Institute of Management Technology, Ghaziabad

INSTITUTE OF MANAGEMENT TECHNOLOGY,
GHAZIABAD
TERM:
COURSE NAME:
NAME OF THE
FACULTY:
TOPIC/TITLE:
ORIGINAL OR
REVISED WRITE-UP:
SECTION:
GROUP NUMBER:
CONTACT NUMBER
AND EMAIL ID OF
GROUP
COORDINATOR:
GROUP MEMBERS:
III
Corporate Finance
Dr Puja Aggarwal
Valuation Company
ORIGINAL
F
1
PHN: +91-9643989549
EMAIL: ft14arnabsaha@imt.ac.in
Serial Number
1
2
3
4
5
6
Roll Number
140101045
140102030
140102128
140103027
140103116
140103019
Name
Chandni Nigam
Arnab Saha
Sovan Satyaprakash
Anushka Gulati
Nitin Jain
Anand Dubey
CONTENT
Executive Summary.3
About the Company 4
Infosys Ltd
Mahindra & Mahindra Ltd
Dr Reddys Laboratories
Discounted Cash Flows..5
Valuation Models..6
Valuation of Infosys Ltd
Using DDM..9
Using FCFE10
Using FCFF11
Findings & Recommendation..12
Valuation of Mahindra & Mahindra Ltd
Using DDM.13
Using FCFE14
Using FCFF15
Valuation of Dr Reddys Laboratories Ltd
Using DDM.17
Using FCFE18
Using FCFF19
Exhibit A: Infosys Chart Past 1 Year.21
Exhibit B: Mahindra & Mahindra Chart Past 1 Year...22
Exhibit C: Dr Reddys Laboratories Chart Past 1 Year...23
2 | Page
Bibliography..24
3 | Page
EXECUTIVE SUMMARY
The project includes a comprehensive analysis of the cash flows of three Indian
companies namely, Infosys Limited, Mahindra & Mahindra Limited and DR Reddys
Laboratories, for arriving at the intrinsic value of the share of the respective
company. The project aims to gauge whether the share of the company is
undervalued or overvalued based on the fundamental values of the company and
the market price. This analysis will help in providing us with a buy or sell
recommendation to the investor. The following discount cash flow models have been
used to arrive at the value of the firm
Dividend Discount
Free Cash Flow to Equity (FCFE)
Free Cash Flow to Firm (FCFF)
We have used the cash flows of the company from FY 2009-10 to FY 2013-14 for
the analysis purpose. The Gordon Growth assumption has been made in the used
discounted cash flow models ie it has been assumed that cash flows of the firm will
continue to grow indefinitely at the sustainable growth rate (g). Also, since the data
availed is till March 31, 2014, all valuations have been done with respect to this
date.
4 | Page
About the Company

Infosys Ltd.
Infosys Ltd is an Indian multinational corporation that provides business
consulting, information technology, software engineering and outsourcing services.
Headquartered in Bangalore, Karnataka, Infosys serves worldwide. It is third
largest India based IT services company by 2014 revenues. On March 31 st 2014, its
market capitalisation was INR 188,510 crores making it Indias fifth largest publicly
traded company. Its revenues for the FY 2013-14 were INR 50,133 crore with a net
profit of INR 10,648 crores. Infosys shares are listed in Bombay Stock Exchange
where it is constituent of BSE SENSEX Index and the National Stock Exchange as a
constituent of S&P CNX NIFTY.
Mahindra & Mahindra Ltd.

