Академический Документы
Профессиональный Документы
Культура Документы
PROJECT REPORT
ON
“A STUDY ON THE COST OF EQUITY AND ITS GROWTH IN IT
SECTOR”
Submitted in partial fulfillment of the requirement for the award of
Submitted By:
Sphoorti M. Padmannavar
DECLARATION
like to declare that the project work made on “A study on the cost of equity and its
University, is of my original work under the guidance of Dr. V. Prabhu Dev , this
has not been submitted earlier to any university or institution for the award of any
AKNOWLEGEMENT
Before we get into thickness of pages I would like to place on record my special
appreciation to many people for their guidance & support to the project in its
formative stage & for their valuable contribution in planning, monitoring &
providing information for the project.
I thank Dr. V. Prabhu Dev for reviewing the entire manuscript with painstaking
attention for detail, and more so for his ability to spot the spelling mistakes in
paragraphs & for his guidance & support.
I would like to add heartfelt appreciation to director Dr. V. Prabhu Dev & HOD of
Surana college PG centre Prof. Vijayendra S. for their guidance & support.
Sphoorti M. Padmannavar
(06KXCM6026)
TABLE OF CONTENT
CHAPTER CONTENTS PAGE NO.
LIST OF TABLES
Table No. 1.4 Key Positives & Negatives for the Indian IT Industry 15
Table no. 4.1 Table showing capital structure of Infosys Technologies Ltd. 41
Table no. 4.2 Table showing dividend paid in the year 2006-07 by Infosys Technologies Ltd. 42
Table no. 4.3 Table showing growth in percentage of Infosys Technologies Ltd. 42
Table no. 4.4 Table showing cost of equity for year 2007-08 of Infosys Technologies Ltd. 42
Table no. 4.5 Table showing capital structure of Wipro Technologies Ltd. 44
Table no. 4.6 Table showing dividend paid in the year 2006-07 by Wipro Technologies Ltd. 45
Table no. 4.7 Table showing growth in percentage of Wipro Technologies Ltd. 45
Table no. 4.8 Table showing cost of equity for year 2007-08 of Wipro Technologies Ltd. 45
Table no. 4.9 Table showing capital structure of Tata Consultancy services 47
Table no. 4.10 Table showing dividend paid in the year 2006-07 by TCS 47
Table no. 4.11 Table showing growth in percentage of TCS Ltd. 47
Table no. 4.12 Table showing cost of equity for year 2007-08 of TCS 48
Table no. 4.13 Table showing capital structure of D-Link (India) Ltd. 49
Table no. 4.14 Table showing dividend paid in the year 2006-07 by D-Link (India) Ltd. 49
Table no. 4.15 Table showing growth in percentage of D-Link (India) Ltd. 49
Table no. 4.16 Table showing cost of equity for year 2007-08 of D-Link (India) Ltd. 50
Table no. 4.17 Table showing capital structure of Satyam Computer Services 51
Table no. 4.18 Table showing dividend paid in the year 2006-07 by Satyam Computer 52
Services
Table no. 4.19 Table showing growth in percentage of Satyam Computer Services Ltd. 52
Table no. 4.20 Table showing cost of equity for year 2007-08 of Satyam Computer Services 52
Table no. 4.21 Table showing capital structure of NIIT Technologies 54
Table no. 4.22 Table showing dividend paid in the year 2006-07 by NIIT Technologies 54
Table no. 4.23 Table showing growth in percentage of NIIT Technologies 54
Table no. 4.24 Table showing cost of equity for year 2007-08 of NIIT Technologies 55
Table no. 4.30 Table showing dividend paid in the year 2006-07 by Sonata Software 58
Table no. 4.31 Table showing growth in percentage of Sonata Software 58
Table no. 4.32 Table showing cost of equity for year 2007-08 of Sonata Software 59
Table no. 4.33 Table showing capital structure of Patni Computer Systems 60
Table no. 4.34 Table showing dividend paid in the year 2006-07 by Patni Computer Systems 60
Table no. 4.35 Table showing growth in percentage of Patni Computer Systems 60
Table no. 4.36 Table showing cost of equity for year 2007-08 of Patni Computer Systems 61
Table no. 4.37 Table showing capital structure of Melstar Infotech 62
Table no. 4.38 Table showing dividend paid in the year 2006-07 by Melstar Infotech 62
Table no. 4.39 Table showing growth in percentage of Melstar Infotech 62
Table no. 4.40 Table showing cost of equity for year 2007-08 of Melstar Infotech 63
LIST OF GRAPHS
PAGE
GRAPH NO. CONTENTS NO.
EXECUTIVE SUMMARY
The cost of equity reflects the opportunity cost of investment for individual
shareholders. It will vary from company to company because of the differences in
the business risk and financial risk of different companies. The cost of equity is the
minimum rate of return a firm must offer shareholders to compensate for waiting
for their returns, and for bearing some risk.
The cost of equity capital for a particular company is the rate of return on
investment that is required by the company's ordinary shareholders. The return
consists both of dividend and capital gains, e.g. increases in the share price.
Computation of the cost of equity shares is the most complex procedure. It is due
to the fact that unlike preference shares or debentures, equity shares do not have
either the interest or dividend to be paid at a fixed rate. The cost of equity shares
basically depends upon the expectation of the equity shares. The market value of
shares depends on the dividends paid and the rate of dividend depends on the
degree of financial and business risks.
