Behaviour Infosys Share prices on various stages of Dividend Pay-out Dates for 5 years from 2014- 2017

The following the Share prices of Infosys on 4 different dates of Dividend Pay-outs

1. Dividend Declaration Date

2. Ex-Dividend Date
3. Effective Dividend Date
4. 1 week after Effective Dividend Date

Price of Infosys Stock of the 2017 Dividend Pay-outs

Declaration Ex- Dividend Effective 1 week after effective
date date date dividend date
2017-Final 981.25 931.4 970.95 956.3
990
980
970
960
Observation:
950
940 On the declaration of Dividend the
930 2017-Final price of stock was 981.25 and a week
920 after the Cum-Dividend date the share
910 price has reduced by 25 rupees to
900 956.3
Declaration Ex- Dividend Record date 1 week after
date date effective
dividend date

Price of Infosys Stock of the 2016 Dividend Pay-outs (Interim & Final)
1 week after
Ex- Dividend effective dividend
Declaration date date Record date date
2016-Interim 1054 1060.35 1038.1 1006.15
2016-Final 1167.35 1180 1185.45 1159
 1200 Observation:
1180
1160 Interim Dividend :
1140 On the declaration of Dividend the
1120 price of stock was 1054 and a week
1100 after the Cum-Dividend date the share
2016-Interim price has reduced by 48 rupees to
1080
2016-Final 1006.15
1060
1040 Final Dividend :
1020
On the declaration of Dividend the
1000
Declaration Ex- Dividend Record date 1 week after price of stock was 1167.35 and a week
date date effective after the Cum-Dividend date the share
dividend date price has reduced by 8rupees to 1159

Price of Infosys Stock of the 2015 Dividend Pay-outs (Interim & Final)

1 week after effective

Declaration date Ex- Dividend date Record date dividend date
2015-Interim 1059.31 1098.4 1093.75 1148.55
2015-Final 2181.95 1996.25 991.1 1001.15
2300 Observation:
2100
Interim Dividend :
1900
On the declaration of Dividend the
1700 price of stock was 1054 and a week
2015-Interim after the Cum-Dividend date the share
1500 2015-Final price has reduced by 48 rupees to
1006.15
1300
Final Dividend :
1100
On the declaration of Dividend the
900
price of stock was 1167.35 and a week
1 2 3 4
after the Cum-Dividend date the share
price has reduced by 8rupees to 1159

Price of Infosys Stock of the 2014 Dividend Pay-outs (Interim & Final)

Ex- Dividend 1 week after effective

Declaration date date Record date dividend date
2014-Interim 3542.95 3594 3865.6 3294
2014-Final 3291.25 3260.45 2924.3 2999.8
 3900

3700

3500

3300
2014-Interim
3100
2014-Final
2900

2700

2500
Declaration Ex- Dividend Record date 1 week after
date date effective
dividend date

Price of Infosys Stock of the 2014 Dividend Pay-outs (Interim & Final)

1 week after effective

Declaration date Ex- Dividend date Record date dividend date
2013-Interim 3015.7 3013.35 3270.1 3309.85
2013-Final 2863.85 2295.48 2342.15 2427.50

3400

3200

3000

2800 2013-Interim

2600 2013-Final

2400

2200

2000
1 2 3 4
 Application of Dividend Policy Theories to

INFOSYS stock price and Dividend Policy

MM HYPTHESIS THEORY OF IRRELEVANCE
Declara 1 week after
Ex- Dividend
tion Record date effective Movement of Price
date
date dividend date
2017-Final 981.25 931.4 970.95 956.3 DOWN
2016-Interim 1054 1060.35 1038.1 1006.15 DOWN
2016-Final 1167.35 1180 1185.45 1159 DOWN
2015-Interim 1059.31 1098.4 1093.75 1148.55 UP
2015-Final 2181.95 1996.25 991.1 1001.15 DOWN
2014-Interim 3542.95 3594 3865.6 3294 DOWN
2014-Final 3291.25 3260.45 2924.3 2999.8 DOWN
2013-Interim 3015.7 3013.35 3270.1 3309.85 UP
2013-Final 2863.85 2295.48 2342.15 2427.5 DOWN
Table 2: Movement of Stock Price to the Dividend Declaration

According to Modigliani and Miller (M-M), dividend policy of a firm is irrelevant as it does not affect the wealth
of the shareholders. He argue that the value of the firm depends on the firm’s earnings which result from its
investment policy.

