Cost of Capital of Godrej
Properties Ltd.
Using CAPM, WACC, DDM while comparing with DLF Ltd.
Presented by:
Chaitanya Gupta (19047)
Chirag Chaitanya (19048)
Deepanshu Rawat (19050)
Divij Shangle (19058)
INTRODUCTION
Introduction
Objective of ● Godrej Properties Limited is a real estate company with its head office in Mumbai,
study India. A subsidiary of Godrej Industries Ltd, the company was established in 1990
under the leadership of Adi Godrej
Research
Methodology
Cost of Equity ● In 2010, Godrej Properties became a publicly listed company through a successful
IPO in which it raised USD 100 million. The company is currently developing projects
CAPM that are estimated to cover more than 89.7 million square feet.
WACC
● According to Godrej Properties' annual report its total sales bookings in financial
DDM year 2019-20 stood at Rs 5,915 crore and 8.80 million sq ft during the last fiscal
year. In 2018-19, the sales bookings stood at Rs 5,316 crore and 8.76 million sq ft.
Analysis The operating profit or EBITDA (Earnings Before Interest, Taxes, Depreciation, and
Amortisation) grew by 23 per cent to Rs 733 crore versus Rs 597 crore in FY19
Conclusion
OBJECTIVE
Introduction
Objective of
study The objective of this study is to ascertain whether investing in a real estate company (in this
case Godrej Properties) is a good decision or not by:
Research I. Evaluating the volatility of its stock price using CAPM, while taking the historical data
Methodology for past 4 years to calculate the beta coefficient
Cost of Equity II. Ascertaining whether the stock is overvalued or undervalued using Dividend Discount
Model that predicts the price of a company's stock based on the theory that its
CAPM present-day price is worth the sum of all of its future dividend payments when
discounted back to their present value
WACC III. WACC is also calculated to evaluate the cost of capital and checking it against rate of
return to check whether its suitable to invest in the company or not.
DDM
To see how valuation of Godrej Properties Ltd. with that of the market leader of Real Estate
Analysis company in India, the above parameters were compared
Conclusion
METHODOLOGY
Introduction
Objective of The study focuses on evaluating the stock price of Godrej properties and ascertaining the
study
cost of capital for this purpose we have used the following methods:
Research
Research 1. CAPM
Methodology
Methodology
In CAPM the stock of Godrej Properties Limited is evaluated by comparing risk and the
Cost of Equity time value of money to its expected return.
CAPM 2. WACC
WACC (weighted average cost of capital) method is used for ascertaining the cost of capital
WACC using cost of equity and cost of debt.
DDM 3. DDM
Analysis In DDM the price of GPL's stock is predicted based on the theory that its present-day price
is worth the sum of all of its future dividend payments when discounted back to their
Conclusion present value.
Cost of Equity
Introduction
Introduction
Objective of Cost of equity is the return a company requires to decide if an investment meets capital
Objective of
study
study return requirements. Firms often use it as a capital budgeting threshold for the required rate
Research of return. A firm's cost of equity represents the compensation the market demands in
Research
Methodology
Methodology exchange for owning the asset and bearing the risk of ownership. The traditional formula for
the cost of equity is the dividend capitalization model and the capital asset pricing model
Cost
Cost ofEquity
Cost of
of Equity
Equity (CAPM).
CAPM
CAPM Cost of Equity
WACC
WACC DCM CAPM
DDM
DDM
Analysis Cost of Equity = DPS/CMV + GRD Cost of Equity =
where: Risk-Free Rate of Return + Beta *
Analysis
Conclusion
DPS = dividends per share, for next year (Market Rate of Return - Risk-Free
Conclusion
CMV = current market value of stock Rate of Return)
GRD = growth rate of dividends
Capital Asset Pricing
Introduction
Introduction Model
Objective of
Objective of
study
study The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk
Research and expected return for assets, particularly stocks. CAPM is widely used throughout finance
Research
Methodology
Methodology
for pricing risky securities and generating expected returns for assets given the risk of those
assets and cost of capital.
