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Infosys Case Assignment Advanced Corporate Finance

Submitted By: S.No 1 2 3 4 5 Name Abhishek Kumar Singh Deepak Mittal Kiran Babu S Sanjay Kumar Parida Vivek Talwar Roll No EPGP-04A-005 EPGP-04A-026 EPGP-04B-041 EPGP-04A-084 EPGP-04A-113

Case Analysis Capital Asset Pricing Model


The Capital Asset Pricing Model (CAPM) does not go well with the emerging markets due to following reasons Because of assumption of Normal distribution. Lack of Perfect market integration in Emerging markets. CAPM beta is based on volatility (standard deviations). It misses the skewness and kurtosis more apparent in emerging markets returns suggesting greater downside and event risk for emerging markets.

Alternate Discount Rate Models


Goldman, Sachs Model Credit Rating - ERV (Erb, Harvey and Viskanta) Model Value at Risk

Valuation
A) CAPM and Goldman Sachs Model
Beta estimation was done for both CAPM and Goldman Sachs Model through 5 series of regression on possible returns on the world markets. The beta estimated as a result varied on a wide scale as shown below: Beta Statistical Value 0.63 0.0 2 0.1 7 2.0 0 2.21

Index Returns Used Indian Indices Infosys Indian Stock Price Changes Crisil 500 India Computer Sub-Index MSDW Indian Software Index Emerging / International Markets Indices MSCI Emerging Markets Data Processing & Reproduction Index MSCI Emerging Markets Hardware Components Index U.S. Index S&P400: Services - Computer Systems Index

R2

t - statistic

0.03 4.09E-05 0.003

1.69 0.06 0.37

0.28 0.35

4.31 5.01

(0.43

0.02

(1.5)

B) Observation
For Indian and US based indices, no correlation found to exist with the world markets. For Emerging Market based indices, very high betas were observed. Since the beta ranges were wide we decided not to go with this approach.

C) ERV (Erb, Harvey and Viskanta) Model


Using EHV Model we found the value of ADS to be around $24. The workings are attached in D) section below. Based on this valuation it seems the issue was over-valued at $55.76.

D)Valuation Workings Datasheet


Infosys Case Assignment-Data Sheet.xls

Conclusion
Based on the ERV analysis it seems the issue is overpriced. However there is considerable risk in estimating the value of the Infosys equity share value. It is thus possible that the ADS issue has been priced at a fair value, because management may have superior information.

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