Thus, when investment decision of the firm is given, dividend decision the split of earnings between dividends
and retained earnings is of no significance in determining the value of the firm.

Observation:
From the Table 2 we can observe that

1. On the ex-dividend date, the stock price is adjusted downward by the amount of the dividend by the
exchange on which the stock trades.
2. The reason for the adjustment is that the amount paid out in dividends no longer belongs to the
company and this is reflected by a reduction in the company’s market cap. Instead, it belongs to the
individual shareholders
3. For most dividends this is usually not observed amidst the up and down movements of a normal day's
trading. It becomes easily apparent, however, on the ex-dividend dates for larger dividends.
4. For those purchasing shares after the ex-dividend date, they no longer have a claim to the dividend, so
the exchange adjusts the price downward to reflect this fact.

MM Hypothesis theory does not hold well in case of Infosys stocks as seen with the above table 2 that paying
out the dividend does move the price of stocks, here there a consistent down ward movement seen that is
visible after the 1 week of paying out the dividend.

Walter’s Dividend Relevance Theory

Walter argues that the choice of dividend policies almost always affects the value of the enterprise. His model
shows clearly the importance of the relationship between the firm’s internal rate of return (r) and its cost of
capital (k) in determining the dividend policy that will maximise the wealth of shareholders.
With a given equity capitalization rate he proposes that a firm is in any one of the following trade cycle phases

1. Growth Phase : irr > Kₑ ; DP ratio=0 is optimal

2. Normal phase : irr= Kₑ ; Any DP ratio is optimal
3. Saturated Phase : irr< Kₑ ; DP ratio=100% is optimal

Calculation of Kₑ for Infosys using CAPM

Kₑ= Rƒ + β (Rᶬ- Rƒ)

Kₑ= Cost of Equity

Rƒ = Risk Free Return = Indian Government Bond return = 6.75 %

β = beta of Infosys = 0.7985 : courtesy: https://ycharts.com/companies/INFY/market_beta_60_month

Rᶬ= Market Return= 21% : courtesy: bseindia.com

Kₑ= 18.13% as per applying the above formula.

Market Consistency Logical Price

Price of with as per
Stock as on Walter's Walter's
Year DPO EPS 31st March model Model
2017 42.80 60.16 929.00  62.91
2016 35.28 68.73 1217  74.03
2015 42.01 105.91 1996.25  116.025444
2014 35.49 178.39 3174.25  201.0112355
2013 26.45 158.76 2227.05  179.7048263
2012 31.86 147.51 2348.8  165.817529
2011 53.46 112.26 2942.15  121.5681081
2010 24.71 101.1 2740.7  113.1926255
2009 23.11 101.71 1448.6  114.152471
2008 42.55 78.15 1686.45  83.78552124
Table 3: Walter’s Calculated Infosys Stock Price Variations and actual Market price of Infosys with DPO

Observation
Considering INFOSYS to in the Normal Growth Phase in IT industry and is a Pure Equity Firm(zero debt)

Above is the table with calculated stock price (as per Walters Formula) and actual Market price of Infy stock
along with various Dividend pay-out ratios.

The market variations in Infy Stock are mostly consistent with the Walters theory of Relevance of Dividend
Policy.
Gordon’s Model of Dividend Equalization
According to this theory the market value of a share (P) is equal to the present value of an infinite stream of
dividends to be received by the share. Therefore increase in Dividend pay-out increases the value of share and
any decrease in dividends (or increased retention) reduces the value of the share .

Consistency
Actual with
Earnings Market Price Gordon's
Year DPO retention as on Mar 31 model
2017 42.80 57.2 929.00 
2016 35.28 64.72 1217 
2015 42.01 57.99 1996.25 
2014 35.49 64.51 3174.25 
2013 26.45 73.55 2227.05 
2012 31.86 68.14 2348.8 
2011 53.46 46.54 2942.15 
2010 24.71 75.29 2740.7 
2009 23.11 76.89 1448.6 
2008 42.55 57.45 1686.45 
TABLE 4 : INFOSYS Dividend pay-out ratio and Retention Ratio for the past 10 years.

