TRENDS IN HISTORICAL COST OF CAPITAL OF INDIAN …shodhganga.inflibnet.ac.in/bitstream/10603/10460/11/11_chapter 4.pdf · Trends in Historical Cost of Capital of Indian Companies

Trends in Historical Cost of Capital of Indian Companies in Selected Industries

64

Chapter–IV

TRENDS IN HISTORICAL COST OF CAPITAL OF

INDIAN COMPANIES IN SELECTED INDUSTRIES

The concept of cost of capital occupies a central place in the theory of the

management and allocation of corporate capital. In recent years it has received

considerable attention from both theorists and practitioners. The cost of capital is the rate

that the firm has to pay explicitly or implicitly to investors for use of their capital or the

minimum rate of return required by the suppliers of capital. It is the cut-off rate for

allocation of capital to investment of projects that will leave the market price of stock

unchanged (Van Horne, 2002). Thus, cost of capital represents two sides of the same

coin-the cost to issuers is the return to investors. The main function of the cost of capital

is to provide a correct and objective criterion by which management can determine

whether it should or should not accept proposals involving capital expenditure. Thus, it is

useful as a standard for evaluating investment decision, designing firm’s debt policy and

appraising the financial performance of top management (I.M.Pandey, 2006)

4.1 Methodology

The present chapter deals with the objective to study trends in historical cost of

capital of Indian companies in selected industries in India. For this purpose a sample of

100 companies representing eight (power, metal, cement, textiles, paper, general

engineering, sugar and tea) industries have been taken. The data have been collected for a

period of 27 years i.e. from 1979-80 to 2005-2006. The various sources of data used are

the Bombay Stock Exchange Directory, Prowess Database maintained by Centre for

Monitoring Indian Economy (CMIE) and annual reports of selected companies. The

trends in cost of each specific source of long-term finance and overall cost of capital (Ko1

and Ko2) have been studied by computing index numbers taking base year value as 100. It

reflects the relative changes in the level of a certain phenomenon over a period of time. In

addition compound growth rates, averages, standard deviation and coefficient of variation

have also been computed to find out changes over a period of time.


65

4.2 Company-wise Trend Analysis

Tables 4.1 and 4.2 exhibit trends in cost of each specific source i.e. cost of debt

(Kdat), cost of preference share capital (Kp), cost of equity capital (Ke1 and Ke2) and

overall cost of capital (Ko1 and Ko2) of 100 companies representing eight industries such

as power, metal, cement, textiles, general engineering, sugar and tea on the basis of

compound growth rates and average over the study period of 27 years.

4.2.1 Company-wise Trend Analysis on the Basis of Compound Growth Rates

Table 4.1 shows the company-wise trend analysis of cost of each specific source

of long-term finance and overall cost of capital (Ko1 and Ko2) of 100 companies

representing 8 industries on the basis of compound growth rates over the study period of

27 years. India has a long tradition of functioning of capital markets. The Bombay Stock

Exchange (BSE) is over a hundred years old and the volume of activity has increased in

the recent years. The process of reforms in capital markets started in 1992 and aimed at

removing direct government control and replacing it by a regulatory framework based on

transparency and disclosure. The major reform in the capital market is the abolition of

Capital Control Issue Act (CCI) and the introduction of free pricing of equity issues in

1992. Simultaneously the Securities and Exchange Board of India (SEBI) was set up as

the apex regulator of the Indian capital markets. At the beginning of the reform process,

the Indian corporate sector, particularly the selected companies in our study have been

observed to be over-levered. This is due to these reasons (i) Subsidized institutional

finance was so attractive that it made the companies to avail of as much of it as they

could get away with. This led to higher debt-equity ratios for selected companies. (ii) In a

protected economy, operating (business) risks were lower and companies could therefore

afford to take more risks on the financing side. (iii) Most of the debt was institutional and

could usually be rescheduled at little cost. An important policy initiative in 1993 was the

opening of capital markets for Foreign Institutional Investors (FII’s) and allowing Indian

companies to raise capital abroad. The depository and share dematerialization systems

have been introduced to enhance the efficiency of the transaction cycle. Prior to the

financial liberalization, interest rates in India were administered by Government. During

this period, credit deployment by banks and financial institutions were at low rates of


66

Table 4.1

Analysis of Compound Growth Rates of Cost of Each Specific Source and Overall

Cost of Capital over the Study Period (1979-80 to 2005-06)

Sr. No.

Name of Company Kdat (%) Kp (%) Ke1 (%) Ke2 (%) Ko1 (%) Ko2 (%)

A. Power Industry

1 C E S C Ltd. 2.57

(1.38)*

0.690

(.651)

-3.58

(-1.83)**

-7.42

(-3.09)***

-.890

(-1.24)

-2.02

(-1.83)**

2 Reliance Energy Ltd. -5.23

(-2.33)**

14.78

(4.59)***

-3.49

(-1.78)**

-10.04

(-4.03)**

-3.99

(-1.98)**

-9.58

(-3.63)***

3 Tata Power Co. Ltd. 2.52

(2.04) **

-.862

(-.183)

-1.26

(-.540)

-2.36

(-.649)

-1.01

(-.636)

-.370

(-.186)

4 Torrent Power A E C Ltd.

-2.18

(-1.30)

10.54

(1.17)

1.00

(.352)

-1.75

(-.449)

5.57

(.459)

-1.99

(-1.12)

5 Torrent Power S E C Ltd.

-5.06

(-3.79)*** N.A.

.385

(.112)

5.01

(1.10)

-.845

(-.68)

.428

(.323)

B. Metal Industry

6 Bharat Forge Ltd. -3.93

(-6.90)***

2.79

(.515)

-2.32

(-1.36)*

4.83

(2.58)**

-3.01

(-2.92)***

1.94

(1.77)**

7 Electrosteel Castings Ltd.

-2.40

(-3.54)*** N.A.

-.844

(-.676)

-1.189

(-.372)

-1.58

(-1.89)**

-.893

(-.55)

8 Ferro Alloys Corpn. Ltd.

-.710

(-1.09)

-2.38

(-.249)

-.097

(-.086)

-4.60

(-.687)

-.278

(-.418)

-4.48

(-1.99)**

9 G K W Ltd. .148

(.211)

-13.27

(-.539)

17.90

(3.95)***

29.52

(-1.12) ***

4.30

(3.01)***

9.05

(5.77)***

10 Goetze (India) Ltd. 12.72

(1.04) N.A.

-1.049

(-.405)

3.51

(7.36)**

.738

(.571)

.190

(..109)

11 Graham Firth Steel Products (India) Ltd.

-3.02

(-3.51)*** N.A.

4.21

(1.68)*

5.05*

(1.41)

.222

(.257)

.134

(.118)

12 K E C Infrastructures Ltd.

-9.85

(-.899)

.399

(.109)

-2.71

(-1.12)

-1.21

(-.297)

-3.45

(-3.29)***

-3.98

(-2.16)**

13 Tata Iron and Steel Company Ltd.

-7.74

(-.501)

58.58

(1.13)

2.97

(1.22)

3.59

(.752)

-1.21

(-1.02)

.044

(.025)

C. Cement Industry

14 Associated Cement Cos. Ltd.

-1.76

(-2.49)** N.A.

-.719

(-.309)

-7.92

(-1.79)**

-.035

(-.028)

-6.60

(-3.68)***

Contd…


67

Sr. No.


15 Chettinad Cement Corpn. Ltd.

-1.05

(-.578)

9.89

(3.07)***

-3.50

(-3.18)***

-10.32

(-5.12)***

-2.35

(-1.94)**

-7.80

(-3.96)***

16 Dalmia Cement (Bharat) Ltd.

-.669

(-.682)

3.61

(1.73)**

-1.56

(-.974)

.566

(.386)

-1.76

(-1.31)

-1.22

(-.934)

17 India Cements Ltd. -2.185

(-2.46)**

23.49

(2.31)**

-5.07

(-2.95)***

-7.11

(-2.32)**

-2.65

(-2.94)***

-3.79

(-2.13)**

18 Madras Cements Ltd. -2.36

(-1.93)**

.092

(.028)

-1.60

(-.711)

-4.00

(-1.33)

-2.00

(-1.27)

-4.38

(-2.31)**

19 Mangalam Cement Ltd.

6.15

(2.15)**

.117

(.047)

4.33

(2.20)**

3.91**

(2.19)

3.17

(1.67)*

4.38

(3.13)***

20 Shree Digvijay Cement Co. Ltd.

-1.10

(-.636)

4.99

(1.28)

2.64

(1.79)**

-.362

(-.226)

1.79

(1.63)*

-1.82

(-1.67)*

D. Textiles Industry

21 Arvind Mills Ltd. -3.69

(-4.44)***

3.46

(.517)

-2.39

(1.20)

-3.58

(-1.35)

-3.08

(-2.60)**

-4.51

(-3.54)***

22 Baroda Rayon Corpn. Ltd.

1.29

(1.16)

6.58

(2.17)**

-1.36

(-.814)

-9.02

(-5.86)***

.24

(.208)

-3.22

(-2.38)**

23 Bharat Commerce & Inds. Ltd.

-.793

(-.685)

-8.32

(-1.42)*

-.839

(-.477)

-2.19

(-.83)

-.58

(-.513)

-2.54

(-1.70)*

24 Birla Transasia Carpets Ltd.

-5.23

(-3.61)*** N.A.

4.08

(1.42)*

-.37

(-.083)

-.57

(-.384)

-5.29

(-3.65)***

25 Birla V X L Ltd. -.648

(-.388)

3.08

(1.54)*

-3.22

(-1.71)**

-4.87

(-1.43)*

-1.61

(-1.88)**

-4.15

(-2.93)***

26 Bombay Dyeing & Mfg. Co. Ltd.

-3.23

(-2.48)** N.A.

-1.50

(-.737)

-5.47

(1.79)**

-1.96

(-1.22)

-4.89

(-2.23)**

27 Century Enka Ltd. -4.79

(-2.54)**

53.86

(1.73)**

-1.93

(-1.11)

-.181

(-.067)

-.96

(-.43)

-.004

(-.001)

28 Century Textiles & Inds. Ltd.

-.537

(-.512)

14.02

(10.99)***

.490

(-.209)

1.86

(.463)

.93

(.48)

.490

(.200)

29 Cheviot Co. Ltd. -6.72

(-6.62)*** N.A.

6.39

(4.47)***

2.39

(.979)

4.15

(4.62)***

4.17

(2.32)**

30 Futura Polyesters Ltd. 6.51***

(5.85) N.A.

3.97

(1.68)*

-.96

(-.27)

5.08

(3.67)***

1.04

(.792)

31 Grasim Industries Ltd. -1.94

(-1.90)**

26.63

(2.62)**

2.08

(1.10)

3.06

(1.36)

1.35

(1.11)

3.42

(2.74)**

32 Hindoostan Spinning & Wvg. Mills Ltd.

.068

(.077)

-8.50

(-1.28)

-.82

(-.281)

6.58

(1.58)*

-.83

(-.469)

.95

(.468)

Contd…


68

Sr. No.


33 Juggilal Kamlapat Cotton Spg. & Wvg. Mills Co. Ltd.

2.12

(1.13)

-6.30

(-3.94)***

-6.27

(-3.86)***

-4.87

(-2.11)**

-2.60

(-2.32)**

-2.26

(-1.49)*

34 Kesoram Industries Ltd.

.323

(.252)

2.22

(2.26)**

-.39

(-.147)

8.03

(1.91)**

.155

(.096)

3.22

(1.46)*

35 L D Textile Inds. Ltd. .854

(1.09)

33.93

(1.87)**

2.47

(1.04)

-2.13

(-.876)

.84

(.611)

.44

(.271)

36 Lakshmi Mills Co. Ltd. 2.59

(3.13)*** N.A.

-1.11

(-.479)

-5.42

(1.46)*

.69

(.717)

-2.06

(-1.49)*

37 Malwa Cotton Spg. Mills Ltd.

2.17

(2.56)** N.A.

3.28

(1.36)

-5.96

(-1.03)

2.88

(1.87)**

-2.07

(-.452)

38 Modipon Ltd. -.081

(-.062)

5.59

(1.94)**

-.79

(-.363)

-.04

(-1.37)

-1.47

(-1.27)

-6.07

(-3.44)***

39 Morarjee Realties Ltd. -.622

(-1.19)

-1.18

(-3.56)***

.40

(.183)

-.49

(-.160)

-3.73

(-2.48)**

-5.79

(-2.84)***

40 N R C Ltd. -.872

(-.927)

17.22

(.967)

.99

(.315)

-.69

(-.162)

.148

(.147)

-2.08

(-1.68)*

41 Rajasthan Spinning & Wvg. Mills Ltd.

-2.56

(-2.78)***

-2.64

(-1.96)**

2.14

(1.22)

4.44

(1.55)*

-1.21

(-.757)

.83

(.544)

42 Raymond Ltd. -2.84

(-3.18)***

8.55

(4.67)***

-.35

(-.153)

-.78

(-.41)

.52

(.364)

.116

(.088)

43 Reliance Industries Ltd.

-2.32

(-1.93)**

2.53

(.848)

2.27

(.967)

8.80

(2.44)**

2.35

(1.66)**

3.79

(1.86)**

44 Ruby Mills Ltd. -3.46

(-3.99)*** N.A.

-8.35

(-3.41)***

-14.34

(-2.52)**

-4.55

(-1.57)*

-10.18

(-2.71)**

45 S I V Industries Ltd. -.677

(-.775) N.A.

.492

(.356)

3.05

(.546)

-.99

(-.986)

.44

(.119)

46 Shree Rajasthan Syntex Ltd.

-2.58

(-1.81)**

57.28

(1.51)*

3.94

(2.05)**

-.17

(-.064)

.024

(.017)

-4.48

(-3.34)***

47 Simplex Realty Ltd. -3.18

(-2.38)** N.A.

-6.74

(-3.41)***

-11.59

(-3.59)***

-3.76

(-3.24)***

-6.03

(-3.14)***

48 Standard Industries Ltd.

.897

(.792)

11.64

(1.73)**

.032

(.011)

1.03

(.231)

-.079

(-.070)

.59

(.265)

49 Victoria Mills Ltd. -1.02

(-.89) N.A.

2.18

(1.03)

1.43

(.455)

1.65

(2.18)**

-.071

(-.053)

E. Paper Industry

50 Andhra Pradesh Paper Mills Ltd.

-4.62

(-3.34)***

-57.89

(-31.06)***

3.46

(1.93)**

2.19

(.771)

1.19

(.885)

-1.60

(-.97)

Contd…


69

Sr. No.


51 Aurangabad Paper Mills Ltd.

10.89

(-4.99)*** N.A.

.012

(.004)

-2.30

(-.508)

-4.07

(-3.58)***

-6.33

(-3.17)***

52 Balkrishna Industries Ltd.

-1.61

(-1.55)* N.A.

.65

(.374)

5.04

(2.11)**

-1.71

(-1.02)

2.98

(2.50)**

53 Ballarpur Industries Ltd.

-.178

(-.099)

.86

(.751)

2.57

(1.14)

-.797

(-.343)

1.19

(1.04)

-1.62

(-1.51)*

54 Jayant Paper Mills Ltd. -3.49

(-3.26)*** N.A.

-2.10

(-.877)

-1.09

(-.366)

-3.51

(-1.95)**

-2.81

(-1.46)*

55 Orient Paper & Inds. Ltd.

-1.55

(-1.87)**

.106

(.047)

3.57

(1.54)*

-2.13

(-.549)

1.37

(1.03)

-2.62

(-1.22)

56 Rohit Pulp & Paper Mills Ltd.

1.96

(1.09)

6.98

(.903)

-4.03

(-1.99)**

-2.41

(-.640)

.731

(.359)

1.08

(.439)

57 Rollatainers Ltd. 3.05

(1.52)*

-5.58

(-3.80)***

-2.38

(-1.46)*

-5.63

(-3.82)***

-1.82

(-1.57)*

-3.16

(-2.38)**

58 Seshasayee Paper & Boards Ltd.

-5.27**

(-2.67) N.A.

2.08

(1.32)

3.05

(1.28)

-1.57

(-.884)

-1.56

(-.93)

59 Shree Vindhya Paper Mills Ltd.

1.94

(2.27)**

22.99

(.306)

2.82

(1.48)*

-3.65

(-1.29)

2.67

(2.77)***

-.96

(-.772)

60 Sirpur Paper Mills Ltd. -1.89

(-1.85)**

.142

(.079)

.98

(.51)

6.31

(1.73)**

-.501

(-.439)

2.75

(1.15)

61 Star Paper Mills Ltd. -1.99

(-2.46)**

.509

(.458)

3.39

(1.67)*

4.69

(2.13)**

0.377

(.358)

1.78

(1.34)

62 West Coast Paper Mills Ltd.

-6.62

(-4.74)***

-10.57

(-.92)

1.39

(.67)

6.64

(2.45)**

-1.39

(-1.29)

1.08

(.645)

F. General Engineering Industry

63 Bajaj Auto Ltd. -18.14

(-7.43)***

-4.39

(-.457)

-1.64

(-.92)

-3.49

(-1.13)

-2.09

(-1.65)*

-3.83

(-1.51)*

64 Bharat Gears Ltd. -.768

(-1.16) N.A.

.878

(.502)

10.13

(2.82)***

-.172

(-.208)

3.48

(1.89)**

65 Bimetal Bearings Ltd. 1.21

(1.47)* N.A.

-.181

(-.114)

1.19

(.882)

.719

(.521)

1.44

(1.42)*

66 Elecon Engineering Co. Ltd.

-3.93

(-3.32)*** N.A.

1.09

(.39)

5.74

(1.378)*

-1.323

(-.849)

2.78

(1.08)

67 Escorts Ltd. 1.41

(1.64)*

-14.63

(-1.14)

-4.45

(-1.66)*

-.157

(-.044)

-1.15

(-1.28)

-.178

(-.088)

68 Force Motors Ltd. -1.66

(-.891) N.A.

-4.64

(-2.02)**

-5.24

(-1.51)*

-2.39

(-1.89)**

-4.89

(-1.96)**

Contd…


70

Sr. No.


69 Gabriel India Ltd. -5.01

(-4.74)*** N.A.