The tables for main points are prepared and analyzed, graphs has been drawn
wherever necessary. Therefore, secondary data have been tabulated, graphically
depicted and analyzed. Based on this analysis the conclusions are drawn and
recommendations are made.
The purpose of the study is to know that how factors influence equity growth in IT
sector and to know which IT Company is more financially sound for investors to
invest. The companies that are considered for this analysis are:-
Surana College P.G. Centre 8
Cost of Equity
CHAPTER 1
INTRODUCTION:
The cost of equity reflects the opportunity cost of investment for individual
shareholders. It will vary from company to company because of the differences in
the business risk and financial or gearing risk of different companies.
The purpose of the study is to know that how factors influence equity growth
in IT sector and to determine the cost of equity in selected IT companies over two
years and to know which IT Company is more financially sound for investors to
invest.
COST OF CAPITAL
The cost of capital for a firm is a weighted sum of the cost of equity and the
cost of debt. Firms finance their operations by external financing, issuing stock
(equity) and issuing debt, and internal financing, reinvesting prior earnings.
Capital (money) used to fund a business should earn returns for the capital
owner who risked their saved money. For an investment to be worthwhile the
projected return on capital must be greater than the cost of capital.
Cost of equity:
Cost of equity is more challenging to calculate as equity does not pay a set
return to its investors. The cost of equity is broadly defined as the risk-weighted
projected return required by investors, where the return is largely unknown. The
cost of equity is therefore inferred by comparing the investment to other
investments with similar risk profiles to determine the "market" cost of equity.
The cost of capital is often used as the discount rate, the rate at which
projected cash flow will be discounted to give a present value or net present value.
The cost of equity is the minimum rate of return a firm must offer shareholders to
compensate for waiting for their returns, and for bearing some risk.
The cost of equity capital for a particular company is the rate of return on
investment that is required by the company's ordinary shareholders. The return
consists both of dividend and capital gains, e.g. increases in the share price. The
returns are expected future returns, not historical returns, and so the returns on
equity can be expressed as the anticipated dividends on the shares every year in
perpetuity. The cost of equity is then the cost of capital which will equate the
current market price of the share with the discounted value of all future dividends
in perpetuity.
The cost of equity reflects the opportunity cost of investment for individual
shareholders. It will vary from company to company because of the differences in
the business risk and financial risk of different companies.
The cost of equity is based on a firm's current rate of return. If one assumes
a perfect market, industry-specific costs of equity reflect the riskiness of particular
industries. A high cost of equity would then indicate a higher-risk industry that
should command a higher return to compensate for the higher risk.
The cost of equity capital is equal to the required rate of return on equity-
supplied capital. There are two categories of equity costs:
The cost of retained earnings, ks, is estimated with two models:
ks = (D1/Po) + g
where
D1 = the next expected dividend [Do (1+g)],
g = the constant growth rate of dividends,
Po = the current market price per share of the common stock,
Under this model, a common misconception is that retained earnings are a costless
source of finance. Although retained earnings do not have any servicing costs, they
have an opportunity cost equivalent to the ongoing cost of equity, since if these
funds were returned to investors they could have achieved an equivalent return
through re-investment at a personal level.
where:
kRF = the risk-free rate of interest,
kM = the expected return on the market,
= a measure of the sensitivity of the firm’s stock returns
relative to those of the market assuming the absence of
diversifiable risk.
The cost of newly-issued common stock, kn is estimated with the constant dividend
growth model so as to allow for flotation cost:
kn = D1/(Po-F)+g
INDUSTRY STRUCTURE
1. Domestic market
2. Exports market.
The exports market constitutes the largest segment accounting for 75% of the
total revenue generated by the Indian software industry.
The domestic IT market is broadly divided into the following four segments:
1. IT Services
2. Software segment which includes engineering and Research &
Development (R&D) services
3. IT-enabled Services and Business Process Outsourcing (ITES-BPO)
4. Hardware
• IT Services: 34%
• ITES-BPO segment: 7%
• Hardware: 49%.
Lately, however, MNCs in the hardware segment have been viewing India as a hub
for setting up hardware manufacturing facilities, for instance Dell.
Source: NASSCOM
IT Services Exports
Chart No.1.1
Within the ITES-BPO segment, Customer Interaction Services (CIS) account for
nearly India’s IT Exports XIV 45-50% of the total ITES-BPO services exports
while finance & accounting contributes for the remaining 40-45%. Human
resource and other high-end knowledge-based processes account for 2% and 8-
10% respectively.
testing, consulting and engineering designing. The global delivery model has not
only facilitated the companies in delivering quality of work but also helped them to
control costs.
Over the years, the Indian companies have positioned themselves well to reap
benefits of the emerging scenario in the IT sector.
Cost arbitrage and the availability of a large talent pool have attracted
several MNCs to India. Big players like IBM, Accenture, Capgemini and Oracle
among others have not only increased their headcounts in India but also
outperformed their global performance in terms of revenue growth. Their Indian
operations are witnessing strong growth as compared to their global business.
Some of the major global companies like Intel, IBM and CSC are cutting jobs
abroad and shifting their base to India.