Cost of
Cost ofEquity
Equity
CAPM The CAPM formula is widely used in the finance industry. It is vital in calculating the
CAPM
weighted average cost of capital (WACC), as CAPM computes the cost of equity.
WACC
WACC
DDM WACC is used extensively in financial modeling. It can be used to find the net present value
DDM (NPV) of the future cash flows of an investment and to further calculate its enterprise value
Analysis
and finally its equity value.
Analysis
Conclusion
Conclusion
Factors
Introduction
Beta
Objective of
study Beta is a measure of the volatility—or systematic risk—of a security or portfolio compared to
the market as a whole. Beta is used in the capital asset pricing model (CAPM), which describes
Research the relationship between systematic risk and expected return for assets (usually stocks). CAPM
Methodology is widely used as a method for pricing risky securities and for generating estimates of the
expected returns of assets, considering both the risk of those assets and the cost of capital.
Cost of Equity
CAPM
CAPM Risk Free Rate
Risk-free return is the theoretical return attributed to an investment that provides a guaranteed
WACC return with zero risks. The risk-free rate of return represents the interest on an investor's
money that would be expected from an absolutely risk-free investment over a specified period
DDM
of time.
Analysis
Market Risk Premium
Conclusion The market risk premium is the difference between the expected return on a market portfolio
and the risk-free rate. The market risk premium is equal to the slope of the security market line
(SML), a graphical representation of the capital asset pricing model (CAPM).
CAPM for Godrej
Introduction
Properties
Objective of
study
Assumptions
Research
Methodology Rf (10Y Government
6.250%
Bond Yield)
Cost of Equity
Beta (Godrej) 1.1333547
CAPM
CAPM
26.3123%
WACC Rm
DDM
Output
Market risk premium 20.1%
Analysis
Godrej 28.98%
Conclusion
Comparison
Introduction
We find that the stocks of both Godrej Properties and DLF swing more than the market
Objective of over time as their Beta scores are over 1, more DLF is a riskier stock as it’s Beta score is
study higher than Godrej’s. Beta is a measure of a stock's volatility in relation to the overall
market. High-beta stocks are supposed to be riskier but provide higher return potential;
Research
Methodology
low-beta stocks pose less risk but also lower returns and we can see that the expected
return on investment in the case of DLF is higher than that of Godrej Properties because of
Cost of Equity higher beta score associated with DLF.
CAPM
CAPM
WACC
Output
DDM Beta (Godrej) 1.1333547
Godrej 28.9877%
Beta (DLF) 1.5070499
Analysis DLF Ltd. 36.4849%
Conclusion
Conclusion
Introduction
● The CAPM uses the principles of Modern Portfolio Theory to determine if a security
Objective of
study is fairly valued. It relies on assumptions about investor behaviors, risk and return
distributions, and market fundamentals. In our study of Godrej Properties using
Research CAPM we found that is a high beta stock which means it swings more than the
Methodology market and that is the reason behind it’s positive expected return on investment.
Cost of Equity
● CAPM has also many limitations associated with it. It assumes that the risk-free rate
CAPM
CAPM will remain constant over the discounting period. An increase in the risk-free rate
also increases the cost of the capital used in the investment and could make the
WACC stock look overvalued.
DDM
● Despite these issues, the CAPM formula is still widely used because it is simple and
Analysis allows for easy comparisons of investment alternatives.
Conclusion
WEIGHTED AVERAGE
Introduction COST OF CAPITAL
Objective of
study
- The weighted average cost of capital (WACC) is a calculation of a firm's cost of capital
Research in which each category of capital is proportionately weighted
Methodology
- It represents the minimum return that a company must earn on an existing asset base
Cost of to satisfy its creditors, owners, and other providers of capital.
