final beta

An Assignment

On

Valuation of Share

as per the CAPM

A Project Report submitted in partial fulfillment of award of MBA Degree.

Submitted To: Submitted By:

Prof. Sandhya Harkawat Vrutika Patel (63)

Punit Rupareliya(74)

Ravindra Rupareliya (75)

Tejas Rupareliya (76)

Babita Singh (94)

S.K.Patel INSTITUTE OF MANAGEMENT & COMPUTER STUDIES,Gandhinagar

Undervaluation and Overvaluation

1…Undervaluation:

An undervalued stock is defined as a stock that is selling at a price significantly below what is assumed to be its intrinsic value.

For example, if a stock is selling for Rs.50, but can be determined to be worth Rs.100 based on predictable future cash flows, then it is an undervalued stock.

One would not be able to predict whether a stock is undervalued without predicting the future profits of a company and future interest rates.

2…Overvaluation:

An Overvalued stock is defined as a stock that is selling at a price significantly over what is assumed to be its intrinsic value.

For example, if a stock is selling for Rs.90, but can be determined to be worth Rs.110 based on predictable future cash flows, then it is an overvalued stock.

It can be difficult to determine whether or not a company is overvalued, but a high price-earnings ratio is one way.

For example, a price-earnings ratio over 1 indicates that the stock price is more than the company's earnings per share, which may mean that the company is overvalued.

Capital Asset Pricing Model (CAPM):

Capital Asset Pricing Model is the model explaining the risk-return relationship is called the capital asset pricing model (CAPM). It provides that in to risk.

rs = rf + β × (rm - rf)

Security Beta:

Security beta CAPM provides a measure of risk and a method of estimating the market’s risk return line. The market (systematic) risk of a security is measured in terms of its sensitivity to the market movements. This sensitivity is referred to the security’s beta.

Beta reflects the systematic risk, which cannot be reduced. Investors can eliminate unsystematic risk when they invest their wealth in a well diversified market portfolio. A beta of 1.0 indicates average level of risk while more than 1.0 means that the security’s return fluctuates more than that of the market portfolio. A beta zero means no risk.

Risk Free Interest Rate:

Risk-free interest rate is the theoretical rate of return of an investment with zero risk, including default risk.

Risk free rate is the minimum return an investor should expect for any investment, as any amount of risk would not be tolerated unless the expected rate of return was greater than the risk-free rate.

The risk-free rate represents the interest that an investor would expect from an absolutely risk-free investment over a given period of time. Therefore, a rational investor will reject all the investments yielding sub-risk-free returns.

In practice, however, the risk-free rate does not technically exist; even the safest investments carry a very small amount of risk.

Market Rate of Return:

The market rate, defined as the rate of interest, on a loan or investment, which is commonly available on the market for that product. Market rate is what should be expected.

For example, for a loan, the market rate is the average rate of interest that will be charged to the receiver from a variety of providers.

While to the investor, the market rate is the average rate of interest gained from all or a certain set of investment vehicles which are available on the open market.

Multi – period Valuation Model:

Since equity shares have no maturity period, they may be expected to bring a dividend stream of infinite duration. Hence the value of an equity share may be:

P0 = D 11+r+ D 2(1+r )2

+…+ Dn(1+r )n

Where,

P0 = Price of the equity share today

D1 = Dividend expected a year hence

r = expected return

Finding expected returns as per CAPM and determining the stock of BAJAJ AUTO

Name of the Stock BAJAJ AUTOE EEE EExpected return on the security, rs 5.80%E Beta of the security, β 0.63E Risk free rate of return, rf (-30.15%)E Market Return, rm 1.38%

Return on the asset as per CAPM rs = rf + β × (rm - rf)

CAPM Returns = (-30.15%) + 0.63 × (1.38% - (-30.15%))

= (-10.29%)

E E E As per the assumption made by Babita Singh

E As per the data available in internet on the site:

http://www.bseindia.com/about/abindices/betavalues.asp


BAJAJ AUTODIVIDEND Rate (%)

Year 2010 2009 2008 2007 2006Rate 400 220 200

Average Dividend Rate (%) 273.33Dividend for the year of 2010 (Rs.) 40

Expected DIVIDEND after t yers hence [40+(1*273.33%)]*tYear 2011 2012 2013 2014 2015

Dividend (Rs.)