Surana College P.G. Centre 20
Cost of Equity
Changing Growth Drivers: There has been a change in the revenue composition of
companies in recent years. The revenue contribution of high-growth segments such
as infrastructure management services, package implementation, testing and
consulting has witnessed a continuous increase. This is in sharp contrast to the
earlier trend wherein almost all companies were largely dependant on the Custom
Application Development and Maintenance (CADM) services segment for their
revenues. Today, the share of CADM has decreased to 49% in FY06 from 80% in
FY01. Thus, newer service lines are not only enabling Indian companies to
increase their sales by cross-selling to their existing customers, but also improving
their average billing rates and recognition of being end-to-end service providers.
On the financial front, wage inflation of 10-15% and FOREX fluctuation can
reduce the top line as well as the bottom line of the companies. Unless the
Government defers the withdrawal of tax incentives which is due to expire after
2009, IT companies operating out of the Software Technology Parks of India
(STPIs) are likely to witness an increase in their tax liabilities, which may reduce
their profitability further.
CHAPTER 2
RESEARCH METHODOLOGY:-
The cost of equity reflects the opportunity cost of investment for individual
shareholders. Computation of cost of equity shares is the most complex
procedure. It is due to the fact that unlike preference shares or debentures,
equity shares do not have either the interest or dividend to be paid at fixed
rate. The cost of equity shares basically depends upon the expectation of
equity shares. The market value of shares depends on the dividend paid &
the rate of dividend depends on the degree of financial & business risks.
Many people want to invest in shares in order to make huge profits. In this
scenario many companies are available and the investors are in a dilemma to
choose a particular company for investing, which gives more returns with
less risk. Many times it is more important to be in the right industry than in
the right stock.
Topic:-
To find out cost of equity of listed 10 IT companies from various groups, by this an
investor can make investment decisions.
• The purpose of the study is to know that how factors influence equity
growth in IT sector.
• To determine the cost of equity in selected IT companies over two
years.
5. Methodology:-
• Valuations of equity shares are difficult since they neither have a well
defined cash flow streams nor limited value.
• The study is limited to IT sector only.
7. Chapter scheme:-
Chapter 1: Introduction
CHAPTER 3
COMPANY PROFILE OF 10 IT INDUSTRIES
The vision of Information Technology (IT) policy is to use IT as a tool for raising
the living standards of the common man and enriching their lives. Though, urban
India has a high internet density, the government also wants PC and Internet
penetration in the rural India. In Information technology (IT), India has built up
valuable brand equity in the global markets. India's most prized resource in today's
knowledge economy is its readily available technical work force. India has the
The Indian software industry has grown from a mere US $ 150 million in 1991-92
to a staggering US $ 5.7 billion (including over $4 billion worth of software
exports) in 1999-2000. No other Indian industry has performed so well against the
global competition. The annual growth rate of India’s software exports has been
consistently over 50 percent since 1991.
Today, India exports software and services to nearly 95 countries around the
world. The share of North America (U.S. & Canada) in India’s software exports is
about 61 per cent. In 1999-2000, more than a third of Fortune 500 companies
outsourced their software requirements to India.
1987: First international office in the United States in Fremont, California, now its
US headquarters. ; Got its first foreign client, Data Basics Corporation from the
United States
1993: Became a public limited company in India with an initial public offering of
Rs. 13 crores.
1999: Listed on NASDAQ; Attained a SEI-CMM Level 5 ranking and became the
first Indian company to be listed on NASDAQ
2006: Became the first Indian company to ring the NASDAQ Stock Market
Opening Bell; August 20, N. R. Narayana Murthy retired from his position as the
executive chairman; Acquired the 23% stake Citibank had in its BPO offshoot
Progeon, making it a wholly owned subsidiary of Infosys and changed the name to
Infosys BPO Ltd.; December, became the first Indian company to make it to
Nasdaq-100
During the 14-year period from 1993 to 2007, the issue price of an Infosys share
has increased three thousand fold. This is excluding the dividends that the
company has paid out over this duration.
Wipro Technologies:-
Type : Public (NYSE: WIT)
Founded : 1945 (Pre Independence)
Headquarters : Bangalore
Key people : Azim Premji, Chairman and Managing director
Industry : Information technology services
Revenue : ▲$3.47 billion USD
Net income : ▲$677 million USD
It has dedicated development centers and offices across India, Europe, North
America, Latin America and Asia Pacific. The current Chairman, Managing
Director and majority stake owner is Azim Premji, who has headed the software
and hardware divisions since Wipro's inception.
Wipro was set up in 1945. Primarily an edible oil factory, the chief products were
Sunflower Vanaspati and 787 laundry soap (a by-product of the Vanaspati
operations). The company was called Western India Vegetable Products Limited;
it had a minor presence in Maharashtra and Madhya Pradesh. In the 1970s and
1980s, it began to expand and made forays into computing. In 1975, Wipro
marketed India's first homegrown PC.
Wipro was the sole representative for Sun Microsystems in India, before the Sun
liaison office was set up in India, in the early 1990s. Wipro is the highest-ranked
Indian IT provider by International Association of Outsourcing Professionals.
Corporate Affairs)
Ajoyendra Mukherjee, (Vice President and Head, Global
Human Resources)
Industry : Information Technology Consulting
Services : Information technology Services and Solutions
Revenue : ▲ $4.3 billion (in FY 2006-07)
Employees : ~110,000 (As on Jan 31st, 2008)
Slogan : Experience certainty
Tata Consultancy Services Limited (TCS Limited Company) is one of the world’s
largest providers of information technology, consulting, services and business-
process outsourcing which commenced operations in 1968. As of 2007, it is Asia's
largest and has the largest number of employees among the Indian IT companies
with strength of over 100,000 IT consultants in 47 countries. TCS is listed on the
National Stock Exchange and Bombay Stock Exchange in India.
