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

SUBSIDIARIES

L&TKomatsu Limited

L&TInfoTech

L&T EmSyS

L&TFinance

L&TInfrastructure

Finance

L&Te-Engineering

Solutions

L&TValves Business

Group

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

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

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%

3 approaches –

Regression approach

Covariance Method for

computation of beta

Using Formula

Beta of L&T

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 –

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 –

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,

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%

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

• 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

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

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%

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