43.73 47.46 51.19 54.93 58.67

Current Market Prices as on 13th May, 2011 (As per bseindia.com) 1337.25

P0 = 43.73

1+(−0.1029)+ 47.46

(1+(−0.1029))2+ 51.19

(1+(−0.1029))3+ 54.93

(1+(−0.1029))4+ +58.67

(1+(−0.1029))5

P0 =

AS the market price is Rs.1337.25 and intrinsic value is Rs.274.48, Share value is Undervalued as compare to its market price.

Finding expected returns as per CAPM and

274.48

determining the stock of DLF LTD

Name of the Stock DLF LTDE EEE EExpected return on the security, rs 7.80%E Beta of the security, β 1.52E Risk free rate of return, rf (-28.39%)E Market Return, rm 0.62%


CAPM Returns = (-28.39%) + 1.52 × (0.62% - (-28.39%))

= 15.71%

E E E As per the assumption made by Babita Singh




DLF LTDDIVIDEND Rate (%)

Year 2010 2009 2008 2007 2006Rate 100 100 100 100 100

Average Dividend Rate (%) 100Dividend for the year of 2010 (Rs.) 2

Expected DIVIDEND after t yers hence [2+(1*100%)]*tYear 2011 2012 2013 2014 2015

Dividend (Rs.)

2 2 2 2 2


P0 = 2

1+0.1571+ 2

(1+0.1571 )2+ 2

(1+0.1571 )3+ 2

(1+0.1571 )4+ +2

(1+0.1571 )5

P0 =


Finding expected returns as per CAPM and determining the stock of ICICI BANK LTD

Name of the Stock ICICI BANK LTD

14.64

E EEE EExpected return on the security, rs 17%E Beta of the security, β 1.43E Risk free rate of return, rf 17.23%E Market Return, rm 8.38%


CAPM Returns = 17.23% + 1.43 × (8.38% - 17.23%)

= 4.57%

E E E As per the assumption made by Tejas Rupareliya




ICICI BankDIVIDEND Rate (%)

Year 2010 2009 2008 2007 2006Rate 140 120 110 110 100



Dividend (Rs.)

15.16 16.32 17.48 18.64 19.80


P0 = 15.161+0.457

+ 16.32(1+0.457 )2

+ 17.48(1+0.457 )3

+ 18.64(1+0.457 )4

+ +19.80(1+0.457 )5

P0 =

AS the market price is Rs. 1075.7 and intrinsic value is Rs. 88.93, Share value is undervalued as compare to its market price.

88.93

Finding expected returns as per CAPM and determining the stock of INFOSYS TECH

Name of the Stock INFOSYS TECHE EEE EExpected return on the security, rs 14%E Beta of the security, β 0.86E Risk free rate of return, rf 6.21%E Market Return, rm 9.26%


CAPM Returns = 6.21% + 0.86 × (9.26 -6.21 )

= 8.83%

E E E As per the assumption made by Tejas Rupareliya




INFOSYS TECHDIVIDEND Rate (%)

Year 2010 2009 2008 2007 2006Rate 1200 500 470 665 230



Dividend (Rs.)

14.13 21.26 36.39 58.65 96.04


P0 = 14.13

1+0.0883+ 21.26

(1+0.0883 )2+ 36.39

(1+0.0883 )3+ 58.65

(1+0.0883 )4+ +96.04

(1+0.0883 )5

P0 =


Finding expected returns as per CAPM and determining the stock of ITC LTD

Name of the Stock ITC LTD

141.71

E EEE EExpected return on the security, rs 14.5E Beta of the security, β 0.73E Risk free rate of return, rf 44.84%E Market Return, rm 6.79%


CAPM Returns = 44.84% + 0.73 × (6.79% - 44.84%)

= 17.06%

E E E As per the assumption made by Punit Rupareliya




ITC LTDDIVIDEND Rate (%)

Year 2010 2009 2008 2007 2006Rate 1000 370 350 310 265



Dividend (Rs.)

15.59 21.18 26.77 32.36 37.95


P0 = 15.59

1+0.1706+ 21.18

(1+0.1706 )2+ 26.77

(1+0.1706 )3+ 32.36

(1+0.1706 )4+ +37.95

(1+0.1706 )5

P0 =


Finding expected returns as per CAPM and determining the stock of NTPC LTD

131.53

Name of the Stock NTPC LTDE EEE EExpected return on the security, rs 10%E Beta of the security, β 0.68E Risk free rate of return, rf (-12.08%)E Market Return, rm 1.96%


CAPM Returns = (-12.08%) + 0.68 × (1.96% - (-12.08%))

= 2.56%

E E E As per the assumption made by Ravindra Rupareliya




NTPC LTDDIVIDEND Rate (%)

Year 2010 2009 2008 2007 2006Rate 8 30 8 30 8

Average Dividend Rate (%) 16.8Dividend for the year of 2010 (Rs.) 0.80

Expected DIVIDEND after t yers hence [0.80+(1*16.8%)]*tYear 2011 2012 2013 2014 2015

Dividend (Rs.)