TCS is part of one of Asia's largest conglomerates the Tata Group, which has
interests in areas such as energy, telecommunications, financial services,
manufacturing, chemicals, engineering and materials. TCS is the first company to
be rated at Level 5 maturity for both the CMMI and PCMM framework. It is also
the first Indian company to be certified AS 9100: Rev B for design of airframe
structures.
It began as a division of the Tata Group, Tata Computer Centre, whose main
business was to provide computer services to other group companies. However, the
potential of computerization and computer services was realized early on, and an
electrical engineer from the Tata Electric Companies, Fakir Chand Kohli, was
brought in as the first General Manager. Soon after, the company was named Tata
Consultancy Services.
The early 1990s saw a tremendous surge in TCS's business, which also resulted in
a massive recruitment drive by the company. In early and mid-1990s, TCS re-
invented itself to become a software products company. In the late 1990s, to
accelerate its revenue growth, TCS decided to employ a three-pronged strategy –
developing new products with high revenue earning potential, tapping domestic
and other fast growing markets and focusing on inorganic growth through mergers
& acquisitions. In 2004, TCS became a public listed company. The Tata Research
Development and Design Centre were established in 1981. TRDDC is today one of
India’s premier R&D centers in software engineering and process engineering.
TCS currently has 19 labs spanning across 4 countries. Many of the labs are
located in India.
D-Link:-
Type : Public (TSE: 2332)
Founded : 1986
Employees : 1,800+(2006)
Datex Inc. was founded in 1986 by seven founders; of the seven founders, Ken
Kao remain as the CEO of D-Link Corporation, John Lee become the CEO of
Alpha Networks, the other five are either retired, or employed by D-Link or D-
Link group of companies.
Datex officially changed its name to D-Link Corporation in 1994, the same year
that it went public, the first networking company in Taiwan to do so. The name
change was due to hard time in explaining who Datex was and what Datex did, but
its D-Link brand was already popular before 1992.
D-Link the brand was already successful before venturing into the OEM business,
the first OEM customer in 1991 was IBM, and subsequently grew to include
Netgear, Intel and Nortel to name a few.
Satyam's network spans 57 countries across six continents. It serves over 489
global companies, 156 of which are Fortune 500 corporations. Satyam has strategic
technology and marketing alliances with over 50 companies. Apart from
Hyderabad, it has development centers in India at Bangalore, Chennai, Pune,
Mumbai, Nagpur, Delhi, Kolkata, Bhubaneswar, and Visakhapatnam.
Satyam has been ranked consistently in the top Employers list released by surveys
done by leading groups such as Business India. The company has massive
expansion plans to penetrate across the globe especially Europe. Satyam is poised
to cross $2 billion in Annual Revenues for the year 2007-2008.
On Jan 21, 2008 Satyam announced the acquisition of an Illinois based boutique
consulting firm Bridge Strategy. This is yet another acquisition by Satyam after
Knowledge Dynamics and Citisoft. "Satyam has the largest overall ERP practice
and the heaviest commercial focus on packaged enterprise software" - Dana
Founded : 1981
NIIT is a technology training and software solutions company that is spread all
over the world, originated from Mumbai, India. NIIT was formerly known as the
National Institute of Information Technology, the name derived from Indian
Institutes of Technology. NIIT was founded in 1981 by Indian entrepreneurs
Rajendra S. Pawar and Vijay K. Thadani to provide IT education in India. NIIT
claims to have trained one out of every three software professionals in the country.
NIIT has diversified into software services. In 2004, the company split into NIIT
Ltd and NIIT Technologies Ltd. While NIIT Ltd focuses on training, NIIT
Technologies focuses on software development and business process management.
In 2007, NIIT claimed to be among the Indian software exporters and have
operations in 42 countries. NIIT has recently tied up with Chinese universities for
training Chinese engineers. Most Indian engineering students are not industry
ready as they cannot afford courses from IT training majors.
NIIT Technologies have received ISO 9001:2000 certification from KPMG for its
software development and been assessed at Level 5 of SEI-CMMi. The
organization has also been assessed at Level 5 of P-CMM.
Aptech Limited:-
Type : Public NSE & BSE: 532475
Founded : 1986
Headquarters : Mumbai, India
Key people : Mr Jayant V Athavale, Vice President
Industry : Training & Computers - software
with The IT People Award for Leadership in IT Education – 2007; it was also
among the top 100 Electronic companies in 2002 & 2004 – Electronics for You.
Best IT Trainer Award – Franchising World 2003. CEO & MD, Aptech Limited
conferred the ‘Man of Franchising Award” – Franchising World 2003. Aptech
declared the No. 1 IT training company in Vietnam – 2003. Aptech declared the
No. 1 IT training company in China for three consecutive years – 2002, 2003 &
2004. Business Today’s listing of Top 100 India’s most valuable companies in
2001. First Indian Express Marketing Excellence Award for Brand Excellence in
IT Industry to Arena Multimedia in December 2001.
Sonata Software:-
Type : Public BSE: 532221
Founded : 1986
Sonata is SEI CMM Level 5 certified. Sonata's shares are publicly traded in Indian
Stock Exchanges. Sonata Software acquired 50.1% stake in TUI InfoTec in an all-
cash transaction in September 2006. InfoTec is the “captive” IT services arm of the
logistics and travel corporation TUI, whose applications and IT infrastructure
systems it develops, maintains and supports worldwide.