3.08

(2.12)**

3.08

(1.41)*

-.367

(-.382)

.321

(.191)

70 Hindustan Motors Ltd. 1.18

(1.29)

-.751

(-1.73)**

.449

(.161)

6.43

(1.35)

-1.25

(-1.58)*

-.183

(-.123)

71 Kirloskar Brothers Ltd. -1.41

(-1.33)

-4.01

(-.581)

1.57

(.893)

2.86

(1.28)

.013

(.016)

3.48

(2.08)**

72 L M L Ltd. 3.08

(.818)

.639

(.264)

-5.06

(-1.89)**

4.11

(1.10)

-1.29

(-.86)

1.02

(.597)

73 Lakshmi Machine Works Ltd.

.739

(.649) N.A.

-5.68

(-2.03)**

-2.59

(-.700)

-2.56

(-1.45)*

-.064

(-.032)

74 Larsen & Toubro Ltd. -.611

(-.544)

22.57

(1.30)

-2.57

(-1.05)

3.21

(.64)

-1.49

(-1.06)

-.164

(-.074)

75 Maharashtra Scooters Ltd.

-10.37

(-2.63)** N.A.

-1.09

(-.484)

-9.78

(-3.29)***

-2.75

(-1.41)*

-9.99

(-3.48)***

76 Mahindra & Mahindra Ltd.

-3.49

(-3.48)***

-1.14

(-.680)

.250

(.188)

3.42

(1.55)

.50

(.516)

3.04

(1.79)**

77 Premier Ltd. .355

(.287) N.A.

-6.73

(-3.95)***

-.94

(-.264)

-5.12

(-3.34)***

-1.68

(-.60)

78 Punjab Tractors Ltd. .227

(.174)

6.94

(2.04)**

-1.68

(-.64)

-4.87

(-1.58)*

-2.49

(-1.88)**

-5.03

(-1.92)**

79 Revathi Equipment Ltd.

-1.59

(-.853)

-5.66

(-1.92)**

1.87

(.99)

-2.05

(-.721)

.39

(.313)

-1.08

(-.46)

80 Tata Motors Ltd. -3.19

(-3.48)***

9.71

(5.77)***

-1.71

(-.85)

4.19

(.999)

-1.46

(-1.61)*

-1.07

(-.60)

81 Tayo Rolls Ltd. -4.22

(-2.76)*** N.A.

2.98

(1.26)

3.49

(1.03)

1.13

(.74)

.949

(.498)

82 Texmaco Ltd. .202

(.104)

-1.85

(-.81)

.453

(.182)

10.34

(1.51)*

1.42

(1.43)*

7.29

(1.63)*

83 Voltas Ltd. .301

(.293) N.A.

-1.82

(-.806)

-.834

(-.358)

.228

(.258)

-1.53

(-2.27)**

G. Sugar Industry

84 Andhra Sugars Ltd. -1.55

(-1.58)* N.A.

-7.25

(-3.79)***

-10.75

(4.90)***

-4.79

(-3.49)***

-7.30

(-4.84)***

85 Bajaj Hindusthan Ltd. -2.35

(-1.57)* N.A.

-2.06

(-.661)

-.97

(-.30)

-1.86

(-1.65)*

-2.88

(-1.77)**

86 Balrampur Chini Mills Ltd.

-3.93

(-4.23)***

-7.04

(-1.99)**

3.91

(1.56)*

-.67

(-.197)

-.61

(-.53)

-2.20

(-1.12)

Contd…


71

Sr. No.


87 Kothari Sugars & Chemicals Ltd.

-11.83

(-3.72)***

1.69

(1.31)

2.22

(1.35)

-2.83

(-1.20)

-2.63

(-2.20)**

-5.01

(-2.26)**

88 Ravalgaon Sugar Farm Ltd.

-3.40

(-2.47)**

-8.78

(-2.82)***

-8.52

(-2.49)**

-14.80

(-4.15)***

-2.67

(-2.77)***

-6.35

(3.57)***

89 Sakthi Sugars Ltd. .161

(.248)

2.73

(4.61)***

-1.35

(-.71)

-4.35

(-2.27)**

-.245

(-.257)

-1.75

(-2.04)**

90 Sri Chamundeswari Sugars Ltd.

.278

(.197)

.454

(.456)

-2.19

(-.92)

-.983

(-.343)

.361

(.372)

-1.93

(-1.39)*

H. Tea Industry

91 Apeejay Tea Ltd. 10.81

(3.74)*** N.A.

3.06

(1.28)

-5.57

(1.377)*

3.74

(1.87)**

-5.60

(1.77)**

92 Assambrook Ltd. .721

(.794)

.555

(2.32)**

4.24

(1.31)

1.41

(.298)

3.53

(2.68)**

1.22

(.661)

93 D P I L Ltd. -5.02

(-1.34) N.A.

-5.00

(-1.01)

-12.28

(-2.99)***

-6.92

(2.81)***

13.16

(-6.42)***

94 Dhunseri Tea & Inds. Ltd.

-.298

(-.264) N.A.

-3.04

(-.91)

-7.35

(-2.49)**

-2.80

(-1.19)

-4.15

(-2.20)**

95 Hasimara Industries Ltd.

-.972

(-1.09) N.A.

-4.21

(-2.13)**

-1.01

(-.337)

-1.53

(-1.72)**

-2.41

(-1.96)**

96 Jay Shree Tea & Inds. Ltd.

-1.06

(-1.31) N.A.

1.46

(.50)

2.33

(.527)

-.090

(-.041)

-.566

(-.247)

97 Moran Tea Co. (India) Ltd.

.93

(.38) N.A.

-.657

(-.279)

-2.32

(-1.07)

-3.69

(-2.01)**

-2.52

(-1.55)*

98 Tata Tea Ltd. .078

(.073) N.A.

8.30

(2.03)**

1.20

(.581)

4.53

(2.62)**

1.44

(.835)

99 Warren Tea Ltd. 3.79

(1.01) N.A.

.803

(.323)

-7.64

(-2.49)**

.272

(.132)

-6.50

(-2.43)**

100 Williamson Tea Assam Ltd.

4.98

(3.45)*** N.A.

1.52

(.781)

-5.89

(-1.91)**

2.75

(2.14)**

-4.69

(-2.10)

Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official

Directory, Prowess Database (CMIE) and Annual Reports of Companies.

Notes: 1. Figures in Parentheses represent t-values.

2. Significance at 10%, 5% and 1% is indicated by one, two and three asterisks respectively.

3. N.A. stands for not available.


72

interests. Low rates of interest made industries more dependent upon the financial

institutions for resource mobilization. As a consequence of financial liberalization,

changes have been observed in both debt and equity markets. The interest rates shot up in

India as result of financial liberalization. In August 1991, the Government of India

allowed all term lending institutions to charge interest rates according to the risk

perception of the concerned project, subject to a minimum rate of 15%. From the Table

4.1, it has been observed that immediately after the financial liberalization, there has been

a spurt in the lending rates. For example, financial institutions raised their lending rates

from 14.5% in 1990-91 to 19% in 1991-92. These changes have impact upon cost of debt

(Kdat) during this period. This period of high interest rate coincided with a very favorable

situation in the stock market. During this period there has been a shift in the financing

pattern of the Indian corporate sector away from borrowing and towards equity oriented

funds. Secondary market activities have a strong influence on the performance of the

primary market. One of the most important determinants of the financing decision of a

firm is the cost of equity capital (Ke). The main criterion affecting the financing decision

of a firm is generally the minimization of the weighted average cost of capital. High stock

prices in the secondary market allow corporate to charge high premium in the primary

market, thereby reducing the cost of equity capital. Upward movements of stock prices

influence firm’s decisions to issue new capital as the pricing of new issues depend on the

level and trend of stock prices at the time of issue. Issuing equities at a high premium

reduces the cost of capital for a firm and makes it an ideal financing choice. Therefore,

the performance of primary market is crucially dependent upon the level and trend of

share prices in the secondary market. The stock market liberalization of the late 1980s

and the entry of large number of domestic and foreign investors into the capital market in

the early 1990s has influenced the cost of capital of Indian corporate sector. The trend of

decline in cost of each specific source of long-term finance and overall cost of capital

(Ko1 and Ko2) have been observed after liberalization in maximum number of selected

companies in selected industries over a period of time. The findings that emerge from the

analysis of cost of each specific source of long-term finance are as follows:

The Table 4.1 shows that 2 out of 5 i.e. 40 percent companies in power industry

have exhibited significant decline in cost of debt (Kdat), cost of equity capital (Ke1 and


73

Ke2) and overall cost of capital (Ko2) during this period. There has been significant

increase in cost of preference share capital (Kp) in case of Reliance Energy Ltd. during

this period. The Reliance Energy Ltd. has been observed with significant decline in

overall cost of capital (Ko1) during this period.

It appears from Table 4.1 that 3 out of 8 i.e. 38 percent companies have exhibited

significant decline in cost of debt (Kdat) and overall cost of capital (Ko1) in metal industry

over the study period. There has been significant decline in cost of equity capital (Ke1) in

case of Bharat Forge Ltd. during this period. The companies such as GKW Ltd. and

Graham Firth Steel Products (India) Ltd. have revealed significant increase in cost of

equity capital (Ke1) during this period. The GKW Ltd. is the only company which has

exhibited significant increase in overall cost of capital (Ko2) during this period. The

companies such as Bharat Forge Ltd. and GKW Ltd. have been observed with significant

increase in overall cost of capital (Ko1) during this period. There has been significant

decline in overall cost of capital (Ko2) in case of KEC Infrastructures Ltd. during the

selected study period.

As revealed from Table 4.1, it has been observed that 3 out of 7 i.e. 43 percent

selected companies have been observed with significant decline in cost of debt (Kdat) and

cost of equity capital (Ke2) in cement industry during this period. The Mangalam Cement

Ltd. is the only company which has exhibited significant increase in cost of debt (Kdat)

and cost of equity capital (Ke2) during this period. There has been significant increase in

cost of preference share capital (Kp) in 3 out of 7 i.e. 48 percent companies over the study

period. The companies such as Chettinad Cement Corpn. Ltd. and India Cements Ltd.

have exhibited significant decline in cost of equity capital (Ke1) during the selected study

period. 2 out of 7 i.e. 29 percent companies have shown significant increase in cost of

equity capital (Ke1) and overall cost of capital (Ko1) during this period. There has been

significant decline in overall cost of capital (Ko1) in 2 out of 7 i.e. 29 percent companies

during this period. 6 out of 7 i.e. 86 percent companies have exhibited significant decline

in overall cost of capital (Ko2) during this period.


74

The Table 4.1 shows that 12 out of 29 i.e. 41 percent companies have exhibited

significant decline in cost of debt (Kdat) in textile industry over the study period. There

has been significant increase in cost of debt (Kdat) in 3 out of 29 i.e. 10 percent companies

during the selected study period. 11 out of 29 i.e. 37 percent companies have exhibited

significant increase in cost of preference share capital (Kp) during this period. There has

been significant decline in 4 out of 29 i.e. 14 percent companies during the selected study

period. 5 out of 29 i.e. 17 percent companies have been observed with significant

increase in cost of equity capital (Ke2) and overall cost of capital (Ko1 and Ko2) during this

period. 6 out of 29 i.e. 21 percent companies have exhibited significant decline in overall

cost of capital (Ko1) during the selected study period. 14 out of 29 i.e. 48 percent

companies have shown significant decline in overall cost of capital (Ko2) during this

period.

As shown by Table 4.1 it appears that 9 out of 13 i.e. 69 percent companies have

exhibited significant decline in cost of debt (Kdat) in paper industry over the study period.

The companies such as Rollatainers Ltd. and Shree Vindhya Paper Mills Ltd. have been

observed with significant increase in cost of debt (Kdat) during this period. The companies

such as Andhra Pradesh Paper Mills Ltd. and Rollatainers Ltd. have shown significant

decline in cost of preference share capital (Kp) during the selected study period. 4 out of

13 i.e. 31 percent companies has revealed significant increase in cost of equity capital

(Ke1 and Ke2) during this period. The companies such as Rohit Pulp and Paper Mills Ltd.

and Rollatainers Ltd. have been observed with significant increase in cost of equity

capital (Ke1) over the study period. The Rollatainers Ltd. is the only company which has

exhibited significant decline in cost of equity capital (Ke2) during this period. 3 out of 13

i.e. 13 percent companies have been observed with significant decline in overall cost of

capital (Ko1) during the study period. There has been significant increase in overall cost

of capital (Ko1) in case of Shree Vindhya Paper Mills Ltd. over the study period. 4 out of

13 i.e. 31 percent companies have exhibited significant decline in overall cost of capital

(Ko2) over the selected study period.

The Table 4.1 reveals that 7 out of 21 i.e. 33 percent companies have exhibited

significant decline in cost of debt (Kdat) in general engineering industry over the study


75

period. The Escorts Ltd has been observed with significant increase in cost of debt (Kdat)

during this period. The companies such as Hindustan Motors Ltd. and Revathi Equipment

Ltd. have exhibited significant decline in cost of preference share capital (Kp) during this

period. There has been significant increase in cost of preference share capital (Kp) in case

of 2 out of 21 i.e. 10 percent companies during the study period. 5 out of 21 i.e. 24

percent companies have revealed significant decline in cost of equity capital (Ke1) over

the study period. The Gabriel India Ltd. is the only company which has exhibited

significant increase in cost of equity capital (Ke1) during this period. 3 out of 21 i.e.14

percent companies have been observed with significant increase in cost of equity capital

(Ke2) over the study period of 27 years. There has been significant decline in cost of

equity capital (Ke2) in 3 out of 21 i.e. 14 percent selected companies during the study

period. 8 out of 21 i.e. 33 percent selected companies have revealed significant decline in

overall cost of capital (Ko1) during this period. There has been significant increase in

overall cost of capital (Ko1) in case of Texmaco Ltd. during this period. 5 out of 21 i.e. 24

percent companies have revealed significant decline in overall cost of capital (Ko2) over

the selected study period. There has been significant increase in overall cost of capital

(Ko2) in 5 out of 21 i.e. 14 percent companies during this period.

As revealed by Table 4.1, it has been observed that 5 out of 7 i.e. 71 percent

companies have exhibited significant decline in cost of debt (Kdat) in sugar industry over the

study period. The companies such as Balrampur Chini Mills Ltd. and Ravalgaon Sugar Farm

Ltd. have been observed with significant decline in cost of preference share capital (Kp)

during this period. There has been significant increase in cost of preference share capital (Kp)

in case of Sakthi Sugars Ltd. during this period. The companies such as Ravalgaon Sugar

Farm Ltd. and Sakthi Sugars Ltd. have been observed with significant decline in cost of

equity capital (Ke1) over the study period. 2 out of 7 i.e. 29 percent companies have been

observed with significant decline in cost of equity capital (Ke2) over the study period. There

has been significant increase in cost of equity capital (Ke2) in case of Andhra Sugars Ltd.

during this period. 4 out of 7 i.e. 57 percent companies have exhibited significant decline in

overall cost of capital (Ko1) during the study period of 27 years. 5 out of 7 i.e. 71 percent

selected companies have been observed with significant decline in overall cost of capital


76

(Ko2) over the study period. There has been significant increase in overall cost of capital (Ko2)

in case of Ravalgaon Sugar Farm Ltd. during this period.

The Table 4.1 shows that the companies such as Apeejay Tea Ltd. and

Williamson Tea Assam Ltd. have been observed with significant increase in cost of debt

(Kdat) in tea industry over the study period. There has been significant increase in cost of

preference share capital (Kp) in case of Assambrook Ltd. during this period. The

Hasimara Industries Ltd. has been observed with significant decline in cost of equity

capital (Ke1) over the study period. There has been significant increase in cost of equity

capital (Ke2) in case of Tata Tea Ltd. during the selected study period. 5 out of 10 i.e. 50

percent companies have been observed with significant increase in overall cost of capital

(Ko1) during this period. The companies such as Hasimara Industries Ltd. and Moran Tea

Co. Ltd. have shown significant decline in overall cost of capital (Ko1) over the study

period. 5 out of 10 i.e. 50 percent companies have exhibited significant decline in overall

cost of capital (Ko2) over the study period of 27 years. There has been significant increase

in overall cost of capital (Ko2) in case of Apeejay Tea Ltd. during this period.

4.2.2 Company-wise Trend Analysis on the Basis of Averages

Table 4.2 presents company-wise trend analysis of cost of each specific source of

long-term finance and overall cost of capital (Ko1 and Ko2) of 100 companies representing

8 industries such as power, metal, cement, textiles, paper, general engineering, sugar and

tea on the basis of averages over the study period of 27 years i.e. 1979-80 to 2005-06.

Theoretically, cost of debt (Kdat) is said to be lower than cost of preference share capital

(Kp). The cost of preference share capital (Kp) is said to be lower than cost of equity

capital (Ke). The fundamental reason behind cost of debt (Kdat) and cost of preference

share capital (Kp) being lower than cost of equity capital (Ke) is due to tax advantage of

debt and lower risk on the part of debt and preferred stock investors as compared to

equity investors. The overall cost of capital (Ko) is expected to lie among cost of debt

(Kdat), cost of preference share capital (Kp) and cost of equity capital (Ke). In power

industry, the cost of debt (Kdat) being 10.58 percent has been observed as higher than cost

of preference share capital (Kp) being 7.76 percent over the study period. This finding is

contrary to theoretical view. This company has raised fresh debt at higher rate of interest

leading to higher cost of debt (Kdat) during this period. The cost of equity capital (Ke1 and


77

Ke2) being 25.12 percent and 24.26 percent respectively have been observed as higher

than cost of debt (Kdat) and cost of preference share capital (Kp) during this period. The

overall cost of capital (Ko1 and Ko2) has been observed 14.18 percent and 14.19 percent

respectively during this period. The Reliance Energy Ltd has cost of debt (Kdat) being

10.19 percent lower than the cost of preference share capital (Kp) being 10.61 percent

over the study period. The cost of equity capital (Ke1 and Ke2) being 35.89 percent and

26.74 percent respectively have been observed higher than cost of debt (Kdat) and cost of

preference share capital (Kp) during this period. The finding of this company along with

remaining three companies in this sector is in conformity with our theoretical viewpoint.

