.04.2010 5654.88 0.0130 2549.50 0.0448

31.03.2010 5582.33 0.0039 2440.25 0.0122

28.02.2010 5560.56 0.0360 2410.75 -0.0927

30.01.2010 5367.11 0.1833 2657.00 0.2344

30.12.2009 4535.53 0.0353 2152.50 0.0705

26.11.2009 4380.95 0.3022 2010.75 0.1493

29.10.2009 3364.26 0.0909 1749.50 0.0294

30.09.2009 3083.89 0.0485 1699.50 0.0833

31.08.2009 2941.28 0.0092 1568.75 0.0370

30.07.2009 2914.53 -0.0318 1512.75 0.0584

30.06.2009 3010.26 0.1703 1429.25 0.1199

31.05.2009 2572.18 0.0070 1276.25 0.0800

30.04.2009 2554.36 0.0439 1181.75 -0.0138

31.03.2009 2446.92 -0.0482 1198.25 -0.0089

26.02.2009 2570.96 -0.0296 1209.00 0.0246

29.01.2009 2649.49 1180.00

Table 2: Calculation of Cost of Equity

Covariance of HeidelBCem & Market Return 0.006056189

Variance of Market Return 0.007627907

Beta 0.793951586

Risk-free Rate 0.0376

Average Market Return (Monthly) 0.0113

Average Market Return (Yearly) 0.135313704

Cost of Equity 0.11517995

Page | 12

Table 3: Calculation of Cost of Debt

Ending Beginning Average

Quasi Equity Loan 122636000 122636000 122636000

ADP Loan 12699000 12699000 12699000

Gratuity 107882000 75908000 91895000

Short Term Loan 38242000 10795000 24518500

Total Debt

251748500

Interest Expense

25500000

Cost of Debt

0.1013

Table 2: Calculation of WACC

Share Price 602.90

No. of Shares Outstanding 56503580

Weight Cost Tax Rate Weighted-

Average

Market Value of Equity 34,066,008,382 0.903251491 0.11517995 0.104036462

Book Value of Debt 3,648,857,000 0.096748509 0.101291567 0.35 0.006369875

Total 37714865382 1 0.110406337