Employees : 14,000
In 2004, Patni came out with an initial public offering (IPO) of 18,724,000 equity
shares in the price of Rs 230 per share for a face value of Rs 2 each. In the same
year, Patni acquired Fremont, California based Cymbal Corporation for a sum of
US$78 mn. Cymbal's acquisition allowed Patni to enter $60 billion IT services
market in the telecom vertical which was previously not available to Patni on their
business landscape. This acquisition also allowed Patni to spread it's Non-GE
Business, and added a development center in Hyderabad, India.
In December 2005, Patni listed its ADRs on the New York Stock Exchange
(NYSE) under the ticker PTI.
Patni added 31 new clients taking the client number count to 293 and reported
revenues to US$ 169.5 million (Rs. 6,735.7 million) during Q3 2007.
“Everyday Melstar is helping its customers across the globe in building and
managing their business applications by virtue of its domain knowledge in
Banking, Insurance and Information Technology as well as its technical expertise
in IBM, Microsoft and Sun technologies.”
Melstar's software facilities are assessed at SEI-CMM Level III and ISO 9001
certification.
Melstar as a corporation practices certain specific principles while building a
relationship with its customers.
2000 - The Company has set up two development centres one at Bangalore and one
in Mumbai, taking the total number of centres to 11.
CHAPTER 4
Cost of equity is more challenging to calculate as equity does not pay a set return
to its investors. The cost of equity is broadly defined as the risk-weighted projected
return required by investors, where the return is largely unknown. The cost of
Table no. 4.2:- Table showing dividend paid in the year 2006-07 by Infosys Technologies Ltd.
Calculation of dividend paid in Rs. for the year 2006-07
Company name Face value Dividend (%) Dividend paid (Do)
Infosys Technologies Limited 5.00 230 11.50
Table no. 4.3:- Table showing growth in percentage of Infosys Technologies Ltd.
Growth calculation
Company name Net Sales of Net Sale of 2007 Increase/Decrease Growth
2006 in Rs. Cr. in Rs. Cr. of sales in Rs. Cr. in %
Infosys Technologies Limited 9,028.00 13,149.00 4,121.00 31.34
Table no. 4.4:- Table showing cost of equity for year 2007-08 of Infosys Technologies Ltd.
Calculation of cost of equity for year 2007-08
Company name Dividend paid Expected dividend Mkt price Growth COE in
in Rs. (Do) in Rs.(D1) in Rs. %
Infosys Technologies 11.50 15.10 1440.80 0.31 32.39
Limited
Chart no. 4.1:- Chart showing the expected dividend of Infosys Technologies Ltd.
Interpretation:
The above graph of Infosys technologies Ltd. indicates, dividend paid in the year
2006-07 is Rs 11.50 and the expected dividend for the year 2007-08 is Rs 15.10,
the calculation is based on dividend paid and the growth of the company in the
year 2006-07.
The above table of Infosys technologies Ltd. indicates market price as Rs 1440.80
and cost of equity as 32.39%, so it’s a good sign for the long term investors to
book their profits. The market price plays an important role for COE.
Table no. 4.6:- Table showing dividend paid in the year 2006-07 by Wipro Technologies Ltd.
Calculation of dividend paid in Rs. for the year 2006-07
Company name Face value Dividend (%) Dividend paid (Do)
Wipro Technologies 2.00 300 6.00
Table no. 4.7:- Table showing growth in percentage of Wipro Technologies Ltd.
Growth calculation
Company name Net Sales of Net Sale of 2007 Increase/Decrease Growth
2006 in Rs. Cr. in Rs. Cr. of sales in Rs. Cr. in %
Wipro Technologies 10,227.12 13,683.90 3,456.78 25.26
Table no. 4.8:- Table showing cost of equity for year 2007-08 of Wipro Technologies Ltd.
Calculation of cost of equity for year 2007-08
Company name Dividend paid Expected dividend Mkt price Growth COE in
in Rs. (Do) in Rs.(D1) in Rs. %
Wipro Technologies 6.00 7.52 430.10 0.25 27.01
Chart no. 4.2:- Chart showing the expected dividend of Wipro Technologies Ltd.
Interpretation:
The above graph of Wipro technologies Ltd. indicates, dividend paid in the year
2006-07 is Rs 6.00 and the expected dividend for the year 2007-08 is Rs 7.52, the
calculation is based on dividend paid and the growth of the company in the year
2006-07.
Surana College P.G. Centre 54
Cost of Equity
The above table of Wipro technologies Ltd. indicates market price as Rs 430.10
and cost of equity as 27.01%, so it’s a good sign for the long term investors to
book their profits.
Table no. 4.10:- Table showing dividend paid in the year 2006-07 by TCS Ltd.
Calculation of dividend paid in Rs. for the year 2006-07
Company name Face value Dividend (%) Dividend paid (Do)
Tata Consultancy Services Limited 1.00 1150.00 11.50
Table no. 4.12:- Table showing cost of equity for year 2007-08 of TCS Ltd.
Calculation of cost of equity for the year 2007-08
Company name Dividend paid Expected dividend Mkt price Growth COE in
in Rs. (Do) in Rs.(D1) in Rs. %
TCS Ltd 11.50 14.36 853.15 0.25 26.51
Chart no. 4.3:- Chart showing the expected dividend of TCS Ltd.