Mahindra
&
Mahindra
Limited
is
an
Indian
multinational
automobile
manufacturing corporation headquartered in Mumbai, Maharashtra. It is one of the

largest vehicle manufacturers by production in India and the largest seller of tractor
across the world. It is a part of Mahindra Group an Indian conglomerate. It was
ranked as the 10th most trusted brand in India, by The Brand Trust Report, India
Study 2014. Its revenues for the FY 2013-14 were INR 4921 crore with a net profit
of INR 887 crores. M&M shares are listed in Bombay Stock Exchange where it is
constituent of BSE SENSEX Index.
Dr Reddys Laboratories
Dr Reddys Laboratories Ltd is a pharmaceutical company based in Hyderabad,
Telangana. Dr Reddys manufactures and markets a wide range of pharmaceutical
in India and overseas. The company has over 190 medications, 60 active
pharmaceutical ingredients (APIs) for drug manufacture, diagnostic kits, critical
care and biotechnology products. Its revenue for the FY 2013-14 was INR 9728
crores with a net profit of INR 1932 crores. Dr Reddys Laboratories shares are
listed in Bombay Stock Exchange and in National Stock Exchange.
5 | Page
Discounted Cash Flow

The discounted cash flow approach finds the value of an asset using its expected
return and the present values of future cash flows. They interpret a firms value as
the present value of cash-flow generated by the firm in a specified future period.
Future cash-flow should be discounted at an appropriate discount rate, but these
methods require a very careful forecast of the flows for each future period. To find
the discounted present value of an asset, it is necessary to sum the discounted
present value of each future cash flow (FV) at any time period (t) in years from the
present time, using the appropriate interest rate (i). The formula used to calculate
the present value is:
Some key points to note in DCF approach are
In the DCF approach, all future expected cash flows associated with the
asset are discounted in order to find their present values.
To determine the value of the asset, the present values of all expected cash
flows are summed.
When future cash flows are infinite or extend past a certain period, a
terminal value can be found and discounted back to the present.
Comparing a value found using the DCF approach with the actual price of
an asset determines if an asset is undervalued, overvalued, or correctly
priced.
Two of the most common methods of discounted cash flows are:
Net Present Value
Internal Rate of Return
Net Present Value
6 | Page
The NPV is the sum of the present values of all the expected incremental cash flows
if a project is undertaken. The discount rate used is the firm's cost of capital,
adjusted for the risk level of the project. For a normal project, with an initial cash
outflow followed by a series of expected after-tax cash inflows, the NPV is the
present value of the expected inflows minus the initial cost of the project. The
formula for calculating the same is:
Internal Rate of Return

Internal rate of return (IRR) is the discount rate that makes the present value of the
expected incremental after-tax cash inflows just equal to the initial cost of the
project. More generally, the IRR is the discount rate that makes the present values
of a project's estimated cash inflows equal to the present value of the project's
estimated cash outflows. The IRR is also the discount rate for which the NPV of a
project is equal to zero:
Valuation Models
Valuation Models are used to calculate the fundamental value of a company for
purposes such as mergers and acquisitions, sale of securities, and taxable events.
Before the value of a business can be measured, the valuation assignment must
specify the reason for and circumstances surrounding the business valuation.
These are formally known as the business value standard and premise of value.
The standard of value is the hypothetical conditions under which the business will
be valued. The premise of value relates to the assumptions, such as assuming that
the business will continue forever in its current form (going concern), or that the
value of the business lies in the proceeds from the sale of all of its assets minus the
related debt (sum of the parts or assemblage of business assets).
Business valuation results can vary considerably depending upon the choice of
both the standard and premise of value. In an actual business sale, it would be
expected that the buyer and seller, each with an incentive to achieve an optimal
7 | Page
outcome, would determine the fair market value of a business asset that would
compete in the market for such an acquisition. The project covers three methods of
company valuation. They are:
Dividend Discount Model
Free Cash Flow to Firm (FCFF)
Dividend Discount Model

The dividend discount model (DDM) is a method of valuing a company's stock price
based on the theory that its stock is worth the sum of all of its future dividend
payments, discounted back to their present value. In other words, it is used to
value stocks based on the net present value of the future dividends. Under this
model, if dividends are expected to grow at a constant rate, g, then the current
value of the stock is given by the dividend growth model:
where:
D1 = next year's dividend

kce = required rate of return on common equity
g = firm's expected constant growth rate
Free Cash Flow to Firm (FCFF) Model