Equity
- A firm’s WACC increases as the beta and rate of return on equity increase because an
CAPM
increase in WACC denotes a decrease in valuation and an increase in risk.
WACC
WACC
- The WACC is calculated taking into account the relative weights of each component of
DDM
the capital structure. The more complex the company's capital structure, the more
Analysis laborious it is to calculate the WACC.
Conclusion
COST OF CAPITAL VS
REQUIRED RATE OF
Introduction
RETURN
Objective of ● The required rate of return is the minimum return an investor will accept for owning
study
a company's stock, as compensation for a given level of risk associated with holding
the stock. Risk Is an Important Factor in RRR
Research
Methodology
● The cost of capital refers to the expected returns on securities issued by a company.
Cost of Companies use the cost of capital metric to judge whether a project is worth the
Equity expenditure of resources. Investors use this metric to determine whether an
investment is worth the risk compared to the return
CAPM
● Both of these metrics embody the critical concept of opportunity cost—the benefits
WACC
WACC that an individual investor or business misses out on when choosing one alternative
over another.
DDM
Analysis
● The cost of capital and RRR metrics can help market participants of all types—buyers
and sellers—to sort through the competing uses of their funds and to make wise
Conclusion financial decisions
FORMULA WACC
Introduction
Objective of WACC is the average after-tax cost of a company’s various capital sources, including
study
common stock, preferred stock, bonds, and any other long-term debt
Research
Methodology
Cost of
Equity
CAPM
E = Market value of the firm’s equity Re = Cost of equity
WACC
D = Market value of the firm’s debt Rd = Cost of debt
DDM
V = E+D Tc = Corporate tax rate
Analysis
Conclusion
WACC for Godrej
Properties
Introduction
Objective of
study v
Research
Methodology
Cost of
Equity
CAPM
WACC
WACC
DDM
The values as taken up from the annual reports are shown here for the purpose of
Analysis
calculation. For the year 2020, weighted average cost of capital of Godrej properties Ltd. is
16.9%
Conclusion
WACC comparison
Introduction with DLF Ltd
Objective of In order to
study understand the WACC
model, we will
Research compare RRR and
Methodology WACC of both the
companies.
Cost of
Equity
Here, RRR is greater
CAPM than WACC by 12%
and 7% for Godrej and
WACC
WACC DLF respectively.
DDM
Analysis
Conclusion
Conclusion
Introduction
Objective of The conclusion that we draw from the following methods is:
study
● WACC indicates the return that both kinds of stakeholders can expect to receive. It is
Research an investor’s opportunity cost of taking on the risk of investing money in a company.
Methodology
● It can be concluded that Investors may often use WACC as an indicator of whether or
Cost of not an investment is worth pursuing. When the required rate of return is greater
Equity than or equal to the cost of capital, it sets the stage for a favorable scenario.
● For the purpose of understanding Godrej Properties Ltd., we compared the required
CAPM
rate of return with WACC, the former is greater by 12%. Thus, we can say that it is a
WACC
WACC good investment opportunity.
● However, one should note, certain elements of the formula, like the cost of equity,
DDM
are not consistent values, they may be reported differently for different reasons. As
Analysis such, WACC should always be used along with other metrics when determining
whether or not to invest in a company.
Conclusion
Dividend Discount Model
Introduction
● The Dividend Discount Model (DDM) is a quantitative method used for predicting the
Objective of price of a company's stock based on the theory that its present-day price is worth the
study sum of all of its future dividend payments when discounted back to their present
value.
Research
Methodology
● If the value obtained from the DDM is higher than the current trading price of
Cost of Equity shares, then the stock is undervalued and qualifies for a buy
CAPM ● If the value obtained from the DDM is lower than the current trading price of shares,
then the stock is undervalued and qualifies for a buy
WACC
DDM
DDM WHY DDM?