Observation
Considering that Infosys is a Pure Equity firm, deciding on the behaviour of Infosys stock prices with respect to
Dividend pay-out and Retention Ratios we observe the following:

1. We observe that the Infosys stocks are not consistent with Gordon’s Dividend relevance Theory.
2. From table 4 we can observe that at many points when retention ration increases the stock price also
increases, which is against the Gordon’s theory.
3. Also we can observe that Infosys Shareholders are not Risk Averse, increase in Stock Price with
increased retention depicts shareholders confidence in the firm’s ability to give a good return on their
retained earrings and are willing to take that RISK.
Determinants of Dividend Policy of a Firm
The following study is based on the Research Paper

Why do firms pay dividends? – Research Article

International evidence on the determinants of dividend policy
 David J. Denis
 Igor Osobov b

Kelley School of Business, Indiana University, Bloomington, IN 47405, USA

Published in
Journal of Financial Economics 89 (2008) 62– 82
https://s3.amazonaws.com/academia.edu.documents/
In developed countries like US, Canada, UK, Germany, France, and Japan, the propensity to pay dividends is higher among
larger, more profitable firms, and those for which retained earnings comprise a large fraction of total equity. Although
there are hints of reductions in the propensity to pay dividends in most of the sample countries, aggregate dividends
have not declined and are concentrated among the largest, most profitable firms.

Finally, outside of the US there is little evidence of a systematic positive relation between relative prices of dividend
paying and value of the firm and the propensity to pay dividends.

The following are the determinants of Dividend Policy of a Firm as suggested by the Article

1. TYPE OF INDUSTRY
2. OWNERSHIP STRUCTURE
3. AGE OF CORPORATION
4. THE EXTENT OF SHARE DISTRIBUTION
5. DIFFERENT SHAREHOLDERS’ EXPECTATIONS
6. LEVERAGE
7. FUTURE FINANCIAL REQUIREMENTS
8. BUSINESS CYCLES
9. GROWTH
10. PROFITABILITY
11. LIQUIDITY
12. TAXATION

The article lists 5 key determinants of a firm’s Dividend Policy that are intrinsic to the Firm for deciding on Dividend
policy.

1. Earnings
2. Cash Flows
3. Share Holders Funds
4. Accumulated Profits
5. Taxation on Dividends
6. Size of the Firm (MCAP)
STATISTICAL ANALYSIS

Objectives
 To know about determinants of Dividend Policy of INFOSYS

 To know whether all the Determinants have equal & uniform effect on Dividend Pay-out Ratio
Method - One way - ANOVA

 To Test for the dependency of INFOSYS Dividend Policy on the Determinants

Method - Multiple Regression.

 To test Homogeneous Peer Firms of INFOSYS and their Consistency in Dividend Policies
Method - One Way – ANOVA.

 To test relevance of DIVIDEND SIGNALLING THEORY on INFY Stocks by testing the effect of
Dividend yield on the Infosys Stock price
Method- Regression
Cash Flow(In Present Share holder Accumulated
Year Cr) Earnings funds Profits
1 2017 19,153.00 13,818.00 68,017.00 66,869.00
2 2016 29,176.00 15,786.00 57,157.00 56,009.00
3 2015 27,722.00 12,164.00 48,068.00 47,494.00
4 2014 24,100.00 10,194.00 42,092.00 41,806.00
5 2013 20,401.00 9,116.00 36,059.00 35,772.00
6 2012 19,557.00 8,470.00 29,757.00 29,470.00
7 2011 15,165.00 6,443.00 24,501.00 24,214.00
8 2010 11,297.00 5,803.00 22,036.00 21,749.00
9 2009 10,289.00 5,818.00 17,809.00 17,523.00
10 2008 7,689.00 4,470.00 13,490.00 13,204.00
TABLE 5 : INFOSYS Financial data for the previous 10 years.