Cash flows into the firm in the form of revenue as it sells its products, and cash
flows out as it pays its cash operating expenses (eg. salaries and taxes but not
interest expense as it is a financing cash flow). The firm takes the cash that is left
over and makes short-term net investments in working capital (eg. inventory and
receivables) and long term investment in property plant and equipment. The cash
that is left is paid out to firms debt holders and equity holders. This pile of
remaining cash is called free cash flow to firm (FCFF) because it is free to pay out to
the firms investors. The formal definition of FCFF is the cash available to all of the
firms investors, including stockholders and bondholders, after the firm buys and
sells products, provides services, pays in cash operating expenses, and makes
short-term and long-term investments.
Calculation of FCFF
8 | Page
FCFF is calculated from net income using the following formula

FCFF
= Net Income + Non-Cash Charges + Interest (1-tax) Fixed Capital

Investment Working Capital Investment
Free Cash Flow to Equity (FCFE) Model

The firm uses FCFF to make payment to its debt and bond holders. This amount
that is left after the firm has met all its obligations to other investors is called free
cash flow to equity. However, the board of directors still has discretion over what to
do with that money. It could pay it all out in dividends to common shareholders,
but it might decide to only pay out some of it and put the rest in a bank to save for
the next year. So, FCFE is the cash available to common shareholders after funding
capital requirements, working capital needs, and debt financing requirements.
Calculation of FCFE
FCFE is calculated using the following formula:
FCFE = FCFF Interest (1-tax) + Net Borrowings
9 | Page
Valuation of Infosys Ltd. Using DDM

Infosys Ltd. has been a consistent payer of dividend to its shareholders. The
company is one of the largest profit making and tax & dividend paying enterprise in
India. In 2014, the company paid an annual dividend of Rs. 63 per share vis--vis
Rs. 25 paid in 2010.
To value Infosys using the dividend discount model, following parameters will be
required:
D1
Expected dividend to be paid in the next year
Ke
Required Rate of Return on Equity
Sustainable growth rate of dividend
To calculate the sustainable growth rate of dividend, CAGR from 2010 to 2014 was
calculated as follows:
CAGR for 5 growth periods = (63/25) ^ (1/5)
= 20.3%
Ke was calculated using the Capital Asset Pricing Model (CAPM)
According to CAPM
Ke
Rf + (Rm Rf)
Rf
Risk Free Rate of Return
Rm
Return on Market
Beta a measure of Systematic Risk
Where,
10 | P a g e
Data for the above mentioned parameters was obtained from BSE website. The
comparable risk free rate of return taken for calculation of CAPM is the return on a
10 year government bond.
Calculation of Required Rate of Return on Equity Using CAPM
Beta ()
0.32
Risk Free Return (10 Year Govt Bond)
8.81%
Return on Market (BSE Sensex)
16%
Putting the above values in CAPM formula we get
Ke
8.81 + 0.32 (16 8.81)
11.11%
An inherent assumption of the dividend discount model is that Ke> g. However, the
above calculations show that in case of Infosys Ltd. the required rate of return on
equity is less than the sustainable growth rate. Therefore, the model is struck by its
inherent limitation and the fundamental value of the share cannot be calculated
using this model.
Valuation of Infosys Ltd. Using FCFE
As compared to dividends, the free cash flows of Infosys have grown at a slower
rate. To calculate FCFE for Infosys Ltd., Cash Flow from Operations have been
used. Since we know that Cash Flow from Operations are calculated using the
following formula:
CFO
Net Income + Non-Cash Charges Working Capital Investment
Accordingly, the formula for FCFE can be modified as:

FCFE =
CFO Fixed Capital Investment + Net Borrowings
Where
Fixed Capital Investment
Purchase of property, plant and equipment during

the year minus any sale of property
Net Borrowings
Long-term and short-term debt issues minus longterm and short-term debt repayments
Using Infosyss balance sheet, net borrowings were calculated as follows:

Calculation of Net Borrowings
Debt Issued
N/A
Debt Repaid
N/A
Net Borrowings (Debt Issued - Debt
2009-10 (Rs.
Crores)
-
2013-14 (Rs.
Crores)
-
0
11 | P a g e
Repaid)
Following the calculation of net borrowings, FCFE was calculated as follows:
2009-10 (Rs.
Crores)
5876
581
5295
Parameter
Cash Flow From Operations
Less: Fixed Capital Investment
Add: Net Borrowings
2013-14 (Rs.
Crores)
9148
2490
6658
Following calculation of FCFE for 2009-10 and 2013-14, CAGR for this period was
CAGR for 5 growth periods (g)
= (6658/5295) ^ (1/5)
= 4.687%
As calculated for the dividend discount model, Ke = 11.11%

For the Gordon Growth assumption to be true in this case, the required rate of
return on equity should be the greater than the sustainable growth rate of free
cash flows. In other words, the following condition should be true:
Ke> g
Since, the above condition holds, we can calculate the value of equity using the
following formula:
Market Value of Equity
FCFE (1 + g)/(Ke g)
6658 (1 + 0.04687)/(0.1111 0.04687)
Rs. 108515.845 Crores
To calculate the market price of the share, we have to divide the market value of
equity by the total number of shares in issue.
Intrinsic Value of a Share =
Market Value of Equity/Number of Shares Issued
1,08,515.845/57.4236166
Rs. 1889.742
Comparing this value with the market price of the stock as on March 31, 2014,
which was Rs. 1639.43 we can conclude that the share is undervalued and hence
its price is expected to gain in the future.
Valuation of Infosys Ltd. Using FCFF
12 | P a g e
The Free Cash Flow to Firm approach has been used to calculate the value of
Infosys Ltd. Likewise FCFE, the FCFF also grew at a very slow rate from the period
2010 to 2014. The following table summarises the calculation of FCFF using CFO:
31-03-2010
Crores)
5876
581
5295
Parameter
CFO
Free Cash Flow to Firm
(Rs. 31-03-2014
Crores)
9148
2490
6658
(Rs.
Following calculation of FCFF for 2009-10 and 2013-14, CAGR for this period was
= (6658/5295) ^ (1/5)
= 4.687%
Since FCFF gives the value of the firm, it is discounted using the Weighted Average
Cost of Capital. WACC for the company has been calculated using the debt-equity
ratio as given in the annual report 2014. The cost of debt has been calculated by
taking the percentage of the total interest paid during the year with the total debt
outstanding at the beginning of the year. The cost of equity has previously been
calculated using the CAPM. Following calculation of Cost of Debt (K d) and Cost of
Equity (Ke), WACC has been calculated using the following formula:
WACC
(D/C) x (Cost of Debt) x (1 tax) + (E/C) x (Cost of Equity)
(0) x (0) x (1 0.30) + (1) x (11.11)
11.11%
Where
D
Debt
Capital Employed
Equity
The following table summarises the results:

WACC Calculation
Debt Equity Ratio (as given in annual report 2013-14)
Debt Outstanding (crores, beginning of year 2014)
Interest Paid in 2014 (crores)
Cost of Debt (Kd)
WACC
0
0
0
0%
11.11%
Since the Gordon Growth assumption holds in this case also, we can calculate the
value of the firm using the following formula:
Market Value of Firm
FCFF (1 + g)/(WACC g)
13 | P a g e
6658 (1 + 0.04687)/(0.1111 0.04687)
Rs. 108515.845 Crores
Findings & Recommendations

Based on the Free Cash Flow to Equity approach we observe that the Infosyss
stock is undervalued and is expected to gain in the near future. Hence, we would
like to issue a BUY recommendation on the stock (Exhibit A).
The same can also be observed from the CAGR of Dividends, FCFF and FCFE.
Whereas the companys dividends have been growing at a compounded growth of
20.3%, the FCFF and FCFE have only registered a single digit growth of close to
4.687% for the same period.
The company has also substantially increased its dividend payments. This shows
that the company does not have any growth opportunities in the future and would
like to be a cash cow in the foreseeable future.
Valuation of Mahindra & Mahindra Ltd. Using DDM