Interpretation:
The above graph of TCS indicates, dividend paid in the year 2006-07 is Rs 11.50
and the expected dividend for the year 2007-08 is Rs 14.36, the calculation is
based on dividend paid and the growth of the company in the year 2006-07.
The above table of TCS indicates market price as Rs 853.15 and cost of equity as
26.51%, so it’s a good sign for the long term investors to book their profits, and the
expected dividend is bit high.
D-LINK (INDIA)
Table no. 4.13:- Table showing capital structure of D-Link (India) Ltd.
Capital Structure
Period Instrument Authorized Issued -PAIDUP-
From To Shares Face Capital
Capital Capital
(nos) Value
(cr) (cr)
2006 2007 Equity Share 7 6 30004850 2 6
2005 2006 Equity Share 7 6 30004850 2 6
2004 2005 Equity Share 7 6 30004850 2 6
2003 2004 Equity Share 7 6 30004850 2 6
2002 2003 Equity Share 7 6 30004850 2 6
2001 2002 Equity Share 7 6 30004850 2 6
2000 2001 Equity Share 7 6.09 4571220 10 4.57
1999 2000 Equity Share 6 4.36 300000 3 0.08
Table no. 4.14:- Table showing dividend paid in the year 2006-07 by D-Link (India) Ltd.
Calculation of dividend paid in Rs. for the year 2006-07
Company name Face value Dividend (%) Dividend paid (Do)
D-Link 2.00 100.00 2.00
Table no. 4.15:- Table showing growth in percentage of D-Link (India) Ltd.
Growth calculation
Company name Net Sales of Net Sale of 2007 Increase/Decrease Growth
2006 in Rs. Cr. in Rs. Cr. of sales in Rs. Cr. in %
D-Link 274.11 283.78 9.67 3.41
Table no. 4.16:- Table showing cost of equity for year 2007-08 of D-Link (India) Ltd.
Calculation of cost of equity for the year 2007-08
Company name Dividend paid Expected dividend Mkt price Growth COE in
in Rs. (Do) in Rs.(D1) in Rs. %
D-Link 2.00 2.07 69.15 0.03 6.40
Chart no. 4.4:- Chart showing the expected dividend of D-Link (India) Ltd.
Interpretation:
The above graph of D-Link (India) indicates, dividend paid in the year 2006-07 is
Rs 2.00 and the expected dividend for the year 2007-08 is Rs 2.07, the calculation
is based on dividend paid and the growth of the company in the year 2006-07.
The above table of D-Link (India) indicates market price as Rs 69.15 and cost of
equity as 6.40%, so it’s not advisable for the long term investors to hold the shares,
and the growth is very slow.
Table no. 4.18:- Table showing dividend paid in the year 2006-07 by Satyam Computer Services
Calculation of dividend paid in Rs. for the year 2006-07
Company name Face value Dividend (%) Dividend paid (Do)
Table no. 4.19:- Table showing growth in percentage of Satyam Computer Services Ltd.
Growth calculation
Company name Net Sales of Net Sale of 2007 Increase/Decrease Growth
2006 in Rs. Cr. in Rs. Cr. of sales in Rs. Cr. in %
Satyam Computer Services Ltd. 4,634.31 6,228.47 1,594.16 25.59
Table no. 4.20:- Table showing cost of equity for year 2007-08 of Satyam Computer Services
Calculation of cost of equity for the year 2007-08
Company name Dividend paid Expected dividend Mkt price Growth COE in
in Rs. (Do) in Rs.(D1) in Rs. %
Satyam Computer Services 3.50 4.40 395.05 0.26 26.71
Ltd.
Chart no. 4.5:- Chart showing the expected dividend of Satyam Computer Services Ltd.
Interpretation:
The above graph of Satyam Computer Services indicates, dividend paid in the year
2006-07 is Rs 3.50 and the expected dividend for the year 2007-08 is Rs 4.40, the
calculation is based on dividend paid and the growth of the company in the year
2006-07.
The above table of Satyam Computer Services indicates market price as Rs 395.05
and cost of equity as 26.71%, so it’s a good sign for the long term investors to
book their profits. Growth and market price of shares aids COE to be in a form.
NIIT TECHNOLOGIES
Table no. 4.21:- Table showing capital structure of NIIT Technologies
Capital Structure
Period Instrument Authorized Issued -PAIDUP-
From To Shares Face Capital
Capital Capital
(nos) Value
(cr) (cr)
2006 2007 Equity Share 45 39.1 39100530 10 39.1
2005 2006 Equity Share 45 38.65 38649280 10 38.65
2004 2005 Equity Share 45 38.65 38649280 10 38.65
2003 2004 Equity Share 15 9.66 9662320 10 9.66
2002 2003 Equity Share 0.25 0.25 25000 100 0.25
Table no. 4.22:- Table showing dividend paid in the year 2006-07 by NIIT Technologies
Calculation of dividend paid in Rs. for the year 2006-07
Company name Face value Dividend (%) Dividend paid (Do)
NIIT Technologies Ltd. 10.00 65.00 6.50
Table no. 4.24:- Table showing cost of equity for year 2007-08 of NIIT Technologies
Calculation of cost of equity for the year 2007-08
Company name Dividend paid Expected dividend Mkt price Growth COE in
Chart no. 4.6:- Chart showing the expected dividend of NIIT Technologies Ltd.