TEST 1:

TESTING FOR UNIFORMITY IN THE FINANCIAL DATA , TO CHECK ON UNIFORM EFFECT ON

DIVIDEND PAY OUT RATIO
Statistical Analysis Tool : ONE- WAY ANOVA

Variables:
1. Cash Flow(CF)
2. Present Earnings(PE)
3. ShareHolder Funds(SF)
4. Acc. Profits(AP)

Null Hypothesis : H0: μ(CF) = μ(PE)= μ(SF)= μ(AP)

Interpretation: Do the variables have uniform effect on Dividend pay-out Ratio

Alternate Hypothesis : H1 : μ(CF) ≠ μ(PE) ≠ μ(SF) ≠ μ(AP)

Interpretation: one or more Variable/s has non-uniform effect of Dividend pay-out ratio
 Anova: Single Factor

SUMMARY
Groups Count Sum Average Variance
Column 1 9 176860 19651.11 44255020
Column 2 9 87612 9734.667 12877547
Column 3 9 345496 38388.44 2.88E+08
Column 4 9 340906 37878.44 2.77E+08
ANOVA
Source of Variation SS df MS F P-value F crit
Between Groups 5.39E+09 3 1.8E+09 11.56159 2.7E-05 2.90112
Within Groups 4.97E+09 32 1.55E+08

Total 1.04E+10 35
The F-statistic = 11.56 is greater than F-Critical which means we REJECT the Null Hypothesis and Accept Ha.

Interpretation: The variables Cash Flow , Present Earnings, Shareholder Fund and Accumulated Profits do
not have uniform and equal effect on Dividend Pay-out Policy in INFOSYS.

Test 2: Data is taken from Table 5

TO CHECK THE DEGREE OF DEPENDENCY OF THE VARIABLES ON DIVIDEND PAYOUT RATIO
Statistical Analysis Tool : MULTI-VARIATE REGRESSION
SUMMARY OUTPUT

Regression Statistics

Multiple R 0.845104586
R Square 0.71420176
Adjusted R Square 0.485563169
Standard Error 6.897518108
Observations 10
ANOVA
Significance
df SS MS F F
Regression 4 594.45 148.61 3.12 0.12
Residual 5 237.88 47.58
Total 9 832.33
Standard P- Upper Lower
Coefficients Error t Stat value Lower 95% 95% 95.0% Upper 95.0%
Intercept 55.39 9.18 6.03 0.00 31.79 78.98 31.79 78.98
Cash Flows 0.01 0.00 3.24 0.02 0.00 0.01 0.00 0.01
Pres. earnings -0.03 0.01 -3.39 0.02 -0.05 -0.01 -0.05 -0.01
SH Funds 0.12 0.04 3.28 0.02 0.03 0.22 0.03 0.22
Acc. Profits -0.12 0.04 -3.26 0.02 -0.22 -0.03 -0.22 -0.03
Interpretation
1. R-Square = 0.7142 which means that the dependent variable Dividend Pay-out Ratio is influenced by
Independent variables by 71.4%.
2. P-values of all the Independent Variables are less that the alpha value of 0.05 which means they are
statistically significant and all of them influence the dependent variable “Dividend Pay-out Ratio”.
3. Another important fact to note is Present Earnings and Accumulated Profits are negatively related to
Dividend Pay-out Ratio.
4. It can be safely interpreted that INFOSYS pays its Dividend from its Present Earnings and Accumulated
Profits.

The regression equation : Y=55.39 + 0.01(CF) - 0.03(PE) + 0.12(SF) - 0.12(AP)

Note: As per the Q2 results of 2017 the management has estimated a Revenue guidance of 8.5% and Profit
guidance of 6.5%. substituting in the above regression equation we can predict that the year 2018 Dividend
pay-out Ratio will be roughly 46.5%

Test 3 :

To check whether the size of firm has any bearing on Dividends the Firms Pay
Statistical Tool: ONE WAY ANOVA
Data:

Dividend pay-out ratios of INFOSYS and its peers are collected for the past 10 years, ANOVA is test for the
homogeneity of dividend pay-out ratios of all the Companies

Dividend Pay-out Ratios of 4 IT Majors of India

Tech
Year Wipro TCS Mahindra Infosys
1 2017 7.91 36.31 45.24 42.80
2 2016 16.52 35.06 36.09 35.28
3 2015 33.03 74.93 25.67 42.01
4 2014 24.29 32.04 17.38 35.49
5 2013 27.15 31.68 9.82 26.45
6 2012 31.48 44.57 11.15 31.86
7 2011 30.4 36.19 7.32 53.46
8 2010 17.98 69.67 5.76 24.71
9 2009 19.7 29.17 4.94 23.11
10 2008 28.61 30.38 19.52 42.55
Table 6: Dividend Pay-out Ratios of 4 IT Companies with similar Market -Cap

Null Hypothesis : H0: μ(WP) = μ(TC)= μ(TM)= μ(INF)

The Dividend Pay-out Ratios of All the Companies are Consistent.