1.968 3.136 4.304 5.472 6.64


P0 = 1.968

1+0.0256+ 3.136

(1+0.0256 )2+ 4.304

(1+0.0256 )3+ 5.472

(1+0.0256 )4+ +6.64

(1+0.0256 )5

P0 =


Finding expected returns as per CAPM and determining the stock of RELIANCE IND

24.63

Name of the Stock RELIANCEE EEE EExpected return on the security, rs 15.00%E Beta of the security, β 0.94E Risk free rate of return, rf -4.90%E Market Return, rm 11.54%


CAPM Returns = (-4.90) + 0.94 × (11.54% - (-4.90%))

= 10.55%

E E E As per the assumption made by Punit Rupareliya




RELIENCE INDDIVIDEND Rate (%)

Year 2010 2009 2008 2007 2006Rate 80 70 130 130 110



Dividend (Rs.)

10.04 12.08 14.12 16.16 18.20


P0 = 10.04

1+0.0256+ 12.08

(1+0.0256 )2+ 14.12

(1+0.0256 )3+ 16.16

(1+0.0256 )4+ +18.20

(1+0.0256 )5

P0 =


Finding expected returns as per CAPM and determining the stock of TATA MOTORS

71.94

Name of the Stock TATA MOTORSE EEE EExpected return on the security, rs 8%E Beta of the security, β 1.44E Risk free rate of return, rf 40.81%E Market Return, rm 3.02%


CAPM Returns = 40.81% + 1.44 × (3.02% - 40.81%)

= (-13.61%)

E E E As per the assumption made by Vrutika Patel




TATA MOTORSDIVIDEND Rate (%)

Year 2010 2009 2008 2007 2006Rate 150 60 150 150 130


Expected DIVIDEND after t yers hence [+(1*%)]*tYear 2011 2012 2013 2014 2015

Dividend (Rs.)

17.28 19.56 21.84 24.12 26.40


P0 = 17.28

1+(−0.1361)+ 19.56

(1+(−0.1361))2+ 21.84

(1+(−0.1361))3+ 24.12

(1+(−0.1361))4+ +26.40

(1+(−0.1361))5

P0 =


Finding expected returns as per CAPM and determining the stock of TATA STL

120.25

Name of the Stock TATA STLE EEE EExpected return on the security, rs 12.50%E Beta of the security, β 1.27E Risk free rate of return, rf -0.65%E Market Return, rm 2.69%


CAPM Returns = (-0.65%) + 1.27 × (2.69% - (-0.65%)

= 3.59%

E E E As per the assumption made by Ravindra Rupareliya




TATA STLDIVIDEND Rate (%)

Year 2010 2009 2008 2007 2006Rate 80 160 160 155 130



Dividend (Rs.)

10.37 12.74 15.11 17.48 19.85

Current Market Prices as on 13th May, 2011 (As per bseindia.com) 594

P0 = 10.37

1+0.0359+ 12.74

(1+0.0359 )2+ 15.11

(1+0.0359 )3+ 17.48

(1+0.0359 )4+ +19.85

(1+0.0359 )5

P0 =

AS the market price is Rs.594 and intrinsic value is Rs.77.78, Share value is Undervalued as compare to its market price.

Finding expected returns as per CAPM and determining the stock of WIPRO LTD

77.78

Name of the Stock WIPRO LTDE EEE EExpected return on the security, rs 2.75%E Beta of the security, β 0.86E Risk free rate of return, rf 11.42%E Market Return, rm 1.80%


CAPM Returns = 11.42% + 0.86 × (1.80% - 11.42%)

= 3.15%

E E E As per the assumption made by Vrutika Patel




WIPRO LTDDIVIDEND Rate (%)

Year 2010 2009 2008 2007 2006Rate 200 100 300 200 200



Dividend (Rs.)

7 10 13 16 19


P0 = 7

1+0.0315+ 10

(1+0.0315 )2+ 13

(1+0.0315 )3+ 16

(1+0.0315 )4+ +19

(1+0.0315 )5

P0 =


67.58

final beta

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