The overall cost of capital (Ko1 and Ko2) has been observed 28.05 percent and 21.43

percent respectively during this period. In metal industry, the Bharat Forge Ltd. has cost

of debt (Kdat) being 15.62 percent has been observed higher than cost of preference share

capital (Kp) being 10.64 percent over the study period. This finding is contrary to our

theoretical proposition. Interest payments of this company has showed upward trend

during the study period. This is due to reason that company has raised new debt. The

fresh debt has been raised at higher rate of interest leading to higher cost of debt (Kdat)

during this period. The cost of equity capital (Ke1 and Ke2) being 19.99 percent and 37.55

percent respectively have been observed higher than cost of debt (Kdat) and cost of

preference share capital (Kp) during this period. The overall cost of capital (Ko1 and Ko2)

has been observed 17.11 percent and 23.53 percent respectively during this period. The

cost of debt (Kdat) being 14.93 percent has been observed lower than cost of equity capital

(Ke1 and Ke2) being 26.43 percent and 32.49 percent respectively in case of Electrosteel

Castings Ltd. during this period. The finding of this company is according to our

theoretical viewpoint. The overall cost of capital (Ko1 and Ko2) has been observed 20.83

percent and 27.95 percent respectively during this period. The companies such as

Electrosteel Castings Ltd and Graham Firth Steel Products (India) Ltd do not have

preference capital over the study period. The findings of companies such as Ferro Alloys

Corpn. Ltd, Goetze Ltd and Tata Iron and Steel Company Ltd have been according to

theoretical proposition. The companies i.e. GKW Ltd, Graham Firth Steel Products

(India) Ltd and K E C Infrastructures Ltd have cost of debt (Kdat) higher than the cost of

equity capital (Ke1) during the study period. The GKW Ltd and K E C Infrastructures Ltd


78

have cost of equity capital (Ke2) lower than cost of debt (Kdat) during the study period.

These findings are contrary to theoretical view. These companies have been observed

with lowest earnings per share during the study period. In cement industry, the cost of

debt (Kdat) being 9.70 percent has been observed as lower than cost of equity capital (Ke1

and Ke2) being 19.71 percent and 26.15 percent respectively in case of Associated

Cement Cos. Ltd over the study period. This finding is in conformity with our theoretical

proposition. The overall cost of capital (Ko1 and Ko2) has been observed 14.26 percent

and 16.97 percent respectively during this period. The Associated Cement Cos. Ltd is

only company out of 7 selected companies for this sector that doesn’t have preference

capital during the study period. The Chettinad Cement Corpn. Ltd has cost of debt (Kdat)

being 11 percent lower than cost of preference share capital (Kp) being 14.84 percent

during this period. The cost of equity capital (Ke1 and Ke2) being 22.04 percent and 19.29

percent respectively have been observed higher than the cost of debt (Kdat) and cost of

preference share capital (Kp) over the study period. The overall cost of capital (Ko1 and

Ko2) has been observed 15.38 percent and 16.20 percent respectively during this period.

The findings of remaining five companies are based upon theory. In textile industry,

Arvind Mills Ltd has cost of debt (Kdat) being 9.37 percent higher than cost of preference

share capital (Kp) being 6.28 percent during the study period. The company has raised

fresh debt at higher rate of interest leading to higher cost of debt (Kdat) during this period.

The cost of equity capital (Ke1 and Ke2) being 17.95 percent and 16.30 percent

respectively have been observed higher than the cost of debt (Kdat) and cost of preference

share capital (Kp) over the study period. The overall cost of capital (Ko1 and Ko2) has been

observed 13.31 percent and 11.83 percent respectively during this period. The cost of

debt (Kdat) being 12.28 percent has been observed as lower than cost of preference share

capital (Kp) being 14.04 percent in case of Baroda Rayon Corpn. Ltd. over the study

period. The cost of equity capital (Ke1 and Ke2) being 14.33 percent and 17.72 percent

respectively have been observed higher than cost of debt (Kdat) and cost of preference

share capital (Kp) over the study period. The overall cost of capital (Ko1 and Ko2) has been

observed 12.95 percent and 14.19 percent respectively during this period. The findings of

this company along with 17 other companies out of 29 companies selected for this sector

are based upon theory. The companies such as Bharat Commerce & Inds. Ltd, Morarjee


79

Realties Ltd and Standard Industries Ltd have cost of debt (Kdat) higher than the cost of

equity capital (Ke1) during the study period. The companies i.e. Futura Polyesters Ltd, L

D Textile Inds. Ltd, Morarjee Realties Ltd, Simplex Realties Ltd and Victoria Mills Ltd

have cost of debt (Kdat) higher than the cost of equity capital (Ke1) over the study period.

The companies such as Hindoostan Spinning & Wvg. Mills Ltd, Juggilal Kamlapat

Cotton Spg. & Wvg. Mills Co. Ltd and N R C Ltd have cost of debt (Kdat) higher than the

cost of equity capital (Ke2) during the study period. The companies with higher cost of

debt (Kdat) have raised fresh debt at higher rate of interest leading to increase in

respective cost during this period. The Birla VXL Ltd has cost of preference share capital

(Kp) higher than the cost of equity capital (Ke1 and Ke2) during the study period. The

Modipon Ltd has cost of preference share capital (Kp) higher than cost of equity capital

(Ke1) over the study period. The companies such as Birla Transasia Carpets Ltd, Bombay

Dyeing and Mfg. Co. Ltd, Lakshmi Mills Co. Ltd, Ruby Mills Ltd and Simplex Reality

Ltd do not have preference capital during the study period. These findings are contrary to

theoretical view. The companies with higher cost of debt (Kdat) have raised new debt at

higher rate of interest. The companies with lower cost of equity capital (Ke1 and Ke2)

have been observed with lowest earnings per share during the study period. In paper

industry, Andhra Pradesh Paper Mills Ltd. has cost of debt (Kdat) being 16.70 percent

lower than cost of preference share capital (Kp) being 34.60 percent during the study

period. This company is having maximum cost of preference share capital (Kp) during the

study period. The company is having preference share capital in 2 out of 27 years of the

study period. The company has paid preference dividend at higher rate during this period

leading to higher cost of preference share capital (Kp). This company has cost of equity

capital (Ke1 and Ke2) being 25.18 percent and 25.20 percent respectively lower than cost

of preference share capital (Kp) over the study period. This finding is contrary to our

theoretical view. The overall cost of capital (Ko1 and Ko2) has been observed 20.80

percent and 20.99 percent respectively during this period. The cost of equity capital (Ke1

and Ke2) being 12.78 percent and 13.29 percent respectively have been observed higher

than cost of debt (Kdat) being 7.99 percent in case of Aurangabad Paper Mills Ltd. during

the study period. This finding is in conformity with our theoretical proposition. The



80

Table 4.2

Analysis of Cost of Each Specific Source and Overall Cost of Capital on the Basis of

Averages over the Study Period (1979-80 to 2005-06)

Contd…

Sr.

No. Name of Company Kdat

(%)

Kp

(%)

Ke1

(%)

Ke2

(%)

Ko1

(%)

Ko2

(%)

A. Power Industry

1 C E S C Ltd. 10.58 7.76 25.12 24.26 14.18 14.19

2 Reliance Energy Ltd. 10.19 10.61 35.89 26.74 28.05 21.43

3 Tata Power Co. Ltd. 7.31 16.28 22.38 25.33 18.05 15.60

4 Torrent Power A E C Ltd. 13.05 17.02 22.48 14.93 19.07 16.61

5 Torrent Power S E C Ltd. 13.13 10.63 27.15 24.88 20.31 18.41

B. Metal Industry

6 Bharat Forge Ltd. 15.62 10.64 19.99 37.55 17.11 23.53

7 Electrosteel Castings Ltd. 14.93 N.A. 26.43 32.49 20.83 27.95

8 Ferro Alloys Corpn. Ltd. 13.75 13.43 26.65 29.41 17.93 21.00

9 G K W Ltd. 21.10 28.64 21.08 18.59 20.61 18.23

10 Goetze (India) Ltd. 17.79 2.70 24.26 30.31 22.66 25.05

11 Graham Firth Steel Products (India)

Ltd. 22.67 N.A. 22.65 36.15 21.98 25.93

12 K E C Infrastructures Ltd. 20.32 10.74 18.96 19.56 19.00 21.88

13 Tata Iron and Steel Company Ltd. 13.06 9.52 35.95 33.86 16.45 14.62

C. Cement Industry

14 Associated Cement Cos. Ltd. 9.70 N.A. 19.71 26.15 14.26 16.97

15 Chettinad Cement Corpn. Ltd. 11.00 14.84 22.04 19.29 15.38 16.20

16 Dalmia Cement (Bharat) Ltd. 8.45 10.07 28.47 43.78 18.93 26.06

17 India Cements Ltd. 12.18 3.84 15.91 22.04 13.06 15.92

18 Madras Cements Ltd. 11.05 9.98 31.62 42.11 21.27 23.82

19 Mangalam Cement Ltd. 11.71 14.91 16.89 17.41 12.90 13.45

20 Shree Digvijay Cement Co. Ltd. 17.08 10.30 27.34 29.67 21.02 23.56

D. Textile Industry

21 Arvind Mills Ltd. 9.37 6.28 17.95 16.30 13.31 11.83


81

Contd…

Sr.


(%)

Kp

(%)

Ke1

(%)

Ke2

(%)

Ko1

(%)

Ko2

(%)

22 Baroda Rayon Corpn. Ltd. 12.28 14.04 14.33 17.72 12.95 14.19

23 Bharat Commerce & Inds. Ltd. 22.37 9.52 11.96 13.35 19.97 20.26

24 Birla Transasia Carpets Ltd. 11.33 N.A. 14.58 17.13 12.63 15.01

25 Birla V X L Ltd. 12.42 27.58 13.57 15.00 13.95 14.95

26 Bombay Dyeing & Mfg. Co. Ltd. 8.78 N.A. 14.78 16.05 13.22 11.98

27 Century Enka Ltd. 8.57 13.21 19.70 31.17 19.07 25.67

28 Century Textiles & Inds. Ltd. 8.91 9.17 18.35 20.41 17.22 18.88

29 Cheviot Co. Ltd. 11.34 11.09 23.46 37.47 20.10 30.01

30 Futura Polyesters Ltd. 12.48 9.30 11.76 15.81 14.04 15.31

31 Grasim Industries Ltd. 8.42 11.50 18.78 25.58 13.26 16.40

32 Hindoostan Spinning & Wvg. Mills

Ltd.

15.80 9.97 17.89 13.73 18.03 13.02

33 Juggilal Kamlapat Cotton Spg. &

Wvg. Mills Co. Ltd.

19.64 11.49 18.46 13.26 17.17 14.94

34 Kesoram Industries Ltd. 10.29 12.19 14.05 13.19 15.71 14.45

35 L D Textile Inds. Ltd. 22.00 11.46 21.98 24.82 21.22 27.93

36 Lakshmi Mills Co. Ltd. 15.28 N.A. 15.40 23.16 16.57 19.89

37 Malwa Cotton Spg. Mills Ltd. 11.59 6.37 18.21 26.72 13.69 24.09

38 Modipon Ltd. 12.72 18.85 16.17 27.15 14.70 23.85

39 Morarjee Realties Ltd. 16.41 6.01 15.30 14.11 15.28 14.17

40 N R C Ltd. 16.15 10.89 17.64 12.99 16.44 14.30

41 Rajasthan Spinning & Wvg. Mills

Ltd.

11.42 10.42 16.36 19.42 13.30 14.37

42 Raymond Ltd. 9.69 12.19 18.57 20.73 15.79 15.37

43 Reliance Industries Ltd. 8.53 13.27 29.83 21.79 20.95 16.25

44 Ruby Mills Ltd. 12.49 N.A. 19.00 17.53 15.18 15.37

45 S I V Industries Ltd. 13.23 7.55 23.49 22.58 17.85 17.48

46 Shree Rajasthan Syntex Ltd. 13.82 12.67 16.40 22.54 16.64 17.84

47 Simplex Realty Ltd. 15.30 N.A. 14.42 16.15 15.27 17.60

48 Standard Industries Ltd. 15.51 6.22 14.47 13.12 15.91 16.24


82

Contd….

Sr.


(%)

Kp

(%)

Ke1

(%)

Ke2

(%)

Ko1

(%)

Ko2

(%)

49 Victoria Mills Ltd. 20.79 5.75 18.14 22.73 21.68 23.98

E. Paper Industry

50 Andhra Pradesh Paper Mills Ltd. 16.70 34.60 25.18 25.20 20.80 20.99

51 Aurangabad Paper Mills Ltd. 7.99 N.A. 12.78 13.29 8.91 8.53

52 Balkrishna Industries Ltd. 8.82 N.A. 15.15 21.58 12.19 15.02

53 Ballarpur Industries Ltd. 12.55 14.20 18.95 19.09 16.09 15.14

54 Jayant Paper Mills Ltd. 13.82 0.00 19.99 16.08 17.45 14.46

55 Orient Paper & Inds. Ltd. 14.27 8.59 13.55 21.50 13.59 20.04

56 Rohit Pulp & Paper Mills Ltd. 13.60 5.69 20.36 23.97 18.15 18.63

57 Rollatainers Ltd. 14.73 9.71 19.10 23.20 16.38 17.09

58 Seshasayee Paper & Boards Ltd. 12.89 N.A. 18.79 20.55 15.88 16.80

59 Shree Vindhya Paper Mills Ltd. 8.74 9.67 14.13 17.01 10.96 11.47

60 Sirpur Paper Mills Ltd. 13.08 8.90 15.26 20.54 14.50 19.72

61 Star Paper Mills Ltd. 14.77 9.95 17.19 21.35 15.28 17.53

62 West Coast Paper Mills Ltd. 14.71 7.93 16.13 21.08 14.48 16.18

F. General Engineering Industry

63 Bajaj Auto Ltd. 6.01 N.A. 13.78 19.54 11.70 16.28

64 Bharat Gears Ltd. 12.99 13.14 16.78 32.11 14.86 18.19

65 Bimetal Bearings Ltd. 9.05 N.A. 15.42 18.67 14.11 16.99

66 Elecon Engineering Co. Ltd. 13.04 9.79 16.23 22.13 14.76 17.79

67 Escorts Ltd. 12.17 12.82 13.94 20.51 13.18 20.16

68 Force Motors Ltd. 13.28 N.A. 9.87 14.46 10.33 14.01

69 Gabriel India Ltd. 15.76 N.A. 20.69 30.37 17.62 25.47

70 Hindustan Motors Ltd. 14.40 11.12 21.20 19.81 18.04 18.27

71 Kirloskar Brothers Ltd. 14.85 10.56 18.01 34.19 16.18 23.02

72 L M L Ltd. 17.37 10.00 16.66 16.30 17.27 16.91

73 Lakshmi Machine Works Ltd. 10.51 N.A. 17.82 24.20 14.91 17.89

74 Larsen & Toubro Ltd. 9.20 14.71 9.35 8.12 9.74 9.64

75 Maharashtra Scooters Ltd. 12.76 N.A. 15.05 20.75 16.67 25.54


83



Note: N.A. stands for not available..

Sr.


(%)

Kp

(%)

Ke1

(%)

Ke2

(%)

Ko1

(%)

Ko2

(%)

76 Mahindra & Mahindra Ltd. 9.45 9.45 18.55 24.48 14.73 18.77

77 Premier Ltd. 22.57 N.A. 16.28 19.59 18.72 21.44

78 Punjab Tractors Ltd. 14.01 10.97 16.48 26.55 14.77 24.92

79 Revathi Equipment Ltd. 14.35 12.92 17.76 30.03 15.20 25.58

80 Tata Motors Ltd. 12.20 15.28 11.56 11.00 12.21 12.49

81 Tayo Rolls Ltd. 14.45 N.A. 18.93 20.97 17.20 17.02

82 Texmaco Ltd. 11.55 6.63 16.10 30.23 13.73 19.86

83 Voltas Ltd. 12.23 14.09 13.93 9.08 13.15 11.75

G. Sugar Industry

84 Andhra Sugars Ltd. 8.57 9.50 17.91 18.31 13.61 13.59

85 Bajaj Hindusthan Ltd. 10.44 7.20 12.74 20.89 11.24 14.88

86 Balrampur Chini Mills Ltd. 10.25 13.66 18.47 18.13 13.45 18.25

87 Kothari Sugars & Chemicals Ltd. 18.69 14.31 24.34 28.82 19.66 21.58

88 Ravalgaon Sugar Farm Ltd. 15.27 9.68 12.34 15.04 13.56 16.07

89 Sakthi Sugars Ltd. 13.30 14.44 15.06 24.04 15.32 16.05

90 Sri Chamundeswari Sugars Ltd. 10.82 10.57 17.07 24.59 11.98 14.93

H. Tea Industry

91 Apeejay Tea Ltd. 9.63 N.A. 10.98 18.83 10.20 17.88

92 Assambrook Ltd. 14.10 5.66 13.79 20.42 12.83 16.08

93 D P I L Ltd. 14.13 N.A. 10.24 8.59 16.34 14.68

94 Dhunseri Tea & Inds. Ltd. 10.39 N.A. 17.68 18.50 27.26 14.39

95 Hasimara Industries Ltd. 18.89 N.A. 10.98 10.18 15.72 15.97

96 Jay Shree Tea & Inds. Ltd. 9.74 N.A. 10.67 15.25 11.65 13.44

97 Moran Tea Co. (India) Ltd. 18.93 N.A. 12.91 14.38 15.18 14.18

98 Tata Tea Ltd. 9.83 N.A. 36.40 27.16 22.58 21.74

99 Warren Tea Ltd. 16.71 N.A. 12.83 20.76 12.08 18.94

100 Williamson Tea Assam Ltd. 12.95 N.A. 10.39 20.33 10.22 18.53

Max 22.67 34.60 36.40 43.78 28.05 30.01

Min 6.01 2.70 9.35 8.12 8.91 8.53


84

respectively during this period. This company has minimum overall cost of capital (Ko1

and Ko2) out of sample of 100 companies over the study period. The findings of other 10

out of 13 selected companies for this sector are based upon theory. The Orient Paper &

Inds. Ltd has cost of debt (Kdat) higher than the cost of equity capital (Ke1) during the

study period that is contrary to our theoretical viewpoint. It appears that company has

raised fresh debt at higher rate of interest leading to increased cost of debt (Kdat) over the

study period. The companies such as Aurangabad Paper Mills Ltd., Balkrishna Industries

Ltd., Jayant paper Mills Ltd. and Seshasayee Paper and Boards Ltd. do not have

preference capital during the study period. In general engineering industry, Bajaj Auto

Ltd. has cost of debt (Kdat) being 6.01 percent lower than cost of equity capital (Ke1 and

Ke2) being 13.78 percent and 19.54 percent respectively over the selected study period.