M&M Ltd. has been a consistent payer of dividend to its shareholders. The company
is one of the largest profit making and tax & dividend paying enterprise in India. In
2014, the company paid an annual dividend of Rs. 13 per share vis--vis Rs. 5 paid
in 2010.
To value M&M using the dividend discount model, following parameters will be
required:
D1
Ke
CAGR for 5 growth periods
= (13/5) ^ (1/5)
= 21.06%

According to CAPM
Ke
Rf + (Rm Rf)
Where,
Rf

14 | P a g e
Rm
Return on Market

Beta ()
0.85
8.81%
16%
Ke
8.81 + 0.85 (16 8.81)
14.9215%
using this model.
Valuation of Mahindra & Mahindra Ltd. Using FCFE

As compared to dividends, the free cash flows of M&M have grown at a slower rate.
To calculate FCFE for M&M Ltd., Cash Flow from Operations have been used. Since
we know that Cash Flow from Operations are calculated using the following
formula:
CFO

FCFE =
Where

Net Borrowings
Using M&Ms balance sheet, net borrowings were calculated as follows:

Debt Issued
Proceeds from borrowing
Debt Repaid
Repayment of borrowings
2009-10 (Rs.
Crores)
436.32
543.98
2013-14 (Rs.
Crores)
620.4
473.99
15 | P a g e

Repaid)
-107.66
146.41

2009-10 (Rs.
Crores)
2336.49
967.06
-107.66
1261.77
Parameter
Add: Net Borrowings
2013-14 (Rs.
Crores)
3727.64
1704.3
146.41
2169.75
= (2169.75/1261.77) ^ (1/5)
= 11.451%

Ke> g
following formula:
FCFE (1 + g)/(Ke g)
2169.75 (1 + 0.11451)/(0.149215 0.11451)
Rs. 69689.2105 Crores
69689.2105/61.5892384
Rs. 1131.51
Valuation of Mahindra & Mahindra Ltd. Using FCFF
16 | P a g e
The Free Cash Flow to Firm approach has been used to calculate the value of M&M
Ltd. Likewise FCFE, the FCFF also grew at a very slow rate from the period 2010 to
2014. The following table summarises the calculation of FCFF using CFO:
31-03-2010 (Rs.
Crores)
2336.49
967.06
1369.43
Parameter
CFO
31-03-2014 (Rs.
Crores)
3727.64
1704.30
2023.34
= (2023.34/1369.43) ^ (1/5)
= 8.12%
WACC
(0.52381) x (6.922835) x (1 0.30) + (.47619) x (14.9215)
9.6438%
Where
D
Debt
Capital Employed
Equity

WACC Calculation
Cost of Debt (Kd)
WACC
1.1
3744.42
259.22
6.922835%
9.6438%
17 | P a g e
FCFF (1 + g)/(WACC g)
2023.34 (1 + 0.0812)/(0.096438 0.0812)
Rs. 143554.36 Crores

Based on the Free Cash Flow to Equity approach we observe that the Mahindra &
Mahindras stock is undervalued and is expected to gain in the near future. Hence,
we would like to issue a BUY recommendation on the stock (Exhibit B).
21%, the FCFF and FCFE have only registered a growth of close to 11.45% for the
same period.
Valuation of Dr Reddys Laboratories Ltd. Using DDM

Dr Reddys Lab Ltd. has been a consistent payer of dividend to its shareholders. In
2014, the company paid an annual dividend of Rs. 15 per share vis--vis Rs. 6.25
paid in 2010.
To value Dr Reddys using the dividend discount model, following parameters will
be required:
D1
Ke
CAGR for 5 growth periods
= (15/6.25) ^ (1/5)
= 19.136%

According to CAPM
Ke
Rf + (Rm Rf)
Where,
Rf
Rm
Return on Market

18 | P a g e

Beta ()
0.35
8.81%
16%
Ke
8.81 + 0.35 (16 8.81)
11.3265%
using this model.
19 | P a g e
Valuation of Dr Reddys Laboratories Ltd. Using FCFE