Alternate Hypothesis : H1 : μ(WP) ≠ μ(TC) ≠ μ(TM) ≠ μ(INF)

There exists at least one inconsistency among the Dividend Pay-out Ratios of the companies.
 Anova: Single Factor
SUMMARY
Groups Count Sum Average Variance
Wipro 10 237.07 23.707 64.26893444
TCS 10 420 42 275.1390889
Tech Mahindra 10 182.89 18.289 186.4702989
Infosys 10 357.72 35.772 92.48124
ANOVA
Source of Variation SS df MS F P-value F crit
Between Groups 3540.519 3 1180.17299 7.634218441 0.000449 2.866265551
Within Groups 5565.236 36 154.589891
Total 9105.755 39

INTERPRETATION:
1. F-Statistic=7.634 value is greater than the F-Critical=2.8666, which means we REJECT the Null
Hypothesis and Accept the Alternate Hypothesis.
2. The dividend pay-out ratios of companies of same size are not same and Consistent.
3. The dividends paid by Wipro is less varying than others, Wipro has a Consistent Dividend Policy
4. We can safely conclude the size of the company is the least deciding factor in Paying Dividends, other
factors like Free Cash flows, Residual Profits, Earrings , Leverage, Management Control.

Dividend Signalling Theory

Dividend signalling is a theory suggesting that when a company announces an increase in dividend pay-
outs, it is an indication it possesses positive future prospects.
The thought behind this theory is directly tied to game theory; managers with good investment potential are
more likely to signal.
Dividend signalling theory has been a key concept in proving that markets are inefficient and its hard to
predict the collective behaviour of millions of Investors.

Test 4: relevance of Dividend Signalling Theory on Infy Share prices.

Dividend Stock price
year
yield on Mar 31
2017 295 929
2016 505 1217
2015 790 1996.25
2014 1460 3174.25
2013 940 2227.05
2012 940 2348.8
2011 700 2942.15
2010 1100 2740.7
2009 470 1448.6
2008 745 1686.45
Table 8: Data on Dividend yield and corresponding year’s share price on March 31st.
Regression Statistics
Multiple R 0.8551
R Square 0.7312
Adjusted R Square 0.6976
Standard Error 413.9480
Observations 10.0000
ANOVA
Significance
df SS MS F F
Regression 1 3729589.91 3729589.9 21.766 0.0016
Residual 8 1370823.52 171352.94
Total 9 5100413.44
Standard P- Lower Upper Lower Upper
Coefficients Error t Stat value 95% 95% 95.0% 95.0%
-
Intercept 558.136 349.705 1.5960 0.1492 -248.2856 1364.558 248.286 1364.558
Dividend
yield 1.904 0.408 4.6654 0.0016 0.9630 2.845 0.963 2.845

Interpretation:
R²= 07312, which means that independent variable Dividend Yield has about 73.12%
influence or Correlation on Dependent variable, here it is the Stock price of
INFOSYS.
1. With Stock Market being highly volatile environment for Risks and Returns 73.12% of influencing factor
can be considered to be good.
2. It means Dividend Yield has a Significant Effect on the Stock Price of Infosys.
3. Both Significance F and P-value of Dividend yield is less that 0.05 hence we can accept the goodness of
fit of data.
4. Infosys stock price does get influence by the Dividend yield . Dividend component of a firm plays a
significant role in building positive market perception among investors of the Firm’s Financial Health
and Performance, Hence investors would want to buy into such company’s stocks.