This finding is in conformity with our theoretical viewpoint. The overall cost of capital

(Ko1 and Ko2) has been observed 11.70 percent and 16.28 percent respectively during this

period. This company has minimum cost of debt (Kdat) out of sample of 100 companies

over the study period. This company is profitable and is having huge stock of retained

earnings. It appears that company has advantage of cheaper debt over the study period

leading to lower cost of debt (Kdat) out of sample of 100 companies during the study

period. The cost of debt (Kdat) being 12.99 percent has been observed as lower than cost

of preference share capital (Kp) being 13.14 percent in case of Bharat Gears Ltd. during

this period. The cost of equity capital (Ke1 and Ke2) being 16.78 percent and 32.11

percent respectively have been observed higher than cost of debt (Kdat) and cost of

preference share capital (Kp) over the selected study period. The overall cost of capital

(Ko1 and Ko2) has been observed 14.86 percent and 18.19 percent respectively during this

period. The findings of these two companies are in conformity with our theoretical view

and similar results have been derived for other 13 out of 21 companies selected for this

sector over the study period. The cost of debt (Kdat) has been observed as higher than cost

of equity capital (Ke1) in case of Force Motors Ltd. over the study period. This company

has raised fresh debt at higher rate of interest leading to increased cost of debt (Kdat)

during this period. The Larson & Toubro Ltd. and Voltas Ltd. have cost of equity capital

(Ke2) lower than cost of debt (Kdat) during the study period. There are more fluctuations

in the earnings per share as compared to market price of this company during this period.


85

The cost of debt (Kdat) has been observed as higher than cost of equity capital (Ke1 and

Ke2) in case of LML Ltd. and Premier Ltd. over the study period. These companies have

raised fresh debt at higher rate of interest leading to increased cost of debt (Kdat) during

this period. The cost of preference share capital (Kp) has been observed as higher than

cost of equity capital (Ke1 and Ke2) in Larson & Toubro Ltd. and Voltas Ltd. during the

study period. These companies have paid preference dividend at higher rate leading to

increase in cost of preference share capital (Kp) during the study period. 8 out of 21

selected companies for this sector do not have preference capital over the study period. In

sugar industry, the cost of debt (Kdat) being 8.57 percent has been observed as lower than

cost of preference share capital (Kp) being 9.50 percent in case of Andhra Sugars Ltd.

during the study period. The cost of equity capital (Ke1 and Ke2) being 17.91 percent and

18.31 percent respectively have been observed higher than cost of debt (Kdat) and cost of

preference share capital (Kp) over the selected study period. This finding is in conformity

with theoretical view. The overall cost of capital (Ko1 and Ko2) has been observed 13.61

percent and 13.59 percent respectively during this period. The Bajaj Hindusthan Ltd. has

cost of debt (Kdat) being 10.44 percent higher than cost of preference share capital (Kp)

being 7.20 percent during this period. The cost of equity capital (Ke1 and Ke2) being 12.74

percent and 20.89 percent respectively have been observed higher than the cost of debt

(Kdat) and cost of preference share capital (Kp) over the study period. The overall cost of

capital (Ko1 and Ko2) has been observed 11.24 percent and 14.88 percent respectively

during this period. The findings of these two companies with other 4 companies out of 7

companies selected for this sector over the study period are based upon theory. The cost

of debt (Kdat) has been observed higher than cost of preference share capital (Kp) in case

of Kothari Sugars & Chemicals Ltd. during the study period. The Ravalgaon Sugar Farm

Ltd. has cost of debt (Kdat) higher than cost of preference share capital (Kp) and the cost

of equity capital (Ke1 and Ke2) during the study period. Interest payments of these

companies have showed upward trend. It appears that companies have raised fresh debt at

higher rate of interest leading to increased cost of debt (Kdat) during this period. In tea

industry, Apeejay Tea Ltd. has cost of debt (Kdat) being 9.63 percent lower than cost of

equity capital (Ke1 and Ke2) being 10.98 percent and 18.83 percent during this period. The



86

respectively during this period. The finding of this company is based upon theory and

similar results have been derived for other 3 companies out of 10 companies selected for

this sector over the study period. The cost of debt (Kdat) being 14.10 percent has been

observed higher than cost of preference share capital (Kp) being 5.66 percent and cost of

equity capital (Ke1) being 13.79 percent in case of Assambrook Ltd. during this period.

The company has raised new debt at higher rate of interest leading to increased cost of

debt (Kdat) during this period. The cost of equity capital (Ke2) being 20.42 percent has

been observed higher than cost of debt (Kdat) and cost of preference share capital (Kp)

over the selected study period. The company has increased the preference capital during

the study period. The company has paid preference dividend at higher rate leading to

increase in cost of preference share capital (Kp) during the study period. The overall cost

of capital (Ko1 and Ko2) has been observed 12.83 percent and 16.08 percent respectively

during the study period. The Assambrook Ltd. is only company out of 10 selected

companies that has preference capital during the study period. The cost of preference

share capital (Kp) in this company has been observed higher than cost of equity capital

(Ke1) over the study period that is contrary to our theoretical viewpoint. The cost of debt

(Kdat) has been observed as higher than cost of equity capital (Ke1) in case of Warren Tea

Ltd. and Williamson Tea Assam Ltd. over the study period. The cost of debt (Kdat) has

been observed as higher than cost of equity capital (Ke1 and Ke2) in case of D P I L Ltd.,

Hasimara Industries Ltd. and Moran Tea Co. (India) Ltd. during the study period. The

companies with higher cost of debt (Kdat) have been observed with increase in debt over

the study period. It appears that company has raised fresh debt at higher rate of interest

leading to increase in respective cost during this period.

The component wise analysis of cost of each specific source of long-term finance

and overall cost of capital (Ko1 and Ko2) reveal that the cost of debt (Kdat) ranges between

6.01 percent in case of Bajaj Auto Ltd. (General Engineering Industry) to 22.67 percent

in case of Graham Firth Steel Prod.(I) Ltd. (Metal Industry) over the study period. The

cost of preference capital (Kp) ranges between 2.70 percent in case of Goetze (India) Ltd.

(Metal Industry) to 34.60 percent in case of Andhra Pradesh Paper Mills Ltd. (Paper

Industry) during the study period. The cost of equity capital (Ke1) ranges between 9.35

percent in case of Larsen & Toubro Ltd. (General Engineering Industry) to 36.40 percent


87

in case of Tata Tea Ltd. (Tea Industry) over the study period of 27 years. The cost of

equity capital (Ke2) ranges between 8.12 percent in case of Larsen & Toubro Ltd.

(General Engineering Industry) to 43.78 percent in case of Dalmia Cement (Bharat) Ltd.

(Cement Industry) over the study period of 27 years. The overall cost of capital (Ko1)

ranges between 9.35 percent in case of Larsen & Toubro Ltd. (General Engineering

Industry) 28.05 percent in case of Reliance Energy Ltd. (Power Industry) over the study

period. The overall cost of capital (Ko2) ranges between 8.53 percent in case of

Aurangabad Paper Mills Ltd. (Paper Industry) to 30.01 percent in case of Cheviot Co.

Ltd. (Textile Industry) during the study period. Wide variations in the cost of each

specific source of long-term finance and overall cost of capital (Ko1 and Ko2) have been

observed over a period of time.

Overall theoretical viewpoint that cost of debt (Kdat) is lower than cost of

preference share capital (Kp) and cost of preference share capital (Kp) is lower than cost

of equity capital (Ke1 and Ke2) has been supported by 78 percent out of total selected

companies over the selected study period. The cost of debt (Kdat) has been observed

higher than cost of preference capital (Kp) in 38 out of total selected 100 companies

during the study period. The cost of debt (Kdat) has been observed higher than the cost of

equity capital (Ke1) in 21 out of total selected companies over the study period. The cost

of debt (Kdat) has been observed as higher than the cost of equity capital (Ke2) in 14 out of

total 100 selected companies during the selected study period. The cost of preference

capital (Kp) has been observed higher than the cost of equity capital (Ke1 and Ke2) in 6 out

of total selected 100 companies during the study period.

Table 4.3 depicts frequency cost of each specific source of long-term finance and

overall cost of capital (Ko1 and Ko2) for the study period of 27 years i.e. 1979-80 to 2005-

06. It appears that approximately 72 percent companies have cost of debt (Kdat) in the

range of 10-20 percent followed by 21 percent in the range of 0-10 percent and 7 percent

in the range of 20-30 percent. Approximately 58 percent companies have cost of

preference capital (Kp) in the range of 0-10 percent followed by 39 percent in the range of

10-20 percent and 2 percent in the range of 20-30 percent. Only 1 percent of selected


88

Table 4.3

Frequency Table of Cost of Capital of Selected Companies for Study Period (1979-

80 to 2005-06)



companies have cost of preference share capital (Kp) in the range of 30-40 percent.

Majority of companies i.e. 74 percent have cost of equity capital (Ke1) in the range of 10-

20 percent followed by 21 percent in the range of 20-30 percent and 3 percent in the

range of 30-40 percent. Only 2 percent companies lie in the range of 0-10 percent over

the study period. Approximately 43 percent companies have cost of equity capital (Ke2)

in the range of 20-30 percent followed by 41 percent companies in the range of 10-20

percent, 11 percent in the range of 30-40 percent and 3 percent in the range of 0-10

percent. Only 2 percent companies have cost of equity capital (Ke2) in the range of 40-50

percent over the study period. Majority i.e. 83 percent of selected companies have overall

cost of capital (Ko1) in the range of 10-20 percent followed by 15 percent in the range of

20-30 percent. Only 2 percent of selected companies have overall cost of capital (Ko1) in

the range of 0-10 percent over the study period. Majority i.e. 70 percent of selected

companies have overall cost of capital (Ko2) in the range of 10-20 percent followed by 27

percent in the range of 20-30 percent, 2 percent in the range of 0-10 percent and 1 percent

in the range of 30-40 percent over the study period.

Variable/ Range 0-10 10-20 20-30 30-40 40-50 Total

Kdat (%) 21 72 7 - - 100

Kp (%) 58 39 2 1 - 100

Ke1 (%) 2 74 21 3 - 100

Ke2 (%) 3 41 43 11 2 100

Ko1 (%) 2 83 15 - - 100

Ko2 (%) 2 70 27 1 - 100


89

4.3 Industry-wise Trend Analysis

Tables 4.4 to 4.19 and Figures 4.1 to 4.8 present industry-wise trend analysis of 8

selected industries such as power, metal, cement, textiles, paper, general engineering,

sugar and tea over the study period of 27 years i.e. 1979-80 to 2005-06. The data have

been analyzed by using suitable techniques and results drawn from there are as follows:

4.3.1 Power Industry

Table 4.4 and Figure 4.1 represent trends in cost of each specific source of long-

term finance and overall cost of capital (Ko1 and Ko2) in case of power industry over the

study period of 27 years i.e. 1979-80 to 2005-06. India's power market is the fifth largest

in the world. The power sector is high on India's priority as it offers tremendous potential

for investing companies based on the sheer size of the market and the returns available on

investment capital. The Government of India has announced policy of liberalization in

1991 and consequent amendments in Electricity (Supply) Act have opened new vistas to

involve private efforts and investments in electricity industry. These changes have

influenced financing patterns of major players operating in this industry and consequently

their cost of capital has undergone tremendous change during post-liberalization era.

The cost of debt (Kdat) ranges between 5.41 percent in the year 2004-05 to 17.41

percent in the year 1987-88. The cost of debt (Kdat) has been observed as 8.57 percent in

the year 1979-80. It declines and finally reaches 5.51 percent in the year 2005-06. There

has been increase in 21 out of 27 years as compared to first year of the study period. An

increasing trend has been observed in cost of debt (Kdat) over the study period. Overall it

exhibits decline of 36 percent as compared to first year of the study period.

The cost of preference share capital (Kp) ranges between 5.02 percent in the year

2001-02 to 24.06 percent in the year 1996-97. The cost of preference share capital (Kp)

has been observed as 9.38 percent in the year 1979-80. It declines to 5.02 percent in the

year 2001-02. The cost of preference share capital (Kp) has been observed as nil in 8 out

of 27 years of the study period. There has been increase in 15 out of 27 years as

compared to first year of the study period. An increasing trend has been observed in cost

of preference share capital (Kp) during this period. Overall it exhibits decline of 47

percent as compared to first year of the study period.


90

Table 4.4

Trend Analysis of Cost of Capital of Power Industry from 1979-80 to 2005-06

Year Kdat

(%) Index

Kp

(%) Index

Ke1

(%) Index

Ke2*

(%) Index

Ko1

(%) Index

Ko2

(%) Index

S1

(%)

S2

(%)

1979-80 8.57 100 9.38 100 33.93 100 22.6 100 25.36

1980-81 9.89 115.44 9.60 102 28.27 83.32 19.13 84.65 18.38

1981-82 10.79 125.86 9.60 102 22.53 66.39 16.59 73.38 11.74

1982-83 12.27 143.1 9.60 102 24.01 70.76 18.09 80.05 11.74

1983-84 13.41 156.43 9.60 102 27.78 81.86 29.25 129.42 14.37

1984-85 13.95 162.8 9.98 106 29.99 88.38 45.22 100 23.91 105.78 27.9 100 16.04 31.27

1985-86 12.85 149.94 9.98 106 45.28 133.45 37 81.82 27.41 121.26 22.63 81.12 32.43 24.15

1986-87 13.36 155.9 10.73 114 32.13 94.7 47.37 104.76 31.32 138.57 27.72 99.36 18.77 34.01

1987-88 17.41 203.16 10.32 110 41.23 121.52 43.59 96.39 30.49 134.89 31.49 112.87 23.82 26.18

1988-89 13.42 156.59 10.49 112 33.78 99.56 38.55 85.24 22.89 101.28 25 89.6 20.36 25.13

1989-90 13.27 154.8 10.49 112 41.81 123.22 26.23 58 25.47 112.69 17.14 61.42 28.54 12.96

1990-91 10.97 128.01 10.49 112 14.29 42.13 22.14 48.97 13.57 60.02 17.42 62.45 3.32 11.17

1991-92 10.84 126.49 12.17 130 11.16 32.89 15.46 34.18 10.96 48.5 12.94 46.38 0.32 4.62

1992-93 12.67 147.81 6.77 72 10.16 29.94 10.83 23.95 10.55 46.66 12.47 44.69 -2.51 -1.84

Contd…


91

Year Kdat

(%) Index

Kp

(%) Index

Ke1

(%) Index

Ke2*

(%) Index

Ko1

(%) Index

Ko2

(%) Index

S1

(%)

S2

(%)

1993-94 12.67 147.78 0.00 0 11.13 32.81 7.77 17.18 8.83 39.06 8.13 29.15 -1.54 -4.9

1994-95 13.24 154.52 0.00 0 20.79 61.26 10.88 24.06 14.34 63.43 9.2 32.97 7.55 -2.36

1995-96 10.41 121.47 9.78 104 49.78 146.71 15.74 34.81 31.04 137.33 10 35.84 39.37 5.33

1996-97 9.78 114.11 24.06 256 16.37 48.24 10.01 22.14 13.31 58.88 9.69 34.73 6.59 0.23

1997-98 8.48 98.98 8.57 91 27.89 82.19 18.41 40.72 18.9 83.61 12.74 45.68 19.41 9.93

1998-99 9.42 109.94 18.32 195 27.62 81.39 25.92 57.31 15.06 66.61 18.29 65.54 18.2 16.5

1999-00 10.64 124.12 0.00 0 23.12 68.13 24.52 54.23 19.6 86.72 18.49 66.26 12.48 13.88

2000-01 9.55 111.44 0.00 0 14.1 41.56 21.37 47.26 11.05 48.89 16.93 60.69 4.55 11.82

2001-02 8.52 99.44 5.02 53 27.77 81.85 25.06 55.42 20.89 92.42 19.96 71.53 19.25 16.54

2002-03 8.99 104.94 0.00 0 22.27 65.64 26.51 58.63 17.93 79.31 20.34 72.91 13.28 17.52

2003-04 6.25 72.92 0.00 0 39.99 117.85 20.17 44.59 27.15 120.1 13.4 48.04 33.74 13.92

2004-05 5.41 63.14 0.00 0 30.21 89.03 15.87 35.09 19.42 85.92 12.01 43.06 24.8 10.46

2005-06 5.51 64.32 0.00 0 27.9 82.23 20.41 45.12 18.47 81.72 15.58 55.84 22.39 14.9

Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official Directory, Prowess Database (CMIE) and Annual Reports of

Companies.

Note:* = g for Ke2 has been Computed as Compound Annualized Growth rate in Earnings per Share on Five-Year Basis (1979-80 to 1983-84) and so on. Hence Ke2 has

been computed from 1984-85 onwards.


92

Figure 4.1

The cost of equity capital (Ke1) ranges between 10.16 percent in the year 1992-93

to 49.78 percent in the year 1988-89. The cost of equity capital (Ke1) has been observed

as 33.93 percent in the year 1979-80. It declines and finally reaches 27.90 percent in the

year 2005-06. There has been decline in 21 out of 27 years as compared to first year of

the study period. The cost of equity capital (Ke1) has exhibited declining trend over the

study period. Overall it exhibits decline of 18 percent as compared to first year of the

study period.







study period. The stock markets in developing countries grew rapidly in the 1980s and

early 1990s. International financial institutions were actively encouraging stock market

growth also. Several domestic and international factors also contributed to this rapid


93

growth of the stock markets. India has also followed the same path. Due to large increase

in share prices and price-earnings ratios the relative cost of equity capital (Ke1 and Ke2)

fell significantly.

The overall cost of capital (Ko1) ranges between 8.83 percent in the year 1993-94

to 31.32 percent the year 1986-87. The overall cost of capital (Ko1) has been observed as

22.60 percent in the year 1979-80. It declines and finally reaches 18.47 percent in the


the study period. The overall cost of capital (Ko1) has exhibited declining trend over the


study period.


to 31.49 percent in the year 1987-88. The overall cost of capital (Ko2) has been observed

as 27.90 percent in the year 1984-85. It declines and finally reaches 15.58 in the year

2005-06. There has been decline in 20 out of 22 years as compared to first year of the

study period. A declining trend has been observed in overall cost of capital (Ko2) during

the study period. Overall it exhibits decline of 45 percent as compared to first year of the

study period.

