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Beta Analysis for Hero Motor Corp Limited

Assignment – 2 Vibhor Mittal, Roll no.6

Data Source:

Hero Motor Corp Limited share price data from Nifty website
https://www.nseindia.com/products/content/equities/equities/eq_security.htm which
is for the period from 01-01-2016 to 30-11-2018 fetch on monthly basis. The data fetch
is of working day as on 15th the month or near that date to reduce noise keeping in mind
that more spikes are observed in the starting and ending of the month.

This data of Hero Motor Corp Limited stock price when compared against NIFTY 500 on
a linear regression is estimated.

The cost of equity calculations require data source for the risk-free rate of return which
is sourced from RBI website https://www.rbi.org.in/home.aspx. The risk-free rate of
return on 30-11-2018 is 6.77%.

Result:

Hero Motor Corp vs Nifty500


0.06
0.04
y = 1.0077x - 0.0022
R² = 0.295 0.02
0 Hero Motor Corp vs
-0.06 -0.04 -0.02 0 0.02 0.04 Nifty500
-0.02
Linear (Hero Motor
-0.04 Corp vs Nifty500)
-0.06
-0.08
-0.1

Beta = 1.0077 p-value = 0.0009 R Square = 0.295

Cost of equity = 16.85%


Analysis:

Hero Motor Corp share price beta value is near to unity, when compared against NIFTY
500 index which essentially means that the share price movement is very similar to
movement of NIFTY 500 movement. The share price will be up when the NIFTY 500
increases and goes down when the index tanks down. As this analysis is of a time frame
of approximately data of 3 years, volatility of this company is not much. The investors
see Hero Motor Corp share price reacting same as macro condition prevalent in the
market.

Since, the stock movement is along with the index that means deviation is less. The risk
associated with Hero Motor Corp is lesser which gives an impression that the increase in
potential gains not high.

R-Square value which is in this case is 0.295 means only one third of Hero Motor Corp’s
risk is market risk and the rest risk is unique. The p-value is 0.0009, so we can
confidently say the estimated beta value is true, considering our null hypothesis of beta
value equal to zero.

rf 6.77% 30-11-2018
beta 1.0077
rm-rf 10%

Ke = rf + beta(rm-rf)
Cost of equity
16.8469

The estimated rate of return for Hero Motor Corp using Capital Asset Pricing Model
gives us the cost of equity is 16.85%.

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