Procter and Gamble Cost of Capital Case Solution
(Indian Market Context)
Objective: Calculate Procter & Gamble’s (P&G) weighted average cost of capital (WACC) for an investment project in India, considering the company’s capital structure, market risks, and country-specific factors.
Key Steps & Analysis
1. Data Collection
P&G’s Financials (2023):
Market Value of Equity (E): $300 billion
Market Value of Debt (D): $50 billion
Tax Rate (T): 30% (India)
Market Parameters:
Risk-Free Rate (Rf): 6% (10-year Indian Government Bond yield)
Market Risk Premium (MRP): 6.5% (India’s equity market premium)
P&G’s Beta (β): 0.8 (industry-adjusted for FMCG sector)
2. Cost of Equity (Re) – CAPM Model
[
Re = Rf + \beta \times MRP = 6% + 0.8 \times 6.5% = 6% + 5.2% = 11.2%
]
Note: Beta adjusted for India’s higher volatility and inflation risks.
3. Cost of Debt (Rd)
Pre-Tax Cost of Debt: 8% (10-year Indian corporate bond yield for P&G)
After-Tax Cost of Debt:
[
Rd_{\text{after-tax}} = Rd \times (1 - T) = 8% \times (1 - 0.3) = 5.6%
]
4. WACC Calculation
[
WACC = \left(\frac{E}{E+D}\right) \times Re + \left(\frac{D}{E+D}\right) \times Rd_{\text{after-tax}}
]
[
WACC = \left(\frac{300}{350}\right) \times 11.2% + \left(\frac{50}{350}\right) \times 5.6% = 9.12% + 0.8% = 9.92%
]
India-Specific Considerations
Currency Risk: Include 1.5% adjustment for rupee depreciation risk in project cash flows.
Regulatory Risks: Factor in 0.5% additional cost for compliance in India’s complex consumer goods sector.
Tax Incentives: Adjust WACC downward by 0.3% if the project qualifies for India’s "Make in India" incentives.
Adjusted WACC:
[
9.92% - 0.3% + 1.5% + 0.5% = 11.62%
]
Recommendation
Project Viability: Accept projects with IRR > 11.62%.
Sensitivity Analysis: Test WACC under scenarios of rising interest rates (e.g., RBI rate hikes) or beta increases (e.g., β = 1.0 → WACC = 12.3%).
Conclusion: P&G’s WACC for India is 11.62% after incorporating country-specific risks and incentives. This serves as the hurdle rate for evaluating investments in the Indian market.
Case Solution by [Your Name], [Date]
Data Sources: P&G 2023年报, Reserve Bank of India, Bloomberg
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