S1 ranges between 0.32 percent in the year 1991-92 to 39.37 percent in the year

1995-96. S2 ranges between 0.23 percent in the year 1996-97 to 34.01 percent in the year

1986-87. The cost of debt (Kdat) has been observed as less than cost of equity capital

(Ke1) in 25 out of 27 years of study period. The cost of equity capital (Ke2) has been

observed as higher than cost of debt (Kdat) in 24 out of 27 years of the study period. The

overall trend indicates that debt is cheaper source of finance as compared to equity for

selected companies in power industry. This finding is in conformity with theoretical

view.

Table 4.5 shows compound growth rates, averages, standard deviation and

coefficient of variation for cost of debt (Kdat), cost of preference share capital (Kp), cost

of equity capital (Ke1 and Ke2) and overall cost of capital (Ko1 and Ko2) in case of power

industry over the study period of 27 years i.e. 1979-80 to 2005-06. The cost of debt


94


overall cost of capital (Ko1 and Ko2) have negative compound growth rates of 2.27

percent, 4.28 percent, 0.694 percent, 3.02 percent, 1.04 percent and 2.37 percent

respectively during this period. This is a good sign as it indicates decline in

Table 4.5

Descriptive Statistics of Variables of Power Industry from 1979-80 to 2005-06

Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official Directory,

Prowess Database (CMIE) and Annual Reports of Companies.



respective costs over a period of time. These values have been observed as significant at 1

percent, 5 percent and 10 percent levels of significance respectively in case of cost of debt

(Kdat), cost of equity capital (Ke2) and overall cost of capital (Ko2) during this period. On an

average, cost of debt (Kdat), cost of preference share capital (Kp), cost of equity capital (Ke1

and Ke2) and overall cost of capital (Ko1 and Ko2) have been observed as 10.50 percent

12.46 percent, 22.47 percent, 20.61 percent 17.25 percent and 15.57 percent respectively

over the entire study period of 27 years. The respective costs have been observed as higher

than industry average in 3, 2, 4, 4, 4 and 4 companies respectively out of total selected 5

companies for this sector during the selected study period. The standard deviation appears

Sr.

No. Variable/

Indicator Cost of

Debt

(Kdat) (%)

Cost of

Preference

Share

Capital

(Kp) (%)

Cost of

Equity

Capital

(Ke1) (%)

Cost of

Equity

Capital

(Ke2) (%)

Overall

Cost of

Capital

(Ko1) (%)

Overall

Cost of

Capital

(Ko2) (%)

1 Compound

Growth Rate -2.27

(-4.24)***

-4.28

(-0.64)

-0.694

(-0.64)

-3.02

(-1.92)*

-1.04

(-1.20)

-2.37

(-2.00)**

2 Average 10.50 12.46 22.47 20.61 17.25 15.57

3 Standard

Deviation 2.78 3.14 10.59 11.67 6.67 6.54

4 Coefficient of

Variation 26.48 25.20 47.13 56.62 38.67 42.00


95

as small for respective costs which indicates that many data points in data series are close

to mean. The coefficient of variation indicates variation of 26.48 percent, 25.20 percent,

47.13 percent, 56.62 percent, 38.67 percent and 42 percent respectively from mean for

these respective costs.

4.2.2 Metal Industry

Table 4.6 and Figure 4.2 show the cost of each specific source of long-term

finance and overall cost of capital (Ko1 and Ko2) in case of metal industry over the study

period of 27 years i.e. 1979-80 to 2005-06. India is the fifth largest producer of metal in

the world. Indian metal industry has grown by leaps and bounds especially during post-

liberalization era. The scope for metal industry is huge and industry estimates indicate

that industry will grow reasonably in the coming years with huge demand for metal in the

construction of new airports and metro rail projects. Indian metal companies draw

competitive advantage from the domestic availability of high quality ore. The major

Indian metal companies, specifically selected companies for our study given their low

operating costs have benefit of high steel prices. The selected companies in metal

industry have gained a lot from high steel prices as reflected in their improved

profitability during post-liberalization era. The improved cash flows have enabled

companies to undertake debt reduction initiatives, invest in improving cost structures and

go for low cost capacity expansion. These changes have reduced cost of capital of Indian

metal industry over a period of time.


percent in the 1987-88. The cost of debt (Kdat) has been observed as 18.11 percent in the

year 1979-80. It declines and finally reaches 10.88 percent in the year 2005-06. There has

been decline in 17 out of 27 years as compared to first year of the study period. A

declining trend has been observed in cost of debt (Kdat) during the study period. Overall it

shows decline of 40 percent as compared to first year of the study period.



has been observed as 9.02 percent in the year 1979-80. It increases and finally reaches

11.95 percent in the year 2005-06. The cost of preference share capital (Kp) has been


96

Table 4.6

Trend Analysis of Cost of Capital of Metal Industry from 1979-80 to 2005-06

Year Kdat

(%) Index

Kp

(%) Index

Ke1

(%) Index

Ke2*

(%) Index

Ko1

(%) Index

Ko2

(%) Index

S1

(%)

S2

(%)

1979-80 18.11 100 9.02 100 22.22 100 20.02 100 4.11

1980-81 20.31 112 10.21 113 21.89 99 22.35 112 1.58

1981-82 17.01 94 7.92 88 16.36 74 15.94 80 -0.65

1982-83 18.06 99 17.16 190 13.51 61 15.16 76 -4.55

1983-84 18.43 102 8.70 96 13.88 62 15.64 78 -4.55

1984-85 19.49 108 15.49 172 17.72 80 17.57 100 16.99 85 26.67 100 -1.77 -1.92

1985-86 20.36 112 10.00 111 19.95 90 14.09 80 19.71 98 23.05 86 -0.41 -6.27

1986-87 22.45 124 9.47 105 30.5 138 27.06 154 25.41 127 25.9 97 8.05 4.61

1987-88 26.35 146 0.00 0 32.5 146 24.52 140 27.7 138 23.09 87 6.15 -1.83

1988-89 17.34 96 0.00 0 28.57 129 38.41 219 22.08 110 24.8 93 11.23 21.07

1989-90 17.71 98 0.00 0 28.19 127 54.75 312 21.69 108 27.07 102 10.48 37.04

1990-91 17.08 94 0.00 0 19.21 86 30.73 175 17 85 20.11 75 2.13 13.65

1991-92 17.68 98 0.00 0 27.44 123 20.06 114 23.9 119 16.69 63 9.76 2.38

1992-93 19.89 110 0.00 0 16.37 74 12.6 72 16.89 84 15.18 57 -3.52 -7.29

1993-94 14.65 81 0.00 0 17.31 77 18.07 103 15.99 80 14.68 55 2.66 3.42

Contd…


97

Year Kdat

(%) Index

Kp

(%) Index

Ke1

(%) Index

Ke2*

(%) Index

Ko1

(%) Index

Ko2

(%) Index

S1

(%)

S2

(%)

1994-95 17.23 95 4.20 47 19.34 87 15.62 89 18.67 93 14.87 56 2.11 -1.61

1995-96 13.33 74 11.28 125 19.31 87 28.41 162 17.23 86 20.92 78 5.98 15.08

1996-97 14.95 83 19.96 221 29.01 131 49.6 282 20.13 101 27.71 104 14.06 34.65

1997-98 14.33 79 0.00 0 22.44 101 41.66 237 16.33 82 23.31 87 8.11 27.33

1998-99 19.91 110 0.00 0 24.63 111 36.58 208 18.47 92 28.03 105 4.72 16.67

1999-00 14.17 78 9.58 106 28.73 129 38.38 218 18.9 94 23.41 88 14.56 24.21

2000-01 15.74 87 8.62 96 22.17 99 35.31 201 17.69 88 21.42 80 6.43 19.57

2001-02 18.33 101 5.80 64 22.24 100 44.61 254 16.46 82 34.22 128 3.91 26.28

2002-03 13.12 72 6.45 72 24.87 112 35.93 205 17.85 89 33.76 126 11.75 22.81

2003-04 13.73 76 9.77 108 22.68 102 40.41 230 15.95 80 23.93 90 8.95 26.68

2004-05 13.6 75 17.53 194 34.6 156 38.49 219 21.46 107 21.79 82 21 24.89

2005-06 10.88 60 11.95 132 20.57 93 25.36 144 17.41 87 16.9 63 9.69 14.48


Companies.




98

Figure 4.2

observed as nil in 9 out of 27 years of the study period. There has been increase in 10 out

of 27 years as compared to first year of the study period. An increasing trend has been

observed in cost of preference share capital (Kp) during this period. Overall it exhibits an

increase of 32 percent as compared to first year of the study period.






study period. Overall it shows decline of 7 percent as compared to first year of the study

period.


to 54.75 percent in 1996-97. The cost of equity capital (Ke2) has been observed as 17.57

percent in the year 1984-85. It increases and finally reaches 25.36 percent in the year

2005-06. There has been increase in 18 out of 22 years as compared to first year of the

study period. An increasing trend has been observed in cost of equity capital (Ke2) over

the study period. Overall an increase of 44 percent has been observed as compared to

first year of the study period.


99






study period. Overall it exhibits decline of 13 percent as compared to the first year of the

study period.







period.

S1 ranges between 2.11 percent in the year 1994-95 to 21 percent in the year






selected companies in metal industry. This finding is based upon theory.


coefficient of variation of cost of each specific source of long-term finance and overall

cost of capital (Ko1 and Ko2) in case of metal industry over the study period of 27 years

i.e. 1979-80 to 2005-06. The cost of debt (Kdat), cost of preference share capital (Kp) and

overall cost of capital (Ko1) have negative compound growth rates of 1.61 percent, 0.417

percent and 0.365 percent respectively during the study period. The negative growth rates

indicate decline in these respective costs over a period time. The compound growth rate

for cost of debt (Kdat) has been observed as significant at 1 percent level of significance


100

Table 4.7

Descriptive Statistics of Variables of Metal Industry from 1979-80 to 2005-06




2. Significance at 5% and 1% is indicated by two and three asterisks respectively.

during this period. The cost of equity capital (Ke1 and Ke2) and overall cost of capital

(Ko2) have positive compound growth rates of 1.11 percent, 2.99 percent and 0.265

percent respectively over the study period. It is not a good sign. It indicates that

respective costs have increased over a period of time. The compound growth rates for

cost of equity capital (Ke1 and Ke2) have been observed as significant at 5 percent level of

significance during this period. On an average, the cost of debt (Kdat), cost of preference

share capital (Kp), cost of equity capital (Ke1 and Ke2) and overall cost of capital (Ko1 and

Ko2) have been observed as 18.09 percent, 12.77 percent, 22.62 percent, 26.27 percent,

19.62 percent and 21.85 percent respectively during this period.

The respective costs have been observed as lower than industry average in 5, 6, 4, 3, 4

and 3 companies respectively out of 8 selected companies for this sector over the study

period. The standard deviation has been observed as small for respective costs which

Sr.

No.

Variable/

Indicator

Cost of

Debt

(Kdat) (%)

Cost of

Preference

Share

Capital

(Kp) (%)

Cost of

Equity

Capital

(Ke1)(%)

Cost of

Equity

Capital

(Ke2) (%)

Overall

Cost of

Capital

(Ko1)(%)

Overall

Cost of

Capital

(Ko2)(%)

1 Compound

Growth

Rate

-1.61

(-4.57)***

-0.417

(-0.42)

1.11

(1.88)**

2.99

(2.27)**

-0.365

(0.93)

0.265

(0.32)

2 Average 18.09 12.77 22.62 26.27 19.62 21.85

3 Standard

Deviation

3.30 1.17 5.59 11.87 3.20 5.44

4 Coefficient

of Variation 18.24 9.16 24.71 45.18 16.31 24.90


101

indicates that many data points in data series are close to mean. The coefficient of

variation for cost of each specific source of long-term finance and overall cost of capital

(Ko1 and Ko2) has been observed as 18.24 percent, 9.16 percent, 24.71 percent, 45.18

percent 16.31 percent and 24.90 percent respectively over the entire study period.

4.2.3 Cement Industry

Table 4.8 and Figure 4.3 show the cost of each specific source of long-term

finance and overall cost of capital (Ko1 and Ko2) in case of cement industry over the study

period of 27 years i.e. 1979-80 to 2005-06. India being the largest cement producer in the

world after China has got a huge cement industry. The cement industry is growing at

enviable pace as the Government of India gives boost to various investment projects,

housing facilities and road networks. The cement industry is experiencing a boom on

account of the overall growth of the Indian economy primarily because of increased

industrial activity, flourishing real estate business, growing construction activity, and

expanding investment in the infrastructure sector. The performance of the industry, under

different policy regimes, truly establishes that decontrol of the industry and liberalization

of the economy has led to remarkable improvement in the indicators such as installed

capacity, capacity utilization, per capita consumption and exports. These developments

have caused a great change in financing patterns, cost of each specific source of long-

term finance and overall cost of capital (Ko1 and Ko2) over the selected study period.



the year 1979-80. It finally reaches 5.15 percent in the year 2005-06. There has been

increase in 24 out of 27 years as compared to first year of the study period. An increasing

trend has been observed in cost of debt (Kdat) over the study period. Overall it shows

decline of 43 percent as compared to first year of the study period.



has been observed as 31.30 percent in the year 1979-80. It declines and reaches to 2.01

percent in the year 2000-01. After that it has been observed as nil up to year 2005-06.


102

Table 4.8

Trend Analysis of Cost of Capital of Cement Industry from 1979-80 to 2005-06

Year Kdat

(%) Index

Kp

(%) Index

Ke1

(%) Index

Ke2*

(%) Index

Ko1

(%) Index

Ko2

(%) Index

S1

(%)

S2

(%)

1979-80 9.07 100 31.30 100 21.48 100 11.85 100 12.41

1980-81 12.01 132 9.64 31 16.62 77 12.86 109 4.61

1981-82 15.6 172 35.43 113 28.95 135 23.06 195 13.35

1982-83 9.92 109 18.71 60 25.25 118 17.88 151 15.33

1983-84 9.22 102 8.44 27 27.03 126 16.41 138 17.81

1984-85 9.63 106 11.08 35 37.3 174 62.06 100 33.62 284 40.99 100 27.67 52.43

1985-86 9.36 103 11.31 36 29.38 137 57.81 93 18.95 160 31.59 77 20.02 48.45

1986-87 14.79 163 13.71 44 20.79 97 32.96 53 15.85 134 19.79 48 6 18.17

1987-88 12.99 143 15.86 51 26.58 124 32.49 52 15.57 131 18.19 44 13.59 19.5

1988-89 10.7 118 15.00 48 17.67 82 15 24 13.13 111 12.23 30 6.97 4.3

1989-90 11.94 132 10.00 32 20.48 95 16.71 26 14.02 118 13.55 33 8.54 4.77

1990-91 11.55 127 8.64 28 25.63 119 29.84 48 15.45 130 17.81 43 14.08 18.29

1991-92 12.34 13 33.78 108 22.77 106 30.28 49 20.68 175 24.05 59 10.43 17.94

1992-93 12.78 141 16.57 53 31.55 147 39.13 63 23.1 195 23.99 58 18.77 26.35

1993-94 12.95 143 14.91 48 33.97 158 52.12 84 23.34 197 29.67 72 21.02 39.17

Contd…


103

Year Kdat

(%) Index

Kp

(%) Index

Ke1

(%) Index

Ke2*

(%) Index

Ko1

(%) Index

Ko2

(%) Index

S1

(%)

S2

(%)

1994-95 14.8 163 10.29 33 28.28 132 40.35 65 21.58 182 27.59 67 13.48 25.55

1995-96 13.54 149 11.43 37 14.66 68 33.99 55 14.28 120 24.51 60 1.12 20.45

1996-97 14.16 156 0.00 0 23.15 108 32.37 52 18.2 154 22.34 54 8.99 18.21

1997-98 13.49 149 0.00 0 20.05 93 27.77 45 16.3 138 19.19 47 6.56 14.28

1998-99 13.71 151 0.00 0 21.42 99 28.61 46 16.73 141 19.82 48 7.71 14.9

1999-00 12.56 139 8.28 26 26.01 121 26.79 43 16.98 143 17.34 42 13.45 14.23

2000-01 9.94 109 14.08 45 26.25 122 26.17 42 15.14 128 16.04 39 16.31 16.23

2001-02 11.48 126 0.00 0 18.98 88 28.24 46 13.87 117 16.69 41 7.5 16.76

2002-03 12.8 141 0.00 0 17 79 23.69 38 14.1 119 16.99 41 4.2 10.89

2003-04 10.86 120 0.00 0 25.69 120 21.55 35 16.58 140 14.69 36 14.83 10.69

2004-05 5.59 62 0.00 0 19.05 89 20.57 33 10.08 85 10.66 26 13.46 14.98

2005-06 5.15 57 0.00 0 32.15 150 12.12 20 16.71 141 7.75 19 27 6.97


Companies.




104

Figure 4.3

There has been decline in 16 out of 27 years as compared to first year of the study

period. A declining trend has been observed in cost of preference share capital (Kp)

during the study period. Overall it exhibits decline of 55 percent as compared to first

year of the study period.

The cost of equity capital (Ke1) ranges between 14.66 percent in the year 1995-

96 to 37.30 percent in the year 1984-85. The cost of equity capital (Ke1) has been

observed as 21.98 percent in the year 1979-80. It increases and finally reaches 32.15

percent in the year 2005-06. There has been increase in 16 out of 27 years as

compared to first year of the study period. An increasing trend has been observed in

cost of equity capital (Ke1) during this period. Overall it shows an increase of 50




observed as 62.06 percent in the year 1984-85. It declines and finally reaches 12.12

percent in the year 2005-06. There has been decline in 21 out of 22 years as compared


105

to first year of the study period. The cost of equity capital (Ke2) has exhibited

declining trend over the study period. Overall it shows decline of 80 percent as

compared to first year of the study period.