As compared to dividends, the free cash flows of Dr Reddys have grown at a slower
rate. To calculate FCFE for Dr Reddys, Cash Flow from Operations have been used.
Since we know that Cash Flow from Operations are calculated using the following
formula:
CFO

FCFE =
Where

Net Borrowings
Using Dr Reddys balance sheet, net borrowings were calculated as follows:

Debt Issued
Proceeds from long term borrowing
Proceeds from short term borrowing
Debt Repaid
Repayment of short term borrowings
Repayment of long term borrowings
Redemption of bonds
Repaid)
2009-10 (Rs.
Crores)
0
730.5
2013-14 (Rs.
Crores)
1010
0
746.9
2.2
91.7
20.7
507.8
-18.6
389.8

Parameter
Add: Net Borrowings
2009-10 (Rs.
Crores)
1253.2
383
-18.6
851.6
2013-14 (Rs.
Crores)
1969.7
1083.1
389.8
1276.4
= (1276.4/851.6) ^ (1/5)
= 8.43%
20 | P a g e

Ke> g
following formula:
FCFE (1 + g)/(Ke g)
1276.4 (1 + 0.0843)/(0.113265 0.0843)
Rs. 47785.0832 Crores
47785.0832/17.0108868
Rs. 2809.0833
Valuation of Dr Reddys Laboratories Ltd. Using FCFF

The Free Cash Flow to Firm approach has been used to calculate the value of Dr
Reddys. Likewise FCFE, the FCFF also grew at a very slow rate from the period
2010 to 2014. The following table summarises the calculation of FCFF using CFO:
Parameter
CFO
31-03-2010 (Rs.
Crores)
1253.00
383
870.2
31-03-2014 (Rs.
Crores)
1969.7
1083.1
886.6
= (886.6/870.2) ^ (1/5)
= 0.375%
21 | P a g e
WACC
(0.224806) x (8.686633) x (1 0.30) + (.775194) x (11.3265)
10.1471989%
Where
D
Debt
Capital Employed
Equity

WACC Calculation
Cost of Debt (Kd)
WACC
0.29
901.5
78.31
8.686633%
10.1471989%
= FCFF (1 + g)/(WACC g)
=886.6 (1 + 0.00374115)/(0.101471989 0.00374115)
=Rs. 9105.79428 Crores

Based on the Free Cash Flow to Equity approach we observe that the Dr Reddys
stock is undervalued and is expected to gain in the near future. Hence, we would
like to issue a BUY recommendation on the stock (Exhibit C).
19.136%, the FCFF and FCFE have only registered a single digit growth of close to
8.43% for the same period.
22 | P a g e
The company has also substantially increased its dividend payments. This shows
that the company does not have any growth opportunities in the future and would
like to be a cash cow in the foreseeable future.
EXHIBIT A: INFOSYS CHART Past 1 Year
23 | P a g e
The share price of Infosys Ltd has gained from its level on 31 st March 2014, and
reached the intrinsic value of the company in October. Initially it obtained
resistance at the level on upside. After the level was broken, the share price rose to
a new high but the intrinsic value became a good support for the share on
downside and has held on since. The limitation of this method is the macro factors
surrounding the organization. The call of going long has to be monitored carefully
with a stop loss cause change in macro factors would affect the movement of share
price. EXHIBIT B: MAHINDRA & MAHINDRA CHART Past 1 Year
The share price of M&M Ltd has gained from its level on 31 st March 2014, and
reached the intrinsic value of the company in June. The share price rose to a new
high but the intrinsic value became a good support for the share on downside. The
limitation of this method is the macro factors surrounding the organization. The
call of going long has to be monitored carefully with a stop loss cause change in
macro factors would affect the movement of share price.
24 | P a g e
EXHIBIT C: DR REDDYS LABORATORIES CHART Past 1 Year