Analysis
1. Justified
2. Consistent
Conclusion 3. No Requirement of Control
4. Mature Businesses
Types of DDM
Introduction 1. Zero Growth Dividend Model: The zero-growth model assumes that the dividend
always stays the same, i.e., there is no growth in dividends
Objective of
study
Research
Methodology 2. Constant Growth Dividend Discount Model: The constant-growth Dividend Discount
Model or the Gordon Growth Model assumes that dividends grow by a specific
Cost of Equity percentage each year
CAPM
WACC Where,
D1 = Value of dividend to be received next year, g = Growth rate of dividend
DDM
DDM D0 = Value of dividend received this year, Ke = Discount rate
Analysis
3. Variable Growth Rate Dividend Discount Model: This takes into the assumption that
Conclusion the growth will be divided into three or four phases (initial phase, transition phase and
finally ends with a lower rate for the finite period). The model solves the problem of a
company giving unsteady dividends..
DDM of Godrej Using
Gordon Growth Model
Introduction
Objective of - Godrej is a mature company with a good dividend track report and has consistently declared
study dividends. Thus, can be a candidate that can be valued using the constant-growth Dividend
Discount Model
Research
Methodology
- The DDM has many variations that differ in complexity. The most common and
Cost of Equity straightforward calculation of a DDM is known as the Gordon growth model (GGM), which
assumes a stable dividend growth rate and was named in the 1960s after American economist
CAPM Myron J. Gordon
WACC
DDM
DDM
Analysis
Conclusion
DDM Comparison with
Introduction DLF Ltd.
- To understand the DDM better, let us compare the 1 Year and 5 Year Gordon Growth
Objective of Model of DDM with the market leader of real estate in India, i.e, DLF Ltd
study
- The intrinsic value calculated using the 1 year and 5 year annualized dividend growth
Research rate for both the companies differ significantly
Methodology
Cost of Equity
CAPM
WACC
DDM
DDM
Analysis
The growth rates as taken from the annual reports of
Conclusion both the companies are shown here. It can be clearly
seen that there is a huge difference in the manner
dividends has been distributed
Conclusion: Dividend
Introduction
Discount Model
- For the purpose of understanding Godrej Properties Ltd. intrinsic value we used GGM
Objective of Model and compared it with that of the current market leader in real estate industry
study
according to market capitalization
Research
Methodology - If the calculated intrinsic value comes to be higher than the current market price of a
share, it indicates a buying opportunity as the stock is trading below its fair value as per
Cost of Equity DDM
CAPM
- It was observed that the intrinsic value of Godrej Properties Ltd. for dividend growth rate
WACC was less than the current market price of the share and thus the stock can be termed as
overvalued and not a good option to invest in.
DDM
DDM
- While the intrinsic value of DLF was more than the current market price of the share, thus
Analysis
indicating undervaluation and a good option for investment
Conclusion
- However, one should note that, like any other valuation method used to determine the
intrinsic value of a stock, DDM requires lots of assumptions and predictions, it may not be
the sole best way to base investment decisions
Conclusion
Introduction
Objective of ● The stock price of Godrej Properties Limited (GPL) is highly volatile as its Beta is
study
greater than one which means it is a high risk stock though the potential of rate of
Research return is high. Research shows that low volatility stocks tend to earn greater
Methodology risk-adjusted returns than high volatility stocks. In case of a downward swing of the
share market, investor in GPL’s stock can bear significant losses
Cost of
Equity ● The rate of return (as calculated in CAPM) on comparison turned out to be higher
CAPM
than the calculated value of WACC which made Godrej properties a suitable
investment opportunity. As the result contradicted our conclusion in CAPM model,
WACC so we further used DDM to make the final decision.
DDM ● In the DDM model it was observed that the intrinsic value of Godrej Properties Ltd.
for dividend growth rate was less than the current market price of the share and
Analysis
thus we can conclude that the stock can be termed as overvalued and not a good
Conclusion
Conclusion
option to invest in
THANK YOU!