The overall cost of capital (Ko1) ranges between 10.08 percent in the year

2004-05 to 33.62 percent in the year 1984-85. The overall cost of capital (Ko1) has

been observed as 11.85 percent in the year 1979-80. It increases and finally reaches

16.71 percent in the year 2005-06. There has been increase in 26 out of 27 years as

compared to first year of the study period. An increasing trend has been observed in

overall cost of capital (Ko1) over the study period. Overall it exhibits an increase of

41 percent as compared to first year of the study period.

The overall cost of capital (Ko2) ranges between 7.75 percent in the year 2005-

06 to 40.99 percent in the year 1984-85. The overall cost of capital (Ko2) has been

observed as 40.99 percent in the year 1984-85. It declines and finally reaches 7.75

percent in the year 2005-06. There has been decline in 21 out of 22 years as compared

to first year of the study period. The overall cost of capital (Ko2) has exhibited

declining trend over the study period. Overall it exhibits decline of 81 percent as


S1 and S2 represent spread i.e. difference between cost of equity capital (Ke1

and Ke2) and cost of debt (Kdat) over a period of time. S1 ranges between 4.2 percent

in the year 2003-04 to 27.67 percent in the year 1984-85. S2 ranges between 4.3

percent in the year 1998-99 to 52.43 percent in the year 1984-85. The cost of debt

(Kdat) has been observed as less than cost of equity capital (Ke1 and Ke2) during the

selected study period. The overall trend indicates that debt is cheaper source of

finance as compared to equity for selected companies in cement industry. This finding

is based upon theoretical proposition.

Table 4.9 shows the compound growth rates, averages, standard deviation and

coefficient of variation of cost of each specific source of long-term finance and

overall cost of capital (Ko1 and Ko2) in case of cement industry over the study period


106

Table 4.9

Descriptive Statistics of Variables of Cement Industry from 1979-80 to 2005-06

Sr.

No. Variable/

Indicator Cost of

Debt

(Kdat) (%)

Cost of

Preference

Share

Capital

(Kp) (%)

Cost of

Equity

Capital

(Ke1) (%)

Cost of

Equity

Capital

(Ke2) (%)

Overall

Cost of

Capital

(Ko1) %)

Overall

Cost of

Capital

(Ko2) (%)

1 Compound

Growth Rate -0.727

(-1.13)

-7.87

(-2.45)**

-0.639

(-0.87)

-3.18

(-2.73)***

-0.633

(-1.04)

-3.30

(-3.18)***

2 Average 11.60 10.66 23.14 28.64 16.69 19.43

3 Standard

Deviation 2.54 6.42 9.75 12.78 4.72 7.56

4 Coefficient of

Variation 21.90 60.23 42.13 44.62 28.28 38.91




2. Significance at 5% and 1% is indicated by two and three asterisks respectively.

of 27 years i.e.1979-80 to 2005-06. The compound growth rates for cost of debt


overall cost of capital (Ko1 and Ko2) have been observed negative to the extent of

0.727 percent, 7.87 percent, 0.639 percent, 3.18 percent, 0.63 percent and 3.30 percent

respectively over the study period. The negative growth rates indicate decline in cost of

each specific source of long-term finance and overall cost of capital (Ko1 and Ko2) over

a period of time. The compound growth rate for cost of preference share capital (Kp)

has been observed as significant at 5 percent level of significance. The cost of equity

capital (Ke1) and overall cost of capital (Ko2) have been observed as significant at 1

percent level of significance during this period. On an average, cost of debt (Kdat), cost

of preference share capital (Kp), cost of equity capital (Ke1 and Ke2) and overall cost of

capital (Ko1 and Ko2) have been observed as 11.60 percent 10.66 percent, 23.14 percent,

28.64 percent 16.69 percent and 19.43 percent respectively over the study period of 27

years. The respective costs have been observed as lower than industry average in 4, 5,


107

3, 4, 4 and 4 companies respectively out of 7 sampled companies for this sector over

the study period. The standard deviation has been observed as small for respective costs

which indicates many data points in data series under observation are close to mean.

The coefficient of variation in data series indicates dispersion of data points from the

mean value. The coefficient of variation has been observed as 21.90 percent, 60.23

percent, 42.13 percent, 44.62 percent 28.28 percent and 38.91 percent respectively for

these respective costs over the study period. The coefficient of variation appears as

large for cost of preference share capital (Kp) that indicates large dispersion of values in

this data series from the mean value.

4.2.4 Textiles Industry

Table 4.10 and Figure 4.4 represent trends in cost of each specific source of

long-term finance and overall cost of capital (Ko1 and Ko2) in case of textiles industry

over the study period of 27 years i.e. 1979-80 to 2005-06. The textile industry is one of

the leading segments of the Indian economy and the largest source of foreign exchange

earnings for India. This industry accounts for 4 percent of the Gross Domestic Product

(GDP), 20 percent of industrial output, and slightly more than 30 percent of export

earnings. The textile industry provides employment opportunities to 38 million people

and is largest employer in India. On January 1, 2005, developed countries removed

import quotas on textile products previously sanctioned by the 1974 Multifiber

Arrangement (MFA). This change provides a major opportunity for India to expand

production and exports of textiles and apparel to developed country markets. These

developments have influenced the cost of each specific source of long-term finance and

overall cost of capital (Ko1 and Ko2) over the study period of 27 years.


percent in the year 1995-96. The cost of debt (Kdat) has been observed as 11.45 percent

in the year 1979-80. Then it shows declining trend till the year 2005-06 and finally

reaches 7.20 percent. There has been increase in 23 out of 27 years as compared to first

year of the study period. An increasing trend has been observed in cost of debt (Kdat)

over the study period. Overall it exhibits decline of 37 percent as compared to first year

of the study period.


108

Table 4.10

Trend Analysis of Cost of Capital of Textiles Industry from 1979-80 to 2005-06

Year Kdat

(%) Index

Kp

(%) Index

Ke1

(%) Index

Ke2*

(%) Index

Ko1

(%) Index

Ko2

(%) Index

S1

(%)

S2

(%)

1979-80 11.45 100 7.56 100 20.06 100 16.83 100 8.61

1980-81 13.03 114 8.01 106 15.68 78 13.72 82 2.65

1981-82 18.61 163 8.00 106 16.32 81 15.92 95 -2.29

1982-83 12.53 109 11.46 152 17.72 88 16.76 100 5.19

1983-84 13.03 114 10.36 137 15.58 78 14.35 85 2.55

1984-85 13.57 119 10.99 145 19.49 97 31.34 100 17.04 101 19.79 100 5.92 17.77

1985-86 14.16 124 11.60 153 15.19 76 21.91 70 22.69 135 16.96 86 1.03 7.75

1986-87 14.36 125 13.03 172 17.79 89 28.07 90 16.47 98 19.66 99 3.43 13.71

1987-88 13.89 121 15.04 199 14.13 70 21.75 69 14.69 87 17.82 90 0.24 7.86

1988-89 14.02 122 12.19 161 18.22 91 33.33 106 15.91 95 20.87 105 4.2 19.31

1989-90 13.71 120 19.87 263 22.49 112 24.61 79 17.52 104 47.23 239 8.78 10.9

1990-91 12.64 110 12.00 159 20.63 103 44.97 144 18.8 112 26.03 132 7.99 32.33

1991-92 13.66 119 16.35 216 17.52 87 23.11 74 50.01 297 16.88 85 3.86 9.45

1992-93 15.92 139 13.76 182 15.56 78 21.25 68 21.79 129 18.19 92 -0.36 5.33

1993-94 13.93 122 14.81 196 17.88 89 24.18 77 19.44 116 18.56 94 3.95 10.25

Contd…


109

Year Kdat

(%) Index

Kp

(%) Index

Ke1

(%) Index

Ke2*

(%) Index

Ko1

(%) Index

Ko2

(%) Index

S1

(%)

S2

(%)

1994-95 13.05 114 11.74 155 17.66 88 25.91 83 15.64 93 19.52 99 4.61 12.86

1995-96 19.21 168 9.47 125 17.37 87 25.86 83 21.98 131 23.39 118 -1.84 6.65

1996-97 15.81 138 13.22 175 10.76 54 21.35 68 16.64 99 19.79 100 -5.05 5.54

1997-98 15.02 131 8.74 116 16.64 83 20.58 66 31.55 188 17.98 91 1.62 5.56

1998-99 15.55 136 11.46 152 13.22 66 16.46 53 16.19 96 15.83 80 -2.33 0.91

1999-00 15.89 139 9.08 120 19.75 98 54.6 174 17.97 107 56.35 285 3.86 38.71

2000-01 14.7 128 10.58 140 18.44 92 16.78 54 16.91 100 15.79 80 3.74 2.08

2001-02 13.99 122 12.88 170 16.86 84 41.27 132 16.49 98 44.34 224 2.87 27.28

2002-03 11.57 101 9.63 127 20.78 104 30.86 98 15.51 92 19.02 96 9.21 19.29

2003-04 9.78 85 13.97 185 19.94 99 19.25 61 17.85 106 15.79 80 10.16 9.47

2004-05 8.99 79 6.83 90 16.9 84 17 54 14.26 85 13.78 70 7.91 8.01

2005-06 7.2 63 6.77 90 16.81 84 16.25 52 12.41 74 11.89 60 9.61 9.05


Companies.

Notes:* = g for Ke2 has been Computed as Compound Annualized Growth rate in Earnings per Share on Five-Year Basis (1979-80 to 1983-84) and so on. Hence Ke2 has



110

Figure 4.4



has been observed as 7.56 percent in the year 1979-80. Then it declines and finally

reaches 6.77 percent in the year 2005-06. There has been decline in 24 out of 27 years

as compared to first year of the study period. The cost of preference share capital (Kp)

has exhibited declining trend over the study period. Overall it shows decline of 10



97to 22.49 percent in the year 1989-90. The cost of equity capital (Ke1) has been

observed as 20.06 percent in the year 1979-80. Then it exhibits declining trend till the

year 2005-06 and finally reaches 16.81 percent. There has been decline in 23 out of 27

years as compared to first year of the study period. The cost of equity capital (Ke1) has

exhibited declining trend over the study period. Overall it shows decline of 16 percent as




observed as 31.34 percent in the year 1984-85. It exhibits declining trend till the year


111

2005-06 and finally reaches 16.25 percent. There has been decline in 17 out of 22 years

as compared with first year of the study period. The cost of equity capital (Ke2) has

exhibited declining trend over the study period. Overall it shows decline of 48 percent

as compared to first year of the study period.


to 50.01 percent in the year 1991-92. The overall cost of (Ko1) has been observed as

16.83 percent in the year 1979-80. Then it declines till the year 2005-06 and finally

reaches 12.41 percent. There has been decline in 14 out of 27 years as compared to first

year of the study period. The overall cost of capital (Ko1) has exhibited declining trend

over the study period. Overall it shows decline of 26 percent as compared to first year of

the study period.



as 19.79 percent in the year 1984-85. Then it shows declining trend till the year 2005-06

and finally reaches 11.89 percent. There has been decline in 15 out of 22 years as

compared to first year of the study period. The overall cost of capital (Ko2) has exhibited

declining trend over the study period. Overall it shows decline of 40 percent as compared

to first year of the study period. Secondary market activities have a strong influence on

the performance of primary market. One of the most important determinants of the

financing decision of a firm is the cost of equity capital (Ke). The main criterion affecting

the financing decision of a firm is generally the minimization of the weighted average

cost of capital. High stock prices in the secondary market allow corporate to charge high

premium in the primary market, thereby reducing the cost of equity capital (Ke). Upward

movements of stock prices influence firms decisions to issue new capital as the pricing of

new issues depends on the level and trend of stock prices at the time of issue. Issuing

equities at a high premium reduces the cost of capital for a firm and makes it an ideal

financing choice.




112



observed as higher than cost of debt (Kdat) over the entire study period covering 27 years.

The overall trend indicates that debt is cheaper source of finance as compared to equity

for selected companies in textile industry. This finding is based upon theory.

Table 4.11 represents compound growth rates, averages, standard deviation and


cost of capital (Ko1 and Ko2) in case of textile industry over the study period of 27 years

Table 4.11

Descriptive Statistics of Variables of Textiles Industry from 1979-80 to 2005-06




2. Significance at 10% and 1% is indicated by one and three asterisks respectively.

i.e. 1979-80 to 2005-06. The cost of debt (Kdat), cost of preference share capital (Kp), cost

of equity capital (Ke2) and overall cost of capital (Ko1 and Ko2) have negative compound

growth rates of 0.84 percent, 7.82 percent, 2.66 percent, 0.011 percent and 0.72 percent

respectively. This is a good sign as it indicates that respective costs have reduced over a

period of time. The compound growth rates for cost of debt (Kdat) and cost of preference

Sr.

No. Variable/

Indicator Cost of

Debt

(Kdat)

(%)

Cost of

Preference

Share Capital

(Kp) (%)

Cost of

Equity

Capital

(Ke1) (%)

Cost of

Equity

Capital

(Ke2) (%)

Overall

Cost of

Capital

(Ko1) (%)

Overall

Cost of

Capital

(Ko2) (%)

1 Compound

Growth Rate -0.84

(-1.73)*

-7.82

(-5.85)***

0.027

(0.058)

-2.66

(-1.39)

-0.011

(-.016)

-0.72

(-0.54)

2 Average 14.24 11.13 19.39 19.49 17.64 17.82

3 Standard

Deviation 2.55 1.85 2.50 10.20 7.26 11.46

4 Coefficient

of Variation 17.91 16.62 12.89 52.33 41.16 64.31


113

share capital (Kp) have been observed as significant at 10 percent and 1 percent levels of

significance respectively during this period. The cost of equity capital (Ke1) has positive

compound growth rate of 0.027 percent during this period. It indicates that respective

cost has increases over a period of time. On an average, cost of debt (Kdat), cost of

preference share capital (Kp), cost of equity capital (Ke1 and Ke2) and overall cost of

capital of (Ko1 and Ko2) have been observed as 14.24 percent, 11.13 percent, 19.39

percent, 19.49 percent 17.64 percent and 17.82 percent respectively over the study

period. The respective costs have been observed as lower than industry average in 18, 18,

24, 16, 22 and 19 companies respectively out of total 29 companies selected for this

sector over the study period of 27 years. The standard deviation has been observed as

small for these respective costs which indicates that many data points in data series are

close to mean. The coefficient of variation has been observed as 17.91 percent, 16.62

percent, 12.89 percent, 52.33 percent, 41.16 percent and 64.31 percent respectively for

these respective costs. The coefficient of variation has been observed as large in case of

cost of equity capital (Ke2) and overall cost of capital (Ko2). It is due to large dispersion of

data points in observed data series from mean value.

4.2.5 Paper Industry

Table 4.12 and Figure 4.5 present trends in cost of each specific source of long-

term finance and overall cost of capital (Ko1 and Ko2) in case of paper industry over the

study period of 27 years i.e. 1979-80 to 2005-06. Paper industry in India provides

employment to nearly 1.5 million people and contributes Rs. 25 billion to the

Government’s revenue. The Indian Government regards the paper industry as one of the

35 high priority industries of the country. Growth of paper industry in India has been

constrained due to high cost of production caused by inadequate availability and high

cost of raw materials, power cost and concentration of mills in one particular area. The

Government of India has taken several policy measures to remove the bottlenecks of

availability of raw materials and infrastructure development. The following changes have

been observed in cost of each specific source of long-term finance and overall cost of

capital (Ko1 and Ko2) over a period of time.


114



the year 1979-80. It declines and finally reaches 8.38 percent in the year 2005-06. There

has been decline in 18 out of 27 years as compared to first year of the study period. A

declining trend has been observed in cost of debt (Kdat) over the study period. Overall it

shows decline of 40 percent as compared to first year of the study period. Along with the

decline in share prices after 1994-95, major changes were introduced in the monetary

policy of the RBI. The RBI, in a bid to inject more liquidity into the economy made

significant reductions in CRR and SLR requirements. The bank rate was also reduced to

give signals to the commercial banks and lending institutions to reduce their lending

rates. This was done to pull the economy out of the recession in industrial production.

These measures resulted in a sustained decline in the lending rates of the banks. The

reduction of the lending rates by the commercial banks and other lending institutions

induced the industry to finance more of their investments through borrowings. This has

impact of reducing the cost of debt capital (Kdat) over the time period.



has been observed as 10.75 percent in the year 1979-80. It declines and finally reaches

23.25 percent in the year 2005-06. There has been decline in 12 out of 27 years as

compared to first year of the study period. Overall it shows increase of 116 percent as








period.


115

Table 4.12

Trend Analysis of Cost of Capital of Paper Industry from 1979-80 to 2005-06

Year Kdat

(%) Index

Kp

(%) Index

Ke1

(%) Index

Ke2*

(%) Index

Ko1

(%) Index

Ko2

(%) Index

S1

(%)

S2

(%)

1979-80 14.18 100 10.75 19.52 100 17.97 100 5.34

1980-81 11.53 81 10.12 94 16.17 83 14.26 79 4.64

1981-82 13.04 92 8.80 82 13.25 68 17.88 99 0.21

1982-83 15.53 110 14.19 132 15.8 81 14.41 80 0.27

1983-84 14.68 103 9.13 85 14.04 72 27.32 152 -0.64

1984-85 13.49 95 10.01 93 17.57 90 24.76 100 19.18 107 17.75 100 4.08 11.27

1985-86 14.95 105 11.14 104 19.41 99 23.38 94 17.21 96 19 107 4.46 8.43

1986-87 15.02 106 12.26 114 15.26 78 29.64 120 14.81 82 23.1 130 0.24 14.62

1987-88 13.97 99 12.45 116 19.68 101 24.95 101 16.04 89 18.46 104 5.71 10.98

1988-89 11.82 83 7.64 71 14.77 76 16.53 67 13.51 75 13.96 79 2.95 4.71

1989-90 13.51 95 10.62 99 14.76 76 17.35 70 21.9 122 14.77 83 1.25 3.84

1990-91 12.51 88 10.62 99 22.54 115 14.67 59 17.26 96 12.98 73 10.03 2.16

1991-92 11.83 83 9.32 87 10.52 54 14.03 57 12.09 67 12.71 72 -1.31 2.2

1992-93 17.95 127 10.37 97 12.16 62 19.76 80 15.53 86 17.35 98 -5.79 1.81

Contd…


116

Year Kdat

(%) Index

Kp

(%) Index

Ke1

(%) Index

Ke2*

(%) Index

Ko1

(%) Index

Ko2

(%) Index

S1

(%)

S2

(%)

1993-94 16.64 117 12.87 120 13.46 69 18.56 75 14.19 79 17.09 96 -3.18 1.92

1994-95 11.68 82 15.20 141 18.1 93 11.83 48 14.56 81 12.1 68 6.42 0.15

1995-96 11.99 85 5.03 47 10.81 55 12.57 51 10.98 61 12.35 70 -1.18 0.58

1996-97 14.17 100 18.80 175 19.57 100 26.51 107 16.06 89 19.25 109 5.4 12.34

1997-98 36.15 255 20.00 186 13.89 71 25.16 102 12.63 70 18.06 102 -22.26 -10.99

1998-99 12.42 88 15.39 143 20.88 107 16.76 68 51.87 289 14.89 84 8.46 4.34

1999-00 10.94 77 8.38 78 15.42 79 35.62 144 13.38 74 15.82 89 4.48 24.68

2000-01 9.75 69 9.65 90 23.87 122 32 129 16.47 92 21.73 122 14.12 22.25

2001-02 9.92 70 18.45 172 21.01 108 25.14 102 15.7 87 16.66 94 11.09 15.22

2002-03 9.53 67 18.98 177 23.38 120 22.19 90 15.45 86 14.99 84 13.85 12.66

2003-04 8.55 60 12.05 112 29.68 152 36.71 148 16.23 90 19.66 111 21.13 28.16

2004-05 39.41 278 39.80 370 17.52 90 19.91 80 14.38 80 16.02 90 -21.89 -19.5

2005-06 8.38 59 23.25 216 17.06 87 17.57 71 11.92 66 12.47 70 8.68 9.19


Companies.




