l&t cost of capital
TRANSCRIPT
![Page 1: L&T Cost of Capital](https://reader033.vdocuments.us/reader033/viewer/2022061421/5526e61d49795900108b4610/html5/thumbnails/1.jpg)
![Page 2: L&T Cost of Capital](https://reader033.vdocuments.us/reader033/viewer/2022061421/5526e61d49795900108b4610/html5/thumbnails/2.jpg)
About the Company
• Leader in India's engineering and construction industry
• India's largest engineering and construction conglomerate
• Mr. Holck-Larsen and Mr. Toubro founded the partnership in 1938
![Page 3: L&T Cost of Capital](https://reader033.vdocuments.us/reader033/viewer/2022061421/5526e61d49795900108b4610/html5/thumbnails/3.jpg)
SUBSIDIARIES
L&TKomatsu Limited
L&TInfoTech
L&T EmSyS
L&TFinance
L&TInfrastructure
Finance
L&Te-Engineering
Solutions
L&TValves Business
Group
![Page 4: L&T Cost of Capital](https://reader033.vdocuments.us/reader033/viewer/2022061421/5526e61d49795900108b4610/html5/thumbnails/4.jpg)
Steps involved:
• Calculation of Cost of equity• Calculation of cost of debt• Calculation of cost of preference share capital• Calculation of Market value of debt and equity
Cost of Capital
![Page 5: L&T Cost of Capital](https://reader033.vdocuments.us/reader033/viewer/2022061421/5526e61d49795900108b4610/html5/thumbnails/5.jpg)
Capital Asset Pricing Model (CAPM)
Es : expected return for a security
Rf: expected risk free return in market (government bond yield)
βs: sensitivity to market risk for the security
RM: historical return of the stock market/ equity market
(RM-Rf): risk premium of market assets over risk free assets.
Cost of Equity
![Page 6: L&T Cost of Capital](https://reader033.vdocuments.us/reader033/viewer/2022061421/5526e61d49795900108b4610/html5/thumbnails/6.jpg)
Risk Free rate of return (Rf)
• 364 day T-bill rate as on 04 Dec 2009 , used as a proxy for the Risk Free Rate = 4.49%
Market risk premium (Rm)• Rm = Market Return – Risk free Return• The Market return has been computed using
BSE SENSEX values for the years 2000-2009.• Market Return is approximately 15.737%.• Thus, Rm = 15.73% - 4.49% = 11.24%
![Page 7: L&T Cost of Capital](https://reader033.vdocuments.us/reader033/viewer/2022061421/5526e61d49795900108b4610/html5/thumbnails/7.jpg)
3 approaches –
Regression approach
Covariance Method for
computation of beta
Using Formula
Beta of L&T
![Page 8: L&T Cost of Capital](https://reader033.vdocuments.us/reader033/viewer/2022061421/5526e61d49795900108b4610/html5/thumbnails/8.jpg)
Returns(L&T) = a + b*Return (SENSEX)(where b indicates beta)
ß = 1.04085
Regression Statistics
R Square 0.402283
Observations 2449
Intercept 0.073806
X Variable 1 1.040858
Regression Approach –
![Page 9: L&T Cost of Capital](https://reader033.vdocuments.us/reader033/viewer/2022061421/5526e61d49795900108b4610/html5/thumbnails/9.jpg)
ß = Covariance (Rs, Rm) Variance (Rm)
where, covariance S,M = ∑ [Rs – Rs(avg)]*[Rm – Rm(avg)]
N
ß = 3.34590 3.21456
ß = 1.04085
Covariance Method –
![Page 10: L&T Cost of Capital](https://reader033.vdocuments.us/reader033/viewer/2022061421/5526e61d49795900108b4610/html5/thumbnails/10.jpg)
ß =(Avg of product of Rs & Rm)–(Product of avg of Rs & Rm)
(Avg of square of Rm) – (Square of avg of Rm)
= 3.35467 – (0.13936*0.06295)3.21852 – (0.06295*0.06295)
ß = 1.04085
Using Formula,
![Page 11: L&T Cost of Capital](https://reader033.vdocuments.us/reader033/viewer/2022061421/5526e61d49795900108b4610/html5/thumbnails/11.jpg)
Inferences of Value of Beta :– L&T stock is moderate risk stock– The volatility of the stock is almost
in tune with that of the market
Inferences of Value of R square :– Value of R square = 0.402283– 40% of the variation in the share
prices of the Company can be explained by the Market Return
– remaining 60% can be attributed to internal variables within the Company.
cost of equity , Ke = 16.17%
![Page 12: L&T Cost of Capital](https://reader033.vdocuments.us/reader033/viewer/2022061421/5526e61d49795900108b4610/html5/thumbnails/12.jpg)
Total Secured Loans =1102.38
Interest Paid=253.08
Cost of Debt, Kd=18.71%
Cost of Debt (After Tax)=12.37%
Cost of Debt
![Page 13: L&T Cost of Capital](https://reader033.vdocuments.us/reader033/viewer/2022061421/5526e61d49795900108b4610/html5/thumbnails/13.jpg)
• Larsen & Toubro does not have any preference share capital in its balance sheet.
• Therefore, the cost of preference share capital is assumed to be NIL.
Cost of Preference Share Capital
![Page 14: L&T Cost of Capital](https://reader033.vdocuments.us/reader033/viewer/2022061421/5526e61d49795900108b4610/html5/thumbnails/14.jpg)
Book Value:
Particulars Book value (Rs. Crore) Weights
Debt (Short Term) 5453.65 28.68%
Debt (Long Term) 1102.38 5.80%
Equity (Net worth) 12,459.69 65.52%
Total 19,015.72 100.00%
Weights of Debt & Equity
![Page 15: L&T Cost of Capital](https://reader033.vdocuments.us/reader033/viewer/2022061421/5526e61d49795900108b4610/html5/thumbnails/15.jpg)
Market value:
• Equity shares outstanding: 58,56,87,862• Market price as on 01 Dec 2009: Rs. 1614.15• Market Capitalization: Rs. 96889.35 Cr
ParticularsMarket Value (Rs.
Crore) Weights
Debt (Short Term) 5453.65 5.39%
Debt (Long Term) 1102.38 1.09%
Equity 94,538.06 93.52%
Total 1,01,094.09 100.00%
![Page 16: L&T Cost of Capital](https://reader033.vdocuments.us/reader033/viewer/2022061421/5526e61d49795900108b4610/html5/thumbnails/16.jpg)
WACC= D/D+E*Kd+E/D+E* Ke
where, D = DebtE = EquityKd = Cost of debt
Ke= Cost of equity
WACC=15.92%
Weighted Average Cost of Capital
![Page 17: L&T Cost of Capital](https://reader033.vdocuments.us/reader033/viewer/2022061421/5526e61d49795900108b4610/html5/thumbnails/17.jpg)