Retained Earnings at INFOSYS

Retention Retained Present
Year RORE
ratio earrings Earnings

2017 0.572 9,029.59 13,818.00 153%

2016 0.6472 7,872.54 15,786.00 201%

2015 0.5799 5,911.50 12,164.00 206%

2014 0.6451 5,880.73 10,194.00 173%

2013 0.7355 6,229.69 9,116.00 146%

2012 0.6814 4,390.26 8,470.00 193%

2011 0.4654 2,700.72 6,443.00 239%

 2010 0.7529 4,380.37 5,803.00 132%

2009 0.7689 3,436.98 5,818.00 169%

Table 7: Financial Data on Retained Earnings of INFOSYS

Return On Retained Earnings

300%

250%

200%

150%
RORE
100%

50%

0%
2017 2016 2015 2014 2013 2012 2011 2010 2009

Observation:
1. From the above data its quite evident that INFOSYS generated a good Returns on its Retained Earnings.
2. Earning leftover from paying off the Dividends is reinvested back into the company.
3. The average retained earnings for past 10 years is 179%.
4. Although Dividend Payments Signals EXTERNAL Markets on the organisations’ good performance,
shareholders money is best reinvested back into the company like INFOSYS with such a good return on
retained earnings.

Taxation on Dividend Pay-outs

Equity
Tax On
Share 7,000.00
Dividend
Dividend
5,915.00 Equity Share Dividend
2017 1,065.00 6,000.00

2016 5,570.00 Tax On Dividend

1,134.00
5,000.00
2015 5,111.00
1,034.00

2014 3,618.00 4,000.00

615.00

2013 2,412.00
403.00 3,000.00
2012 2,699.00
438.00
3,445.00 2,000.00
2011 568.00

2010 1,434.00
240.00 1,000.00

2009 1,345.00
228.00
0.00
2008 1,902.00
323.00 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008
Table 8 : Dividend Tax
Observation
1. Paying Dividend comes with a cost of not Re-investing back into the company and the Dividend
distribution tax levied on the company.
2. This adds to the tax burden of the organisation who practise a policy of constant dividend pay-outs.
3. From the above table we can notice that Infosys pays about 1065 crores as tax on dividend payments,
this amount is shown as tax expense in their financial.
4. Organisations need to strike a balance between gaining benefits to incurring costs of Dividend pay-outs.

Valuation of the Infosys using Dividend Discount Method

Objective: To find out its Intrinsic Value
Valuation of Infosys share is done to find out the actual intrinsic value of Infosys based on its Dividend Policy. Dividends
given by the company for the last ten years are shown in Table 4.1.

Two methods,

1. Constant dividend growth

2. Two phase growth

Are considered for this purpose.

Assumptions are clearly mentioned for each case and calculations for each case are shown. At the end the intrinsic value
of the stock is compared with the current market price of the share and verdict is given whether it will be profitable to
buy or sale the share of Bharat Forge.

YEAR 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Amount 37.25 23.50 55.00 35.00 47.00 47.00 73.00 54.25 25.74 14.50
Table 9 shows the dividend paid by Infosys in the last ten years.

Note : For calculation purposes we will take present dividend paid as Rs.25.74 since complete dividend for the year 2017
is not yet realized.

Infosys Financial Details

Net Income(2017)(in Cr) 13,818.00
Current Market Price 929.65

Particulars 2017 2016 2015 2014 2013

No. of Shares(in Cr) 229.6 229.6 114.8 57.14 57.41
EPS 60.16 68.73 105.91 178.39 158.76
Book Value 296.24 248.94 418.71 735.87 628.21
Dividend Paid /share 25.75 24.25 59.5 63 42
Retention Ratio 57.19 64.71 57.98 64.5 73.54
Earning/share 258.23 235.12 412.02 775.19 640.51
dividend paid 5,915.00 5,570.00 5,111.00 3,618.00 2,412.00
ROE 20.31 27.61 25.3 24.21 25.28
Long term Growth Rate(%) g 11.62 17.87 14.67 15.62 18.59
 Calculation of Market Value of Infosys 2017-16

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝟏𝟑,𝟖𝟏𝟖.𝟎𝟎

EPS= = = 60.182
𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 229.6

𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝟗𝟐𝟗.𝟔𝟓

PE Ratio =
𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
= = 15.45295878
𝟔𝟎.𝟏𝟔

𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 / 𝑆ℎ𝑎𝑟𝑒 𝟗𝟐𝟗.𝟔𝟓

Market to Book= = = 3.138165001
𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒/𝑆ℎ𝑎𝑟𝑒 𝟐𝟗𝟔.,𝟐𝟒

