PROJECT REPORT

Course name: Financial Management-1

Share Price Using Dividend Discount Model

Risk and Return

FAS Group No: H1

Name of Students:
Abhishek Khaitan (15F203)
Ankit Garg (15F209)
Gourav Baid (15F221)
Rachita Sahu (15F238)
Supradeep Mallimadugula (15F255)

TERM 2 2015
T A PAI MANAGEMENT INSTITUTE, MANIPAL

I. Valuation of Shares
i) Rationale behind the selection of the companies
1. Sun Pharmaceutical Industries- Pharmaceutical companies are engaged in a full array of
activities from research and development (R&D) to manufacturing and marketing medicines.
They also experience a costly and lengthy R&D processes, including the ups and downs during
clinical trials, but still are able to withstand the volatility better because these companies tend to
have many more product lines producing revenue that covers the R&D costs. Therefore, their
stocks are comparatively more stable and considered safer investments. Sun Pharma is Indias
most valued pharmaceutical company and Dilip Sanghvi, its founder is the second wealthiest
person of India. It is expanding its business in a rapid way.
2. Tata Motors- Tata Motors Limited, a USD 42 billion organization, is a leading global
automobile manufacturer with a portfolio that covers a wide range of cars, sports vehicles, buses,
trucks and defence vehicles. Its marquee can be found on and off-road in over 175 countries
around the globe. It is the world's 17th-largest motor vehicle manufacturing company, fourthlargest truck manufacturer, and second-largest bus manufacturer by volume. It is a group
company of Indias most reputed and desired conglomerate. Despite a global economic
meltdown and various other geo-political issues the automobile industry still maintained a
relatively high growth. Tata motors always look towards technology innovation and enhancing
customer experience and achieving world class quality through focused initiative.
3. Reliance Industries Limited- The oil and gas sector is always in the news due to the dynamic
regulations governing this sector. With the crude oil prices rising and falling every now and then,
the stock prices of the companies in this sector also face volatility but constantly grow to high
valuation. RIL is the largest Indian private company and is also the only Indian private company
to be listed in Fortune 500. Despite of reducing oil prices the company is able to maintain its
growth and profitability. It is also one of the most controversial companies in respect that it is
always targeted by various political parties of government lobbying. These factors also affect its
share price.
4. Tata Consultancy Services- TCS is Indias biggest company in terms of valuation. It is also
Indias largest outsourcer. TCS has not only helped its employees become richer, but it has also
become a wealth creator for millions of its shareholders. In 2014-15 alone, TCS gave a total cash
payout of Rs. 17,000 crore or $2.7 billion to its shareholders as dividends. TCS earmarked 10th
anniversary of its IPO listing in 2015. From 2004 till now it has issued bonus shares twice in the
ratio of 1:1. It is a group company of Indias most reputed and desired conglomerate.
5. Bank of Baroda- BOB is the second-largest public sector bank in India, after State Bank of
India. BOB has a high capital efficiency and a superior liability franchise - valuations too are
attractive with multiples still below the seven-year mean. During FY15, despite the macro
headwinds, BOBs global businesses crossed the 10 trillion mark and touched Rs 10,45,625 crore
by registering a growth of 8.25%. The domestic business grew at a higher rate of 8.43% in FY15
and reached Rs 7,06,148 crore.

ii) Methodology
After selecting 5 companies and taking their last price data (monthly) for the last 5 years from
the Bloomberg terminal we calculated the returns for individual stocks for each month by using
the following formula:
Returns= (Closing Price-Opening Price)/Opening Price
For our project we have taken Nifty 50 as our market index and calculated the monthly market
returns using the same formula as given above.
We then found out the value of Beta Coefficient () for each stock by using Slope function
keeping the monthly returns of the stock in Y-Axis and monthly returns of the market in X-Axis.
We calculated the growth rate (g) by using XLTP XDCF function in the Bloomberg terminal.
We then calculated the estimated Dividend Per Share (D1) value for the year 2016 by using
Trend function and divided this value by (1+g) to get the estimated initial Dividend Per Share
(D0) value.
D0= D1/(1+g)
For calculating the required return (E(R)) for each stock we used Capital Asset Price Model
(CAPM) which says:
E(R)= Rf+*(Rm-Rf)
Where Rf is the risk free rate, i.e., 10 year G-Sec Bond and Rm is the expected market return
which we have calculated by doing the geometric mean of yearly market returns for the last 5
years.
Lastly we calculated the intrinsic value (P0) for each stock by using Dividend Discount Model
(DDM) which says:
P0=D0*(1+g)/(E(R)-g)
iii) Intrinsic Values of the shares

II. Risk and Return

i) Table 1: Risk, Return and Beta of 5 stocks

ii) Table 2: Covariance, Correlation and Standard Deviation of two-stock portfolio

iii) Table 3: Particulars

iv) Efficient Frontier Graph