Scribd
Upload
1K views

L&T Cost of Capital

The document provides information about Larsen & Toubro (L&T), a large Indian engineering and construction company. It outlines the steps to calculate L&T's weighted average cost of capital (WACC). It determines L&T's cost of equity is 16.17% using the capital asset pricing model. It finds L&T's cost of debt is 12.37% based on interest paid and total secured loans. Weighting these costs based on the company's market value of debt and equity results in an estimated WACC of 15.92% for L&T.

Uploaded by

bishnuchettri
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
1K views

L&T Cost of Capital

The document provides information about Larsen & Toubro (L&T), a large Indian engineering and construction company. It outlines the steps to calculate L&T's weighted average cost of capital (WACC). It determines L&T's cost of equity is 16.17% using the capital asset pricing model. It finds L&T's cost of debt is 12.37% based on interest paid and total secured loans. Weighting these costs based on the company's market value of debt and equity results in an estimated WACC of 15.92% for L&T.

Uploaded by

bishnuchettri
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 17

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
L&T
Komatsu
Limited
L&T
Valves L&T
Business InfoTech
Group

L&T SUBSIDIARIES
e- L&T EmSyS
Engineering
Solutions

L&T
L&T
Infrastructure
Finance
Finance
Cost of Capital

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 Equity

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.
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%
Beta of L&T

3 approaches –

Covariance
Regression Method for Using
approach computation Formula
of beta
Regression Approach –

Returns(L&T) = a + b*Return (SENSEX)


(where b indicates beta)
Regression Statistics
R Square 0.402283

Observations 2449

Intercept 0.073806
X Variable 1 1.040858

ß = 1.04085
Covariance Method –
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
Using Formula,
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
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%


Cost of Debt

Total Secured Loans =1102.38

Interest Paid=253.08

Cost of Debt, Kd=18.71%

Cost of Debt (After Tax)=12.37%


Cost of Preference Share Capital

• 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.
Weights of Debt & Equity
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%


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

Market Value (Rs.


Particulars 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%


Weighted Average Cost of Capital

WACC= D/D+E*Kd+E/D+E* Ke

where,
D = Debt
E = Equity
Kd = Cost of debt
Ke= Cost of equity

WACC=15.92%

You might also like