117

Figure 4.5



as 24.76 percent in the year 1984-85. It exhibits declining trend and finally reaches 17.57

in the year 2005-06. There has been decline in 13 out of 22 years as compared to first

year of the study period. A declining trend has been observed in cost of equity capital

(Ke2) during the study period. Overall it shows decline of 30 percent as compared to first








study period.

S1 and S2 represent spread i.e. difference between cost of equity capital (Ke1 and

Ke2) and cost of debt (Kdat) over a period of time. S1 ranges between 0.21 percent in the

year 1981-82 to 21.13 percent in the year 2003-04. S2 ranges between 0.58 percent in the

year 1995-96 to 28.16 percent in the year 2003-04. The cost of debt (Kdat) has been

observed as less than cost of equity capital (Ke1) in 20 out of 27 years of study period.

The cost of equity capital (Ke2) has been observed as higher than cost of debt (Kdat) in 20

out of 22 years of the study period. The overall trend indicates that debt is cheaper source


118

of finance as compared to equity for selected companies in paper industry. This finding is

based upon theoretical view.

Table 4.13 exhibits compound growth rates, averages, standard deviation and


cost of capital (Ko1 and Ko2) in case of paper industry over the study period of 27 years

Table 4.13

Descriptive Statistics of Variables of Paper Industry from 1979-80 to 2005-06





i.e. 1979-80 to 2005-06. The cost of debt (Kdat), cost of preference share capital (Kp) and

overall cost of capital (Ko1 and Ko2) have negative compound growth rates of 0.35

percent 4.28 percent, 0.54 percent and 0.37 percent respectively during this period. This

is a good sign as it indicates that respective costs have reduced over a period of time. The

compound growth rate for cost of preference share capital (Kp) has been observed as

significant at 1 percent level of significance during this period. The cost of equity capital

(Ke1 and Ke2) has positive compound growth rates of 1.02 percent and 0.87 percent

respectively during this period. This is not a good sign. It indicates that respective costs

have increased over a period of time. The compound growth rate for cost of equity capital

(Ke1) has been observed as significant at 10 percent level of significance during this

Sr.

No.

Variable/

Indicator

Cost of

Debt

(Kdat) (%)

Cost of

Preference

Share

Capital

(Kp) (%)

Cost of

Equity

Capital

(Ke1)(%)

Cost of

Equity

Capital

(Ke2)(%)

Overall

Cost of

Capital

(Ko1)(%)

Overall

Cost of

Capital

(Ko2) (%)

1 Compound

Growth Rate -0.35

(-0.40)

-4.28

(-3.53)***

1.02

(1.72)*

0.87

(0.80)

-0.54

(-0.72)

-0.37

(-0.58)

2 Average 13.22 12.14 17.28 21.10 15.09 16.78

3 Standard

Deviation 7.10 1.25 4.39 7.06 7.67 3.07

4 Coefficient of

Variation 53.71 10.30 25.41 33.46 50.83 18.30


119

period. On an average, these respective costs have been observed as 13.22 percent, 12.14

percent, 17.28 percent, 21.10 percent, 15.09 percent and 16.78 percent respectively

during this period. The respective costs have been observed as lower than industry

average in 6, 11, 7, 7, 6 and 6 companies respectively out of 13 companies selected for

this sector over the study period of 27 years. The standard deviation has been observed as

small which indicates that many data points in this data series are close to mean. The

coefficient of variation has been observed as 53.71 percent, 10.30 percent, 25.41 percent,

33.46 percent, 50.83 percent and 18.30 percent respectively for these respective costs.

4.2.6 General Engineering Industry

Table 4.14 and Figure 4.6 show trends in cost of each specific source of long-term

finance and overall cost of capital (Ko1 and Ko2) in case of general engineering industry

over the study period of 27 years i.e. 1979-80 to 2005-06. The automobile industry is one

of the leading industries in Indian economy. India has become the target of major global

automobile players after liberalization in Indian economy. The automobile industry is

emerging as one of the leading industries as economic reforms initiated after

liberalization aimed at deregulation and attracting foreign investment have moved this

industry at its higher place in terms of potential of earning foreign exchange through

exports. The automobile industry is now working in terms of the dynamics of an open

market. Many joint ventures have been set up in India with foreign collaboration, both

technical and financial with leading global manufacturers. The Government of India

provides suitable economic and business environment conducive to the success of the

established and prospective foreign partnership ventures in automobile sector. The

financial liberalization has influenced the cost of capital of selected companies of this

sector. The following observations have been made regarding trends in cost of each

specific source of long-term finance and overall cost of capital (Ko1 and Ko2) over the

study period of 27 years.



the year 1979-80. It increases and finally reaches 10.63 percent in the year 2005-06.

There has been increase in 23 out of the 27 years as compared to first year of the study


120

period. An increasing trend has been observed in cost of debt (Kdat) over the study period.

Overall it shows an increase of 2 percent as compared to first year of the study period.



has been observed as 9.38 percent in the year 1979-80. It declines to 1.54 percent in the

year 2000-01. After that the cost of preference share capital (Kp) has been observed as nil

up to year 2005-06. There has been increase in 13 out of 27 years as compared to first

year of the study period. An increasing trend has been observed in cost of preference

share capital (Kp) during this period. Overall it exhibits decline of 84 percent as




as 22.03 percent in the year 1979-80. It increases and finally reaches 28.21 percent in the



study period. Overall an increase of 28 percent has been observed as compared to first







study period. Overall it exhibits an increase of 12 percent as compared to first year of the

study period. The contribution of capital markets peaked during 1993-95. The

contribution of the capital market has declined after 1995 for general engineering

industry. As far as the contribution of equity market is concerned, it has been observed

that after reaching a peak in 1994-95, there has been decline in the contribution of equity

market in almost all the industries specifically selected companies in general engineering

industry.


121

Table 4.14

Trend Analysis of Cost of Capital of General Engineering Industry from 1979-80 to 2005-06

Year Kdat

(%) Index

Kp

(%) Index

Ke1

(%) Index

Ke2*

(%) Index

Ko1

(%) Index

Ko2

(%) Index

S1

(%)

S2

(%)

1979-80 10.44 100 9.38 100 22.03 100 16.17 100 11.59

1980-81 11.47 109.89 12.73 136 20.81 94.48 16.97 105 9.34

1981-82 13.32 127.66 9.79 104 27.12 123.09 22.67 140.25 13.8

1982-83 15.71 150.54 10.43 111 18.42 83.6 15.53 96.07 2.71

1983-84 16.31 156.25 11.15 119 14.06 63.84 15.23 94.21 -2.25

1984-85 16.08 154.07 15.10 161 19.1 86.71 24.26 100 18.25 112.91 20.98 100 3.02 8.18

1985-86 13.18 126.26 12.42 132 18.35 83.3 22.6 93.16 16.07 99.41 19.7 93.88 5.17 9.42

1986-87 16.02 153.51 12.68 135 12.79 58.07 24.38 100.49 15.1 93.4 21.56 102.76 -3.23 8.36

1987-88 14.85 142.32 12.96 138 14.46 65.64 23.49 96.82 14.54 89.98 20.83 99.27 -0.39 8.64

1988-89 14.28 136.85 9.23 98 15.61 70.86 21.72 89.53 14.9 92.2 17.58 83.78 1.33 7.44

1989-90 12 114.95 13.33 142 10.91 49.54 18.08 74.54 12.4 76.68 13.62 64.93 -1.09 6.08

1990-91 11.45 109.71 33.37 356 9.66 43.86 15.92 65.6 11.14 68.91 14.6 69.59 -1.79 4.47

1991-92 12.29 117.72 11.76 125 9.21 41.81 20 82.46 10.63 65.76 17.38 82.83 -3.08 7.71

1992-93 14.72 141.04 11.76 125 10.21 46.36 15.45 63.67 12.15 75.18 16.71 79.66 -4.51 0.73

1993-94 16.8 161.01 0.00 0 9.65 43.81 16.53 68.15 12.12 74.98 10.11 48.18 -7.15 -0.27

Contd…


122

Year Kdat

(%) Index

Kp

(%) Index

Ke1

(%) Index

Ke2*

(%) Index

Ko1

(%) Index

Ko2

(%) Index

S1

(%)

S2

(%)

1994-95 16.48 157.89 0.00 0 13.54 61.46 18.04 74.37 13.71 84.84 15.21 72.5 -2.94 1.56

1995-96 12.61 120.87 0.00 0 14.64 66.43 18.74 77.27 13.86 85.74 17.64 84.1 2.03 6.13

1996-97 16.48 157.93 10.48 112 18.44 83.71 28.36 116.92 16 98.97 23.33 111.19 1.96 11.88

1997-98 11.52 110.37 6.67 71 17.37 78.85 34.89 143.82 14.03 86.81 24.65 117.48 5.85 23.37

1998-99 13.02 124.79 0.00 0 14.06 63.83 29.3 120.78 14.08 87.11 22.31 106.35 1.04 16.28

1999-00 11.98 114.83 8.20 87 13.96 63.37 22.12 91.18 13.62 84.27 19.5 92.94 1.98 10.14

2000-01 12.36 118.43 1.54 16 15.78 71.65 26.11 107.61 14.66 90.68 21.57 102.82 3.42 13.75

2001-02 11.72 112.29 0.00 0 14.57 66.12 28.56 117.73 12.1 74.88 16.3 77.69 2.85 16.84

2002-03 9.83 94.19 0.00 0 13.33 60.51 20.94 86.32 12.63 78.15 14.43 68.78 3.5 11.11

2003-04 8.89 85.16 0.00 0 18.66 84.72 34.84 143.62 15.52 96.01 23.59 112.44 9.77 25.95

2004-05 6.98 66.84 0.00 0 14.38 65.27 17.88 73.72 11.24 69.52 13.57 64.67 7.4 10.9

2005-06 10.63 101.84 0.00 0 28.21 128.05 27.09 111.66 22.02 136.23 26.27 125.23 17.58 16.46

Source: Compiled and Analyzed from the Basic Data Obtained from Bombay Stock Exchange Official Directory, Prowess Database (CMIE) and Annual

Reports of Companies.

Note:* = g for Ke2 has been Computed as Compound Annualized Growth rate in Earnings per Share on Five-Year Basis (1979-80 to 1983-84) and so on. Hence

Ke2 has been computed from 1984-85 onwards.


123

Figure 4.6





the study period. A declining trend has been observed in overall cost of capital (Ko1)

during the study period. Overall it exhibits an increase of 36 percent as compared to first







study period. Overall it shows an increase of 25 percent as compared to first year of the

study period.







124


selected companies in general engineering industry.



cost of capital (Ko1 and Ko2) in case of general engineering industry over the study period

of 27 years i.e. 1979-80 to 2005-06. The cost of debt (Kdat), cost of preference share

capital (Kp), cost of equity capital (Ke1) and overall cost of capital (Ko1) have negative

Table 4.15

Descriptive Statistics of Variables of General Engineering Industry from

1979-80 to 2005-06

Sr.

No. Variable/

Indicator Cost of

Debt

(Kdat) (%)

Cost of

Preference

Share

Capital

(Kp) (%)

Cost of

Equity

Capital

(Ke1) (%)

Cost of

Equity

Capital

(Ke2) (%)

Overall

Cost of

Capital

(Ko1) (%)

Overall

Cost of

Capital

(Ko2) (%)

1 Compound

Growth Rate -1.29

(-2.81)***

-19.67

(-7.67)***

-0.48

(-0.68)

1.20

(1.54)*

-0.70

(-1.60)*

0.38

(0.466)

2 Average 14.48 11.65 15.86 21.06 15.00 19.01

3 Standard

Deviation 2.56 2.98 4.79 5.64 2.88 4.17

4 Coefficient of

Variation 17.68 25.58 30.20 26.78 19.20 21.94





compound growth rates of 1.29 percent, 19.67 percent 0.48 percent and 0.70 percent

respectively over the study period. This is a good sign as it indicates that respective costs

have reduced over a period of time. The compound growth rates for cost of debt (Kdat),

cost of preference share capital (Kp) and overall cost of capital (Ko1) have been observed

as significant at 1 percent level of significance during this period. The cost of equity

capital (Ke2) and overall cost of capital (Ko2) have positive compound growth rates of


125

1.20 percent and 0.38 percent respectively during this period. This is not a good sign as it

indicates that respective costs have increased over a period of time. The compound

growth rate for cost of equity capital (Ke2) has been observed as significant at 10 percent

level of significance during this period. On an average, the cost of debt (Kdat), cost of

preference share capital (Kp), cost of equity capital (Ke1 and Ke2) and overall cost of

capital (Ko1 and Ko2) have been observed as 14.48 percent, 11.65 percent, 15.86 percent,

21.06 percent, 15 percent and 19.01 percent respectively over the study period. The

respective costs have been observed as lower than industry average in 17, 15, 8, 12, 13

and 13 companies respectively out of 21 companies selected for this sector over the study

period of 27 years. The standard deviation has been observed as small which indicates

that many data points in observed data series are close to mean. The coefficient of

variation for cost of debt (Kdat), cost of preference share capital (Kp), cost of equity

capital (Ke1 and Ke2) and overall cost of capital (Ko1 and Ko2) has been observed as 17.68

percent, 25.58 percent, 30.20 percent, 26.78 percent 19.20 percent and 21.94 percent

respectively during this period.

4.2.7 Sugar Industry

Table 4.16 and Figure 4.7 show trends in cost of each specific source of long-term

finance and overall cost of capital (Ko1 and Ko2) in case of sugar industry over the study

period of 27 years i.e. 1979-80 to 2005-06. India is the fourth major sugar producing

country in the world, the first three being Russia, Brazil and Cuba. Sugar industry

occupies an important place among organized industries in India. Sugar industry is one of

the major agro-based industrial in India with highest share in resource mobilization,

employment generation, income generation and creating social infrastructure in rural

areas. Sugar industry covers around 7.5 percent of total rural population and provides

employment to 5 lakh rural people. The wide variation in cost of each specific source of

long-term finance and overall cost of capital (Ko1 and Ko2) has been observed over the

study period of 27 years as given below:



the year 1979-80. It declines and finally reaches 3.80 percent in the year 2005-06.


126

There has been decline in 20 out of 27 years as compared to the first year of the study

period. A declining trend has been observed in debt (Kdat) during the study period.

Overall it exhibits decline of 75 percent as compared to first year of the study period.



has been observed as 23.95 percent in the year 1979-80. It declines and finally reaches

19.58 percent in the year 2001-02. After that it has been observed as nil up to year 2005-

06. The cost of preference share capital (Kp) has been observed as nil in 5 out of 27 years

of the study period. There has been decline in 21 out of 27 years as compared to first year

of the study period. The cost of preference share capital (Kp) has exhibited declining

trend over the study period. Overall it exhibits decline of 25 percent as compared to first





year 2005-06. There has been increase in 14 out of 27 years as compared to first year of

the study period. An increasing trend has been observed in cost of equity capital (Ke1)

during this period. Overall it exhibits an increase of 65 percent as compared to first year





2005-06. There has been decline in 16 out of 22 years as compared to first year of the

study period. The cost of equity capital (Ke2) has exhibited declining trend over the study

period. Overall it exhibits decline of 52 percent as compared to first year of the study

period. The financial liberalization and active government support for the development

and fostering of the stock markets in the late 1980s and early 1990s has led to a vibrant

stock market in India. The rapid increase of share prices during the initial phase of

liberalization has led to decline in cost of equity capital (Ke1 and Ke2) during this period.


