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