Interpretation:
The above graph of NIIT Technologies indicates, dividend paid in the year 2006-
07 is Rs 6.50 and the expected dividend for the year 2007-08 is Rs 8.19, the
calculation is based on dividend paid and the growth of the company in the year
2006-07.
The above table of NIIT Technologies indicates market price as Rs 100.80 and cost
of equity as 34.06%, it’s very high and it’s an excellent share for the long term
investors to book their profits and get huge returns.
APTECH LIMITED
Table no. 4.25:- Table showing capital structure of Aptech Ltd.
Capital Structure
Table no. 4.26:- Table showing dividend paid in the year 2006-07 by Aptech Ltd.
Calculation of dividend paid in Rs. for the year 2006-07
Company name Face value Dividend (%) Dividend paid (Do)
Aptech Limited 10.00 0.00 0.00
Table no. 4.28:- Table showing cost of equity for year 2007-08 of Aptech Ltd.
Calculation of cost of equity for the year 2007-08
Company name Dividend paid Expected dividend Mkt price Growth COE in
in Rs. (Do) in Rs.(D1) in Rs. %
Aptech Limited 0.00 0.00 226.30 -0.23 -23.48
Chart no. 4.7:- Chart showing the expected dividend of Aptech Ltd.
Interpretation:
The above graph of Aptech Ltd. indicates, dividend paid in the year 2006-07 is Rs
0.00 and the expected dividend for the year 2007-08 is Rs 0.00, the calculation is
based on dividend paid and the growth of the company in the year 2006-07.
The above table of Aptech Ltd. indicates market price as Rs 226.30 and cost of
equity as -23.48%. It’s a negative COE, so it’s not advisable for the investors to
buy the share or hold the position.
SONATA SOFTWARE
Table no. 4.29:- Table showing capital structure of Sonata Software
Capital Structure
Period Instrument Authorized Issued -PAIDUP-
From To Shares Face Capital
Capital Capital
(nos) Value
(cr) (cr)
2005 2006 Equity Share 15 10.52 105159306 1 10.52
2004 2005 Equity Share 15 10.52 105159306 1 10.52
2003 2004 Equity Share 15 10.52 105159306 1 10.52
Table no. 4.30:- Table showing dividend paid in the year 2006-07 by Sonata Software
Calculation of dividend paid in Rs. for the year 2006-07
Company name Face value Dividend (%) Dividend paid (Do)
Sonata Software 1.00 110.00 1.10
Table no. 4.32:- Table showing cost of equity for year 2007-08 of Sonata Software
Calculation of cost of equity for the year 2007-08
Company name Dividend paid Expected dividend Mkt price Growth COE in
in Rs. (Do) in Rs.(D1) in Rs. %
Sonata Software 1.10 1.32 31.85 0.20 24.14
Chart no. 4.8:- Chart showing the expected dividend of Sonata Software
Interpretation:
The above graph of Sonata software indicates, dividend paid in the year 2006-07 is
Rs 1.10 and the expected dividend for the year 2007-08 is Rs 1.32, the calculation
is based on dividend paid and the growth of the company in the year 2006-07.
The above table of Sonata software indicates market price as Rs 31.85 and cost of
equity as 24.14%, so it’s an average situation for the long term investors to invest
and returns are moderate.
Table no. 4.34:- Table showing dividend paid in the year 2006-07 by Patni Computer Systems
Calculation of dividend paid in Rs. for the year 2006-07
Company name Face value Dividend (%) Dividend paid (Do)
Patni Computer Systems 2.00 150.00 3.00
Table no. 4.35:- Table showing growth in percentage of Patni Computer Systems
Growth calculation
Company name Net Sales of Net Sale of 2007 Increase/Decrease Growth
2006 in Rs. Cr. in Rs. Cr. of sales in Rs. Cr. in %
Patni Computer Systems 875.60 997.83 122.23 12.25
Table no. 4.36:- Table showing cost of equity for year 2007-08 of Patni Computer Sytems
Calculation of cost of equity for the year 2007-08
Company name Dividend paid Expected dividend Mkt price Growth COE in
in Rs. (Do) in Rs.(D1) in Rs. %
Patni Computer Systems 3.00 3.37 208.85 0.12 13.86
Chart no. 4.9:- Chart showing the expected dividend of Patni Computer Systems
Interpretation:
The above graph of Patni Computer Systems indicates, dividend paid in the year
2006-07 is Rs 3.00 and the expected dividend for the year 2007-08 is Rs 3.37, the
calculation is based on dividend paid and the growth of the company in the year
2006-07.
The above table of Patni Computer Systems indicates market price as Rs 208.85
and cost of equity as 13.86%, so it’s advisable for the long term investors to go for
any better option, like investor can investing in a bank with less risk.
MELSTAR INFOTECH
Table no. 4.37:- Table showing capital structure of Melstar Infotech
Capital Structure
Period Instrument Authorized Issued -PAIDUP-
From To Shares Face Capital
Capital Capital
(nos) Value
(cr) (cr)
2005 2006 Equity Share 20 14.28 14283139 10 14.28
2004 2005 Equity Share 20 14.28 14283139 10 14.28
2003 2004 Equity Share 20 14.28 14283139 10 14.28
2002 2003 Equity Share 20 14.28 14283139 10 14.28
Table no. 4.38:- Table showing dividend paid in the year 2006-07 by Melstar Infotech
Calculation of dividend paid in Rs. for the year 2006-07
Company name Face value Dividend (%) Dividend paid (Do)
Melstar Information Technologies Ltd. 10.00 0.00 0.00
Table no. 4.40:- Table showing cost of equity for year 2007-08 of Melstar Infotech
Calculation of cost of equity for the year 2007-08
Company name Dividend paid Expected dividend Mkt price Growth COE in
in Rs. (Do) in Rs.(D1) in Rs. %
Melstar Information 0.00 0.00 7.96 0.01 0.79
Technologies Ltd.