127

Table 4.16

Trend Analysis of Cost of Capital of Sugar Industry from 1979-80 to 2005-06

Year Kdat

(%) Index

Kp

(%) Index

Ke1

(%) Index

Ke2*

(%) Index

Ko1

(%) Index

Ko2

(%) Index

S1

(%)

S2

(%)

1979-80 14.89 100 26.17 100 15.57 100 17.13 100 0.68

1980-81 9.82 66 13.43 51 28.53 183 14.96 87 18.71

1981-82 9.59 64 9.78 37 19.17 123 11.93 70 9.58

1982-83 16.72 112 17.38 66 14.54 93 17.57 103 -2.18

1983-84 21.16 142 8.74 33 20.39 131 18.34 107 -0.77

1984-85 22.78 153 8.74 33 18.55 119 27.56 100 18.38 107 22.18 100 -4.23 4.78

1985-86 21.14 142 9.00 34 14.28 92 29.56 107 15.66 91 22.79 103 -6.86 8.42

1986-87 12.96 87 8.91 34 16.21 104 26.32 95 16.33 95 20.43 92 3.25 13.36

1987-88 14.13 95 7.90 30 11.61 75 25.05 91 12.3 72 20.64 93 -2.52 10.92

1988-89 11.95 80 12.50 48 23.09 148 58.99 214 18.98 111 33.71 152 11.14 47.04

1989-90 8.24 55 16.93 65 24.98 160 61.74 224 14.79 86 27.12 122 16.74 53.5

1990-91 9.19 62 12.96 50 20.06 129 34.2 124 14.03 82 16.68 75 10.87 25.01

1991-92 11.18 75 9.43 36 16.27 104 23.37 85 12.95 76 14.7 66 5.09 12.19

1992-93 13.01 87 9.43 36 14.61 94 18.81 68 12.62 74 15.11 68 1.6 5.8

1993-94 12.57 84 7.19 27 38.18 245 9.64 35 19.49 114 11.16 50 25.61 -2.93

Contd…


128

Year Kdat

(%) Index

Kp

(%) Index

Ke1

(%) Index

Ke2*

(%) Index

Ko1

(%) Index

Ko2

(%) Index

S1

(%)

S2

(%)

1994-95 9.21 62 16.02 61 12.05 77 9.37 34 11.63 68 9.01 41 2.84 0.16

1995-96 10.55 71 12.82 49 12.75 82 18.73 68 11.74 69 13.23 60 2.2 8.18

1996-97 12.66 85 15.77 60 13.84 89 20.82 75 13.45 78 15.43 70 1.18 8.16

1997-98 16.09 108 10.64 41 11.97 77 18.93 69 14.67 86 16.55 74 -4.12 2.84

1998-99 15.8 106 0.00 0 14.2 91 14.47 52 14.71 86 14.73 66 -1.6 -1.33

1999-00 12.19 82 9.28 35 16.63 107 19.54 71 13.29 78 13.59 61 4.44 7.35

2000-01 12.6 85 9.15 35 16.54 106 15.34 56 13.31 78 13.21 59 3.94 2.74

2001-02 9.3 62 19.58 75 13.67 88 22.55 82 10.62 62 13.18 59 4.37 13.25

2002-03 12.35 83 0.00 0 14.17 91 34.42 125 12.41 72 21.1 95 1.82 22.07

2003-04 7.33 49 0.00 0 17.3 111 17.38 63 10.25 60 17.66 80 9.97 10.05

2004-05 4.93 33 0.00 0 10.18 65 12.03 44 6.39 37 6.78 31 5.25 7.1

2005-06 3.8 26 0.00 0 25.62 164 13.09 47 13.22 77 7.79 35 21.82 9.29


Companies.




129

Figure 4.7






during the study period. Overall it exhibits decline of 33 percent as compared to first year








study period.





130




selected companies in sugar industry. This finding is based upon theoretical proposition.


coefficient of variation for cost of each specific source of long-term finance and overall

cost of capital (Ko1 and Ko2) in case of sugar industry over the study period of 27 years

i.e. 1979-80 to 2005-06. The negative compound growth rates of cost of each specific

source of long-term finance and overall cost of capital (Ko1 and Ko2) indicate decline in

Table 4.17

Descriptive Statistics of Variables of Sugar Industry from 1979-80 to 2005-06




2. Significance at 1% is indicated by three asterisks respectively.

these respective costs over a period of time. The compound growth rates for cost of debt

(Kdat), cost of preference share capital (Kp), cost of equity capital (Ke2) and overall cost of

capital (Ko1 and Ko2) have been observed as significant at 1 percent level of significance

Sr.

No. Variable /

Indicator Cost of

Debt

(Kdat) (%)

Cost of

Preference

Share

Capital (Kp)

(%)

Cost of

Equity

Capital

(Ke1) (%)

Cost of

Equity

Capital

(Ke2) (%)

Overall

Cost of

Capital

(Ko1) (%)

Overall

Cost of

Capital

(Ko2) (%)

1 Compound

Growth Rate -2.714

(-3.23)***

-7.84

(-5.44)***

-0.95

(-1.29)

-3.77

(-2.63)***

-1.76

(-3.79)***

-3.73

(-3.71)***

2 Average 12.48 11.34 16.85 21.40 14.12 16.48

3 Standard

Deviation 4.54 4.73 6.13 13.66 3.00 6.33

4 Coefficient of

Variation 36.38 41.71 36.38 63.83 21.25 38.41


131

during this period. On an average, cost of debt (Kdat), cost of preference share capital

(Kp), cost of equity capital (Ke1 and Ke2) and overall cost of capital (Ko1 and Ko2) have

been observed as 12.48 percent, 11.34 percent 16.85 percent, 21.40 percent, 14.12

percent and 16.48 percent respectively during this period. The respective costs have been

observed as lower than industry average in 4, 4, 3, 4, 6 and 5 companies respectively out

of 7 companies selected for this sector over the study period of 27 years. The standard

deviation has been observed as small for these respective costs which indicates that many

data points in data series are close to mean. The coefficient of variation has been

observed as 36.38 percent, 41.71 percent, 36.38 percent, 63.83 percent, 21.25 percent and

38.41 percent respectively for these respective costs. The coefficient of variation has been

observed as very high in case of cost of equity capital (Ke2) that indicates great variation

of this data series from mean value over the study period.

4.2.8 Tea Industry

Table 4.18 and Figure 4.8 represent trends in cost of each specific source of long-

term finance and overall cost of capital (Ko1 and Ko2) in case of tea industry over the

study period of 27 years i.e. 1979-80 to 2005-06. India plays a significant role in world

tea trade, being the world's largest producer, consumer and exporter. Tea is indigenous to

India and is an area where the country takes a lot of pride. This is mainly because of its

pre-eminence as a foreign exchange earner and its contributions to the country's GNP.

Since independence tea production has grown over 250 percent, while land area has just

grown by 40 percent over a period of time. After independence for a few decades India

occupied the first position for exporting tea in the world. The following trends have been

observed in cost of each specific source of long-term finance and overall cost of capital

(Ko1 and Ko2) over the study period of 27 years.



the year 1979-80. It increases and finally reaches 10.69 percent in the year 2005-06.

There has been increase in 26 out of 27 years as compared to first year of the study

period. An increasing trend has been observed in cost of debt (Kdat) over the study period.

Overall it exhibits an increase of 43 percent as compared to first year of the study period.


132


1981-82 to 5.74 percent in the year 1984-85. The cost of preference share capital (Kp) has

been observed as 5.63 percent in the year 1979-80. The cost of preference share capital

(Kp) has been observed as nil in 22 out of 27 years as compared to first year of the study

period. There has been increase in 4 out of 27 years as compared to first year of the study

period. An increasing trend has been observed in cost of preference share capital (Kp)

during this period. Overall it exhibits an increase of 1 percent as compared to first year of

the study period.





the study period. The cost of equity capital (Ke1) has exhibited increasing trend over the

study period. Overall it exhibits an increase of 136 percent as compared to first year of

the study period.







period.



as 4.93 percent in the year 1979-80. It increases and finally reaches 11.22percent in the


the study period. An increasing trend has been observed in overall cost of capital

(Ko1)over the study period. Overall it shows an increase of 128 percent as compared to

first year of the study period.


133

Table 4.18

Trend Analysis of Cost of Capital of Tea Industry from 1979-80 to 2005-06

Year Kdat

(%) Index

Kp

(%) Index

Ke1

(%) Index

Ke2*

(%) Index

Ko1

(%) Index

Ko2

(%) Index S1 (%) S2 (%)

1979-80 7.46 100 5.63 100 5.41 100 4.93 100 -2.05

1980-81 10.84 145 5.66 101 9.55 176 9.77 198 -1.29

1981-82 11.22 150 5.60 99 15.7 290 13.95 283 4.48

1982-83 14.24 191 5.71 101 63.44 1172 27.85 565 49.2

1983-84 21.63 290 0.00 0 57.85 1068 47.44 963 36.22

1984-85 10.7 143 5.74 102 13.7 253 23.1 100 13.55 275 21.9 100 3 12.4

1985-86 11.19 150 0.00 0 5.61 104 24.4 106 8.63 175 21.46 98 -5.58 13.21

1986-87 15.88 213 0.00 0 8.72 161 21.9 95 11.52 234 22.63 103 -7.16 6.02

1987-88 31.12 417 0.00 0 54.89 1014 12.21 53 56.54 1147 17.55 80 23.77 -18.91

1988-89 22.48 301 0.00 0 19.29 356 12.64 55 20.79 422 16.42 75 -3.19 -9.84

1989-90 22.9 307 0.00 0 14.66 271 20.1 87 17.26 350 20.05 92 -8.24 -2.8

1990-91 11.14 149 0.00 0 17.33 320 32.53 141 13.65 277 23.39 107 6.19 21.39

1991-92 16.62 223 0.00 0 12.85 237 29.94 130 12.8 260 23.01 105 -3.77 13.32

1992-93 19.51 261 0.00 0 8.95 165 21.56 93 11.63 236 16.39 75 -10.56 2.05

1993-94 13.71 184 0.00 0 15.5 286 14.51 63 14.25 289 14.7 67 1.79 0.8

Contd…


134

Year Kdat

(%) Index

Kp

(%) Index

Ke1

(%) Index

Ke2*

(%) Index

Ko1

(%) Index

Ko2

(%) Index S1 (%) S2 (%)

1994-95 25.95 348 0.00 0 7.5 138 9.47 41 12.26 249 13.53 62 -18.45 -16.48

1995-96 25.11 336 0.00 0 22.1 408 7.75 34 19.55 397 10.7 49 -3.01 -17.36

1996-97 18.19 2437 0.00 0 13.61 251 10.12 44 14.59 296 12.41 57 -4.58 -8.07

1997-98 15.74 211 0.00 0 12.32 227 18.46 80 21.24 431 18.55 85 -3.42 2.72

1998-99 13.26 178 0.00 0 22.29 412 24.08 104 20.07 407 20.93 96 9.03 10.82

1999-00 15.41 206 0.00 0 15.1 279 31.35 136 14.76 300 25.17 114 -0.31 15.94

1999-00 15.41 206 0.00 0 15.1 279 31.35 136 14.76 300 25.17 114 -0.31 15.94

2000-01 144.4 1934 0.00 0 9.19 170 22.87 99 10.18 207 20.76 95 -5.25 8.43

2001-02 15.46 207 0.00 0 5.18 96 7.51 33 7.63 155 9.39 43 -10.28 -7.95

2002-03 14.36 192 0.00 0 8.76 162 6.22 27 8.83 179 7.9 36 -5.6 -8.14

2003-04 10.69 143 0.00 0 15.17 280 11.27 49 13.46 273 9.97 46 4.48 0.58

2004-05 8.1 108 0.00 0 16.94 313 9 39 14.67 298 8.48 39 8.84 0.9

2005-06 10.69 143 5.66 101 12.78 236 10.18 44 11.22 228 9.34 43 2.09 -0.51


Companies.




135

Figure 4.8






during the study period. Overall it shows decline of 57 percent as compared to first year



Ke2) and cost of debt (Kdat) over a period of time. S1 ranges between 1.79 percent in the

year 1993-94 to 49.2 percent in the year 1982-83. S2 ranges between 0.80 percent in the

year 1993-94 to 15.94 percent in the year 1999-00. The cost of debt (Kdat) has been

observed as higher than cost of equity capital (Ke1) in 16 out of 27 years of study period.

The cost of equity capital (Ke2) has been observed as higher than cost of debt (Kdat) in 19

out of 22 years of the study period. The overall trend indicates that debt is cheaper source

of finance as compared to equity for selected companies in tea industry.


coefficient of variation for cost of each specific source of long-term finance and overall


136

Table 4.19

Descriptive Statistics of Variables of Tea Industry from 1979-80 to 2005-06





cost of capital (Ko1 and Ko2) in case of tea industry over the study period of 27 years i.e.

1979-80 to 2005-06. The cost of equity capital (Ke1 and Ke2) and overall cost of capital

(Ko1 and Ko2) have negative compound growth rates of 1.43 percent, 3.70 percent, 0.85

percent and 3.79 percent respectively during this period. This is a good sign. It indicates

that respective costs have reduced over a period of time. The compound growth rate for

cost of equity capital (Ke2) has been observed as significant at 5 percent level of

significance. The overall cost of capital (Ko2) has been observed as significant at 1

percent level of significance during this period. The cost of debt (Kdat) and cost of

preference share capital (Kp) have positive compound growth rates of 1.63 percent and

7.68 percent respectively over the study period. It is not a good sign as it indicates cost of

preference share capital (Kp) has been observed as significant at 10 percent level of

significance during this period. On an average, cost of debt (Kdat), cost of preference

share capital (Kp), cost of equity capital (Ke1 and Ke2) and overall cost of capital (Ko1 and

Ko2) have been observed as 13.92 percent, 5.66 percent 15.98 percent, 18.08 percent,

Sr.

No. Variables/

Indicator

Cost of

Debt

(Kdat) (%)

Cost of

Preference

Share

Capital

(Kp) (%)

Cost of

Equity

Capital

(Ke1) (%)

Cost of

Equity

Capital

(Ke2) (%)

Overall

Cost of

Capital

(Ko1) (%)

Overall

Cost of

Capital

(Ko2) (%)

1 Compound

Growth Rate 1.63

(0.89)

7.68

(1.75)*

-1.43

(-0.90)

-3.70

(2.45)**

-0.850

(-0.67)

-3.79

(-4.03)***

2 Average 13.92 5.66 15.98 18.08 16.39 16.74

3 Standard

Deviation 40.09 12.01 15.44 8.26 11.31 5.59

4 Coefficient of

Variation 288.00 212.19 96.62 45.69 69.01 33.39


137

16.39 percent and 16.74 percent respectively during this period. The respective costs

have been observed as lower than industry average in 5, 9, 8, 4, 8 and 6 companies

respectively out of 10 companies selected for this sector over the study period of 27

years. The standard deviation appears as small for these respective costs which indicates

that many data points in data series under observation are close to mean. The coefficient

of variation has been observed as 288 percent, 212.19 percent, 96.62 percent, 45.69

percent, 69.01 percent and 33.39 percent respectively for these respective costs. This

value has been observed as very large for cost of debt (Kdat), cost of preference share

capital (Kp), cost of equity capital (Ke1) and overall cost of capital (Ko1) during the

selected study period. It indicates large dispersion of data points in data series from mean

value.

Conclusion

The problem of efficient financial management is of crucial importance in modern

industrial organization. The potential of an enterprise is gauged in terms of its financial

success. The superstructure of any enterprise can be built on sound financial base which

depends on the availability of adequate finance, smoothly, regularly and at reasonable

cost. The management of capital structure is important function of finance manager as it

affects the risk as well as return available to shareholders. Business enterprise generally

procures its permanent capital in form of long term debt, preference share capital,

ordinary share capital and reserves and surplus. These are individual components which

when taken together would constitute a company’s capital structure. A financial manager

has to plan its capital structure in such a way that gives the maximum benefits. An

optimum capital structure can be viewed as that particular combination of debt,

preference share capital and equity share capital at which the company’s cost of capital is

minimum or alternatively the value of the company is at its maximum.

The Indian capital market has started showing signs of good performance since

the mid-1980s with the partial liberalization of the industrial sector, introduction of a

long-term fiscal policy and the emergence of the debenture market as an alternative

source of finance for the large corporate sector. The capital market in India suffered from

many serious weaknesses until 1992 (Aggarwal, 1996). Reforms in the capital market

have been introduced since 1992-93. The stock market boomed in the mid-1990s


138

reflecting developments in the capital markets along with economic reforms in other

sectors of the Indian economy. These developments have altered the financing behavior

of the corporate sector changing their dependence from the bank-dominated loans to

capital market-based equity capital.

The main criterion affecting the financing decision of a firm is generally the

minimization of the weighted average cost of capital. High stock prices in the secondary

market enable corporate to charge high premium in the primary market thereby reducing

the cost of equity capital (Ke). Upward movements of stock prices influence firm’s

decisions to issue new capital as the pricing of new issues depends on the level and trend

of stock prices at the time of issue. Issuing equities at a high premium reduces the cost of

equity capital (Ke) for a firm and makes it an ideal financing choice. The stock market

liberalization of the late 1980s and the entry of large number of domestic and foreign

investors into the capital market in the early 1990s has reduced the cost of capital for the

Indian corporate sector. The trend of decline in cost of each specific source of long-term

finance and overall cost of capital (Ko1 and Ko2) have been observed after liberalization in

maximum number of selected companies in selected industries over a period of time.

On the basis of company-wise analysis, it has been observed that majority of

selected companies have cost of each specific source of long-term finance and overall

cost of capital (Ko1 and Ko2) in the range of 10-20 percent. On the basis of industry-wise

analysis it has been observed that the cost of debt (Kdat) and cost of preference share

capital (Kp) exhibit declining trend in almost all industries expect tea industry over the

study period. The cost of equity capital (Ke1) has exhibited declining trend in almost all

industries except metal, textile and paper industries over the study period. The cost of

equity capital (Ke2) has exhibited declining trend in almost all industries except metal and

paper industries over the study period. The overall cost of capital (Ko1 and Ko2) exhibits

declining trend in almost all industries over the study period of 27 years. On the basis of

average, cost of debt (Kdat) and cost of preference share capital (Kp) have been observed

as lower than cost of equity capital (Ke1 and Ke2) in maximum number of years in almost

all industries. The overall cost of capital (Ko1 and Ko2) has exhibited declining trend in

almost all industries the study period of 27 years. This type of trend in selected industries


139

indicates that as result of liberalization cost of capital of selected Indian companies have

reduced over a period of time.


Ke2) and cost of debt (Kdat) over a period of time. The cost of equity capital (Ke1 and Ke2)

has been observed as higher than cost of debt (Kdat) in all industries in maximum number

of years over the entire study period. This is due to fundamental reason that cost of debt

(Kdat) is lower than cost of equity capital (Ke) due to tax advantage and lower risk

premium demanded by debt investors as compared to equity shareholders and due to

lower risk attached to debt capital as compared to equity.

The overall findings of this chapter supports traditional viewpoint of capital

structure theories. It indicates that overall cost of capital (Ko) reduces with use of

leverage up to reasonable limit. The financial risk caused by debt may increase the cost of

equity capital (Ke) slightly but not as much that advantage of cheaper debt is taken of

totally. The Modigliani and Miller (M-M) approach that overall cost of capital is

independent of capital structure changes does not seem as applicable to selected

companies in selected industries for present study.

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