The share price of Infosys Ltd has gained from its level on 31 st March 2014, and
reached the intrinsic value of the company in October. Initially it obtained
resistance at the level on upside. The limitation of this method is the macro factors
surrounding the organization. The call of going long has to be monitored carefully
with a stop loss cause change in macro factors would affect the movement of share
price.
25 | P a g e
Bibliography
Annual Report Infosys Ltd 2013-14 and 2009-10
Annual Report Mahindra & Mahindra Ltd 2013-14 and 2009-10
Annual Report Dr Reddys Laboratories Ltd 2013-14 and 2009-10
http://www.nseindia.com/archives/indices/update/indup.pdf
26 | P a g e
http://www.investing.com/rates-bonds/india-10-year-bond-yield-historical-data
http://www.gurufocus.com/global-market-valuation.php?country=IND
http://www.irjcjournals.org/ijmssr/May2013/9.pdf
http://www.moneycontrol.com/stock-charts/infosys/charts/IT
http://www.moneycontrol.com/stock-charts/drreddyslaboratories/charts/DRL
http://www.moneycontrol.com/india/stockpricequote/autocarsjeeps/mahindrama
hindra/MM
27 | P a g e

Institute of Management Technology, Ghaziabad

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Institute of Management Technology, Ghaziabad

Uploaded by

Copyright:

Available Formats

INSTITUTE OF MANAGEMENT TECHNOLOGY,

About the Company

Mahindra & Mahindra Ltd.

manufacturing corporation headquartered in Mumbai, Maharashtra. It is one of the

Discounted Cash Flow

Some key points to note in DCF approach are

Two of the most common methods of discounted cash flows are:

Net Present Value

Internal Rate of Return

Net Present Value

Internal Rate of Return

Dividend Discount Model

Free Cash Flow to Equity (FCFE)

Free Cash Flow to Firm (FCFF)

Dividend Discount Model

D1 = next year's dividend

Free Cash Flow to Firm (FCFF) Model

FCFF is calculated from net income using the following formula

= Net Income + Non-Cash Charges + Interest (1-tax) Fixed Capital

Free Cash Flow to Equity (FCFE) Model

Valuation of Infosys Ltd. Using DDM

Expected dividend to be paid in the next year

Required Rate of Return on Equity

Sustainable growth rate of dividend

Risk Free Rate of Return

Beta a measure of Systematic Risk

8.81 + 0.32 (16 8.81)

Valuation of Infosys Ltd. Using FCFE

Net Income + Non-Cash Charges Working Capital Investment

Accordingly, the formula for FCFE can be modified as:

CFO Fixed Capital Investment + Net Borrowings

Purchase of property, plant and equipment during

Using Infosyss balance sheet, net borrowings were calculated as follows:

As calculated for the dividend discount model, Ke = 11.11%

6658 (1 + 0.04687)/(0.1111 0.04687)

Rs. 108515.845 Crores

Market Value of Equity/Number of Shares Issued

Valuation of Infosys Ltd. Using FCFF

(D/C) x (Cost of Debt) x (1 tax) + (E/C) x (Cost of Equity)

(0) x (0) x (1 0.30) + (1) x (11.11)

The following table summarises the results:

6658 (1 + 0.04687)/(0.1111 0.04687)

Rs. 108515.845 Crores

Findings & Recommendations

Valuation of Mahindra & Mahindra Ltd. Using DDM

Expected dividend to be paid in the next year

Required Rate of Return on Equity

Sustainable growth rate of dividend

Ke was calculated using the Capital Asset Pricing Model (CAPM)

Risk Free Rate of Return

Beta a measure of Systematic Risk

Calculation of Required Rate of Return on Equity Using CAPM

8.81 + 0.85 (16 8.81)

Valuation of Mahindra & Mahindra Ltd. Using FCFE

Net Income + Non-Cash Charges Working Capital Investment

Accordingly, the formula for FCFE can be modified as:

CFO Fixed Capital Investment + Net Borrowings

Purchase of property, plant and equipment during

Using M&Ms balance sheet, net borrowings were calculated as follows:

Net Borrowings (Debt Issued - Debt

Following the calculation of net borrowings, FCFE was calculated as follows:

As calculated for the dividend discount model, Ke = 14.9215%

2169.75 (1 + 0.11451)/(0.149215 0.11451)