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑎𝑖𝑑
Retention Ratio = 1 - =1-
𝟓𝟗𝟏𝟓.𝟎𝟎
= 57.1935157
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝟏𝟑𝟖𝟏𝟖.𝟎𝟎

Long term Growth Rate = RoE x Retention Ratio = (20.31 x 57.19)/100 = 11.61

Calculation of Expected Rate of Return

Assumptions:
1. Expected Rate of Return
Forward rate of Returns of top 10 Indian IT Majors, the average is taken as
expected rate of Return for an IT stock in India.
Expected Rate of Return=R= 14.74% .

2. Valuation is done as per Constant Dividend Growth Model

Forward
Rate of
Top 10 IT companies Return
Infy 13.69
wipro 19.23
cognizant 18.98
oracle Financial Services 10.56
HCL 17.30
Tech Mahindra 18.30
TCS 13.45
Mindtree 11.20
L&T Infotech 17.80
Rolta 11.14
Average 14.74
Constant Growth Dividend Model
𝟐𝟓.𝟕𝟒 ∗ (𝟏+𝟎.𝟏𝟏𝟔𝟐)
𝑫 ∗ (𝟏+𝒈) = = 920.87
Value of a Share = (𝟎.𝟏𝟒𝟕𝟒−𝟎.𝟏𝟏𝟔𝟐)
(𝑹−𝒈)

Observation : Current Market Price of Infosys Share is 929.65 (13th Oct ,2017) and calculated Price is
920.87

Recommendation : As the intrinsic value (920.87) of share is close to the market price of 929.65 .
we can recommend to buy or hold the share.

Two Phase Growth Dividend Model

Assumptions:
1. Expected Rate of Return = 14.74% .( as per previous Calculations)
2. Initial Growth Rate (g1) = 11.62% .( as calculated before will continue for next 5 years).

3. Second Phase Growth Rate (g2) = 8.5%

as per Management's Guidance report on future Growth Rate July '17
(source: http://economictimes.indiatimes.com/markets/stocks/news/infosys-may-report-5)

4. Value of Share is Calculated as Two Phase Growth Dividend Model

Calculation of expected Dividend and Its future Value

Present dividend 25.74
Growth Expected Present
Future year Rate Dividend Value
1 0.1162 28.74 25.05
2 0.1162 32.08 24.37
3 0.1162 35.81 23.71
4 0.1162 39.97 23.06
5 0.1162 44.62 22.43

Value of Share as per Two -Phase Growth Dividend Model

From 6thyear onwards it will be acting as a growing perpetuity.
So the price at the end of year 5 is given by:

𝑫𝒊𝒗𝒊𝒅𝒆𝒏𝒅 𝒐𝒇 𝟔𝒕𝒉𝒚𝒆𝒂𝒓 𝑫𝟓 ∗(𝟏+𝒈𝟐) 𝟐𝟐.𝟒𝟑∗(𝟏+𝟎.𝟎𝟖𝟓)

P 5= = = = 390.00
(𝑹−𝒈𝟐) (𝑹−𝒈𝟐) (𝟎.𝟏𝟒𝟕𝟒−𝟎.𝟎𝟖𝟓)

Present Value of P5
𝑷𝟓 𝟑𝟗𝟎.𝟎𝟎
=
(𝟏+𝑹)⁵
=
(𝟏+𝟎.𝟏𝟒𝟕𝟒)⁵
= 196.10
Observation
O : The market price of Infosys as 13 Oct ’17 is 929.65 and calculated price is 196.10

Recommendation : As the intrinsic value (196.1) of share is very less to the market price of 929.65 we
definitely can recommend to sell the share to earn profit.

Observation :
It is interesting to observe that two different models (Constant Growth and Two Phase Growth) give two
Different intrinsic values of the share, one is very close to market price and one is very lesser than
market price.

This is mainly due to the assumption of growth rate (g2), which was based on Management signalling
of information

Management’s guidance or estimation of expected Growth Rate of the Firm can indeed have a significant
impact on the investor Perceptions in the market and in turn has a cascading effect (can be positive or
negative ) on Returns of Shares.