Chart no. 4.10:- Chart showing the expected dividend of Melstar Infotech
Interpretation:
The above graph of Melstar Infotech indicates, dividend paid in the year 2006-07
is Rs 0.00 and the expected dividend for the year 2007-08 is Rs 0.00, the
calculation is based on dividend paid and the growth of the company in the year
2006-07.
The above table of Melstar Infotech indicates market price as Rs 7.96 and cost of
equity as 0.79%, so it’s not advisable for the long term investors to invest in this
company as growth is very less and COE is less than 1.
Chart no. 4.11:- Chart showing the Cost of Equity of all 10 IT companies
Interpretation:
The above table represents the Cost of Equity of 10 IT companies which have been
chosen from three different groups’ viz., Group A, Group B1 and Group T.
The IT companies under Group A are performing consistently and they all are
having excellent cost of equity. Only D-Link is not performing as expected the
reason being not much change in sales compared to last year which has affected its
growth.
The IT companies under Group B1 are not sailing in the same boat i.e., they all
have different levels of cost of equity. NIIT Technologies is showing the best cost
of equity in the selected IT companies and Aptech Ltd. is showing negative
response. From Group T Melstar Ltd. is showing very low return on investment.
So, the Group A is best for long term investors to invest and earn huge returns.
These are the factors influencing the equity growth that the company has control
over:
1. Capital-structure policy
2. Dividend policy
3. Investment policy
As we have been discussing above, a firm has control over its capital structure,
targeting an optimal capital structure. As more debt is issued, the cost of debt
increases, and as more equity is issued, the cost of equity increases.
2. Dividend Policy
Given that the firm has control over its payout ratio, the breakpoint of the equity
cost can be changed. For example, as the payout ratio of the company increases
the breakpoint between lower-cost internally generated equity and newly issued
equity is lowered.
3. Investment Policy
These are the factors influencing the equity growth that the company has no
control over:
The level of interest rates will affect the cost of debt and, potentially, the cost of
equity. For example, when interest rates increases the cost of equity increases,
which ultimately increases the cost of capital.
2. Currency Fluctuation
The currency fluctuation will affect the cost of equity when the company is
exposed to foreign currency. If there is depreciation in the exposed currency
then it badly affects the company’s earnings which ultimately affects on the
returns of the investors.
CHAPTER 5
FINDINGS
Cost of equity is more challenging to calculate as equity does not pay a
When a company has a high expected dividend and growth then the
returns expected from the company is also high. This shows high cost of
equity and attracts huge investments.
D-Link is not performing as expected the reason being not much change
in sales compared to last year which has affected its growth.
The IT companies under Group B1 are not sailing in the same boat i.e.,
they all have different levels of cost of equity.
Group A is best for long term investors to invest and earn huge returns.
SUGGESTIONS
The long term investors have an opportunity to earn high returns if they
invest in the companies which are listed under Group A.
The companies listed under Group T is not a good choice for investor to
include in their portfolio as they give very low returns i.e., cost of equity.
No dividends are paid and growth is also very slow.
The long term investor can invest in such company’s share where the
growth is constantly going upwards and which pays dividend too.
CONCLUSION
The cost of equity capital for a particular company is the rate of return on
investment that is required by the company's ordinary shareholders. The return
consists both of dividend and capital gains. The cost of equity reflects the
opportunity cost of investment for individual shareholders. It will vary from
company to company because of the differences in the business risk and
financial risk of different companies. The cost of equity is the minimum rate of
return a firm must offer shareholders to compensate for waiting for their
returns, and for bearing some risk. The cost of equity is based on a firm's
current rate of return. If one assumes a perfect market, industry-specific costs of
equity reflect the riskiness of particular industries. A high cost of equity would
then indicate a higher-risk industry that should command a higher return to
compensate for the higher risk.
The vision of Information Technology (IT) policy is to use IT as a tool for
raising the living standards of the common man and enriching their lives. In
Information technology (IT), India has built up valuable brand equity in the
global markets.
The 10 IT companies which have been chosen from three different groups’ viz.,
Group A, Group B1 and Group T perform differently. The groups are made as
per the companies’ performance; the companies which are listed under Group A
are providing excellent cost of equity which a long term investor expects.
The company which has high dividend payout ratio and high growth they show
higher cost of equity, and all the long term investors expects the same to
minimize their risk.
The risk averse always concentrates on the following factors before investment:
Growth of the company
Market price
Using the above data an investor calculates the cost of equity and invests
according to the results shown by the companies. This calculation helps them to
have a good portfolio.
The companies listed under Group T are not good choice of shares to invest for
long term investors.
BIBLIOGRAHY
Text books:
Websites:
• www.google.com
• www.wikipedia.com
• www.moneycontrol.com
• www.answers.com
• www.infosys.com
• www.wipro.com
• www.niit.com
• www.aptech.com
• www.melstar.com
• www.dlink.com
• www.12managemanagementcommunities.com