Clarification for Project Work

I.

Clarification on the Dividend Discount Model:

If Dividend Data is available, refer to point no. 1. If you will use the Earnings data, refer to point no. 2.
1. The DDM model is based on Dividends. You can use past data for finding future dividends D1 =
Do(1+g). The past data is used to extrapolate g rate. Use last 5 years Dividend data to find the
growth rate. Use the excel function, Trend to estimate this growth rate.
D1 = Dividend for 2015
Do = Dividend in year 2014

2. In case you do not find Dividend data for the companies. Then use the Earnings data to calculate
intrinsic value of the share. See the formula below for more clarity.

E1 = Earnings (EPS) for 2015

E0 = Earnings (EPS) for 2014
b is the retention ratio or (1-b) is the Dividend Payout ratio for 2014.
g = growth in earnings (notation k can also be used to represent growth rate in earnings). Find
g/k using the Trend function in Excel for Earnings.
r value is calculated using CAPM

II.

Clarification on the Risk-Return problem:

1. Risk-free rate, i.e. 10 year G-Sec Bond
2. Choose a market rate (Rm) (index) that is relevant for your stocks.
3. Generate the risk-return profiles for each stock and the market. The profile consists of mean
returns, variance, standard deviation, correlation and Beta for each stock.
4. Choose the two best stocks from among the 5 stocks, based on their risk-return profiles
calculated in step 3.
5. Build the portfolio for the two selected stocks, and draw the efficient frontier based on these
stocks.

Guidelines for Submission.

a) Send the MS-Excel file (soft copy only) The file name of the Excel sheet should be:
<Roll numbers><Section>
Eg: 301302303304305sec3
b) Prepare a brief report based on your calculations. The report should contain the following
sections (Hard Copy) Max 3 pages for both problems.
Valuation of Shares:
i)
Rationale behind the selection of companies
ii)
Method followed by the group to calculate the intrinsic value of the share
iii)
Intrinsic value of the shares
Risk and Return:
i)
ii)
iii)

Stock 1
0
25
50
75
100

Table 1: Risk, Return and Beta of five stocks

Table 2: Covariance, Correlation and Standard Deviation of two-stock portfolio
Table 3: Particulars

Stock 2
100
75
50
25
0
iv)

PORTFOLIO
RETURN

PORTFOLIO
RISK

PORTFOLIO
BETA

PORTFOLIO
REQUIRED RATE
OF RETURN
(CAPM)

COMMENT
(UNDERVALUED/
OVERVALUED Alpa)

Efficient Frontier Graph in hard copy and the calculations in excel sheet (soft copy).